Immediate Annuities

(The Money Pros) - Annuities are a type of investment issued by an insurance company. Most annuities are deferred annuities, meaning the annuity holder deposits funds with the insurance company and earns a return on their deposit depending upon the type of annuity. Funds are generally taken out in retirement in order to supplement retirement income.

Annuities can be used in two basic ways to generate retirement income. An annuity can be annuitized. In this scenario the lump sum on deposit with the insurance company is given up. In exchange, the annuity holder receives a promise from the insurance company to pay income for a set amount of time. This can be a fixed period of years or for the duration of someone’s life, no matter how long that may be. In that sense, an annuitized annuity can be used to insure against the risk of living longer than expected.

If the annuity holder is reluctant to turn over control of their lump sum they can instead take systematic withdrawals from the annuity over time. In many cases the annuity company will guarantee theses payments over one or more lifetimes as well. But the trade-off to maintaining control over the principal amount is lower payments over time.

Annuities are complex investments with many moving parts. When considering an annuity, it should be part of a broader retirement income strategy. Careful attention should be paid to insurance company strength and any surrender charges that may apply. Beware of high-pressure sales tactics and be sure to understand all of the details surrounding the purchase.