One of the simpler annuity products to understand is the immediate fixed annuity. The immediate annuity is designed to create a stream of income for the investor and can be used to fund a variety of different functions. Depending on what you want the annuity to accomplish, you can design the product to facilitate a number of actions in your financial plan.
To better understand the immediate annuity it is beneficial to run over a couple of the basics of how the product functions. This insurance contract is almost always purchased with a lump sum payment to the company. This premium is then turned into recurring payments to the annuity’s beneficiary.
Depending on how the contract is written, the annuity will provide income distributions for either a set period of time or for the lifetime of the annuitant. This lifetime option uses a life expectancy table specifically for annuities, and bases the size of the distribution on the expected remaining lifetime of the annuity owner or annuitant.
The fixed portion of the account will typically refer to one of two things. The income is either fixed or the contract is created as a fixed rate annuity. The fixed rate annuity is based off of a predetermined and fixed interest rate that determines the growth of the account and the size of the distributions.
Immediate annuities can be designed to fund a number of different options in your financial plan. Many will use the income payments to fuel their insurance premiums, while others will use the payments as income during retirement. How you use the income is entirely dependent on what makes sense for your unique retirement or financial plan.
Despite the simplicity of the product, it is still important to consult with a qualified professional before implementing a fixed annuity into your financial plans. You will want to understand the risks, disadvantages, and tax consequences before committing to this insurance product.
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