Annuity, Immediate

What it protects against

Outliving one's money.

How it works

The policyholder pays a lump sum to an insurer, and the insurer guarantees to make periodic payments to the annuitant for life or some other period. These payments remain the same or grow in a fixed contract, may fluctuate with greater growth potential in a variable contract, or may increase but not decrease in an equity-indexed product. The periodic payments are likely to be higher than for other fixed-income investments, because they include a return of principal in each payment. That is particularly true when bought by the elderly since the payments come from a pool of money that is divided among survivors when other annuitants in the pool die.

Who needs it

People in need of reliable income that lasts for life. An immediate annuity is a kind of personal pension plan.

Who may not need it

People who have reliable pension income or are affluent enough to live off their assets without fear of depleting them.

When to buy it

Returns are greater after 65.

How you pay for it

A single premium.

Terms to Know

General Account (View Definition Hide Definition)

All premiums are paid into an insurer's general account. Thus, buyers are subject to credit-risk exposure to the insurance company, which is low but not zero.

Laddering (View Definition Hide Definition)

Purchasing bond investments that mature at different time intervals.

Period Certain (View Definition Hide Definition)

When annuitizing a deferred annuity, or when buying an immediate annuity, it is one of several options that define how you want to take your stream of income payments. Period certain means you choose to take them for a special time rather than over your lifetime.