
Immediate Annuities
Tips When Buying an Immediate Annuity
Find the answers to your questions when buying an annuity.
Like many insurance or financial products, the immediate annuity allows you to customize and add features to meet your needs. The base product will provide the most income based on the premium you pay, your age and your gender. But extra features (sometimes called riders) can create better guarantees and be inclusive of your family dynamics.
While not every insurer will offer every option, here is an overview of what features you may encounter.
You can have an immediate annuity just for yourself, or add your spouse to it.
You can choose a further guarantee for the payments you want to receive:
You can choose to receive income payments on a monthly, quarterly, semi-annual or annual schedule. Most choose monthly.
You can choose to have your income adjusted for inflation each year. It can be inflated between 1-5% or based on the Consumer Price Index. However, this will cause your income start point to be lower.
This feature is important because retirement can be long, and your income might lose purchasing power over time. While we’re currently experiencing a period of low inflation, it’s averaged 3.2% over the past century, meaning that prices have almost doubled every 20 years. However, the immediate annuity is usually not the most efficient way to hedge against inflation, as the extra protection will come at a cost. Consider instead more direct ways to earn inflation-adjusted dollars. Your Social Security benefit, for one, will be indexed for inflation through a Cost of Living Adjustment. And, for the rest of your assets, maintaining exposure to equity markets and investing in inflation-linked bonds, such as TIPS or I-Bonds, can provide an effective hedge.
To illustrate, let’s use Matthew, a 65-year-old who is purchasing a $174,000 SPIA. His initial quote excluded inflation protection and got him $1,000 per month ($12,000 per year). If he’d like his income payments to keep pace with inflation, estimating it to be 1% per year, he’ll have to accept a lower initial income of $910 per month ($10,900 per year) which will increase over time.
Also known as principal protection, the cash refund option mentioned above guarantees that any principal not yet paid back in the form of income payments will be returned to your beneficiary upon your passing.
Immediate annuities are like paychecks rather than savings accounts, so the money you receive each month isn’t usually flexible. However, most insurance companies offer the option to receive the next few months of payments in advance, which can be useful in emergency situations. This benefit goes by many names: commutations, withdrawal benefits, or payment acceleration. Each insurance company has different rules as to how many months of payments you can receive at once, and how many times you can utilize the benefit.
While each insurance company may have some different versions, this is a fairly comprehensive overview of the features.
If you are ready to get your immediate annuity quotes, you can use Blueprint Income’s online annuity calculator. You can customize your immediate annuity quotes quickly with our tool:
Find the answers to your questions when buying an annuity.
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