Immediate Annuities

Investment Management

Feb 19, 2020

To put it as simply as possible, when you purchase an Immediate Annuity, you are trading a sum of money for a stream of income to be paid for a period of time. The period of time is usually for life.  They can certainly serve as a hedge against longevity risk.  However, it is important to understand that the money that you pay to the insurance company is essentially gone.  There are some that will give you a certain amount back if you try to close it out early, but it will be subject to a very significant penalty.  With that said, you should not put a high percentage of your money in an Income Annuity if you choose to purchase one. 

Immediate Annuities can sound too good to be true, especially if you are in the later stages of life.  There are advertisements that quote the payout rate.  It is very easy to mistake that with an interest rate and as a cynical advisor, my opinion is that the advertisers know what they’re doing.  The payout rates are calculated based on your age.  The older you are, the higher the payout rate because, statistically, you have less years left to live.  For example, a 70 year old should have more years left to live than an 80 year old.  Therefore, the insurance company is going to offer to pay less income for life to a 70 year old since they should be paying him or her for more years. 

Let’s look at a quick example:

A $100,000 income annuity may pay a 70 year old approximately $6500, which would equate to a 6.5% payout rate.  A $100,000 annuity may pay an 80 year old $7700, which would be a 7.7% payout rate.  An 80 year old consumer may see an advertisement for an annuity that pays a 7.7% payout rate.  The consumer may think that it is offering 7.7% risk free interest and not realize what he or she is really buying.

Immediate Annuities are no different than other annuities in that they offer benefits, but they certainly offer drawbacks.  In my opinion, you usually give up more than you receive with Immediate Annuities.  They can make sense for some situations, but there is usually a more flexible alternative worth considering.  Furthermore, please pay careful attention to payout rates vs. interest rates.  If you are looking for the best rate on your money without investment risk and you are offered a rate that is significantly higher than what anyone else is offering, chances are there is a catch.  Please remember that if it sounds too good to be true, it probably is. 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information.

The views and opinions expressed herein are those of the speaker or writer and do not necessarily reflect the views of Alliance Wealth Advisors, LLC. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Diversification does not guarantee a profit or protect against loss in a declining financial market.

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