An Immediate Annuity was designed in such a way as to provide earnings instantly post-retirement.
A fixed kind of Immediate Annuity is a contract between the annuity holder and the insurance company. Immediate annuities are purchased with a hefty lump-sum of money by investors so that they can afford the expenses for a long period of time. In lieu of the paid lump-sum payment, the insurance company pays the annuity holder a monthly income for the rest of his or her life.
At the time of purchase of an Immediate Annuity, the insurance company computes the amount of monthly income the annuity holder would be provided regularly. These computations are made on the basis of type of annuity whether it is fixated, variable or inflation-based.
The tenure of the annuity is also considered as life-long, joint-life or term oriented. Companies also consider the age and gender of annuity holder in order to gain his or her life expectancy.
Before the buyer decides a certain type of Annuity, it is imperative to ponder over some important questions such as –
• When the maximum income would be required?
• Would the inflation-ridden lower payment be acceptable or not?
• What kind of payout is required - fixed, guaranteed or variable?
Deciding the term is important issue to settle down. A fixed-term Annuity will ensure steady inflow of income for specific number of years. A life-long plan assures fixed monthly income for the entire life span of the annuity holder.
Those who are keen to buy such a plan for themselves must make a clear understanding of various aspects lest they do not incur any losses in the long term. They must review the alternatives of retirement income-funds, the laddered-bonds, or a comprehensive return-portfolio. The annuity buyer must also have knowledge of calculation of rate of income return so that fishy brokers do not take their advantage.
It is vital to know that most of the immediate annuities cannot be reversed back once purchased. Whatever the term is decided at the time of signing the contract cannot be cancelled back. It is not possible to halt the contract in between the tenure and get paid the lump-sum money back. It is important for annuity buyer to get a clear understanding of various factors so that a reversal is never contemplated while the Immediate Annuity contract is in progress.
Inspite of the entire promising scenario presented by Immediate Annuities, its no-reversal option is its major drawback. Purchasing of a single-premium for annuity plan is like a life-long permanent decision that cannot be overturned. Hence serious contemplation must be made before deciding to sign over the dotted line of the contract.
Those investors, who want maximum returns for their investments at one go, must not go for this option as its main purpose is to provide a consistent in-flow of income thus providing financial security.