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Immediate Payment Annuity

What is an 'Immediate Payment Annuity'

An immediate payment annuity is an annuity contract that is purchased with a single lump-sum payment and in exchange, pays a guaranteed income that starts almost immediately. An immediate payment annuity is especially suitable for retirees who are concerned about outliving their savings. However, one disadvantage is that an immediate payment annuity is irreversible once it has been purchased. This may pose a problem should the annuitant need a large sum to deal with an emergency.

Explaining 'Immediate Payment Annuity'

Another large drawback of an immediate payment annuity is that it is terminated upon death of the annuitant. This means that in the event of the annuitant's premature death, the size of the estate left to his or her heirs may be much smaller than it would have been if the immediate payment annuity had not been purchased. Since the annuity payments are terminated upon the death of the annuitant, financial planners do not recommend this type of annuity for retirees who are not in good health.


Further Reading


Optimal asset allocation during retirement in the presence of fixed and variable immediate life annuities (payout annuities)
patents.google.com [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

Assessing investment and longevity risks within immediate annuitiesAssessing investment and longevity risks within immediate annuities
www.degruyter.com [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

Variable payout annuities and dynamic portfolio choice in retirementVariable payout annuities and dynamic portfolio choice in retirement
www.cambridge.org [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

In sickness and in health: An annuity approach to financing long-term care and retirement incomeIn sickness and in health: An annuity approach to financing long-term care and retirement income
www.jstor.org [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

Behavioral obstacles in the annuity marketBehavioral obstacles in the annuity market
www.tandfonline.com [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

Understanding the role of annuities in retirement planningUnderstanding the role of annuities in retirement planning
books.google.com [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

Participating payout life annuities: lessons from GermanyParticipating payout life annuities: lessons from Germany
papers.ssrn.com [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …

Rational and behavioral perspectives on the role of annuities in retirement planningRational and behavioral perspectives on the role of annuities in retirement planning
www.nber.org [PDF]
… a special guarantee period or estate benefit was purchased at the same time, which is normally paid for by … 8 The initial payment is estimated by Ibbotson Associates … This makes intuitive sense, since the investor could get little or no utility from immediate annuity investments if he …



Q&A About Immediate Payment Annuity


How does an immediate payment annuity differ from other types of annuities?

This type differs in that it has no payout period or maturity date; rather, payments begin almost immediately after purchase. It also differs because unlike some other types, it doesn't have any tax benefits or tax-deferred growth potentials.

What is an immediate payment annuity?

An immediate payment annuity is a type of annuity that pays out immediately.

What type of payment stream does an annuity have?

A life annuity has a payment stream that has an unknown duration based principally upon the date of death of the annuitant. At this point the contract will terminate and the remainder of the fund accumulated is forfeited unless there are other annuitants or beneficiaries in the contract. Thus a life annuity is a form of longevity insurance, where uncertainty about individual lifespan is transferred from individuals to insurers, which reduces their own uncertainty by pooling many clients.

What are the advantages and disadvantages of an immediate payment annuity?

The advantage is that it provides guaranteed income almost immediately. The disadvantage is that it can be irreversible once purchased, which may pose a problem if there's a large sum needed for emergencies. Another drawback to this type of annuity is that payments are terminated upon death of the purchaser, so financial planners do not recommend this type of annuity for retirees who are not in good health.

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