Immediate Annuity

What Is an Immediate Annuity?

An immediate annuity, sometimes called an immediate payment annuity, is a contract between a buyer and an insurance company. The buyer pays a single lump sum, and the insurer begins making regular payments almost right away, typically within one year. Unlike a deferred annuity, which is designed to grow for years before payouts start, an immediate annuity is built to convert savings into income. Payments usually continue for the rest of the buyer's life, though contracts can also be set up to pay for a fixed number of years or to continue for a surviving spouse.

How It Works

After the premium is paid, the insurer calculates the payment based on the buyer's age, the amount paid, prevailing interest rate levels, and the payout option selected. Payments may be fixed, meaning the same amount each period, or variable, where amounts move with the performance of underlying investments. Some contracts offer inflation adjustments, but these usually reduce the starting payment.

Common payout options include:

• Single life, which pays only for the annuitant's lifetime
• Joint and survivor, which continues payments to a second person after the first dies
• Period certain, which guarantees payments for a set number of years even if the annuitant dies earlier

Tax treatment varies by country and by how the annuity was funded. When bought with after-tax money, part of each payment is often treated as a return of the original premium, and the rest is treated as taxable income.

Advantages and Risks

The main appeal is that payments can last as long as the buyer lives, shifting longevity risk to the insurer. This predictable income can make retirement spending easier to plan.

The trade-offs are significant. The premium is generally irrevocable, so the buyer usually cannot get the lump sum back on demand. Payments also depend on the insurer's ability to pay, a form of counterparty risk. In the United States, state guaranty associations offer limited protection if an insurer fails. Fixed payments lose purchasing power when inflation rises. Under a life-only option, any remaining value may not pass to heirs if the annuitant dies early.