Immediate Annuities:
  Pros & Cons

There are typically several options for the income stream.

It wasn’t long ago that single premium immediate annuities were bashed regularly as a lousy use of money.  Today, however, with longer life expectancies, baby boomers reaching retirement age and increased volatility in the financial markets, these annuities are gaining in popularity.

A single premium immediate annuity is a contract with an insurance company; you write a check and in return receive a stream of income.  There are typically several options for the income stream.  You can set it for a specific period of time or for life.

With the specified time period, the payments go to you or your designated beneficiary for the time selected.  If you do not survive that time period, the beneficiary receives the income for the remainder of the time period selected.

When you choose the lifetime income solution, the payments often end when you die.  To protect against the risk of a premature death, many choose what is called a “period certain” for that income stream.  The period certain allows you to select a minimum time period that the income will flow to your beneficiary if you die.  The payments will be lower than if you selected a straight life only income.

The good news, however, is that the lifetime income stream pays you the stated amount regardless of how long you live. With advances in science that appear to be extending life expectancy, this option may make sense for some people – especially if longevity is in the family history.

The downside to these annuities is that the interest rate used in figuring your annuity payment is frequently low, and you are locking in that rate for an extended period.  During boom times in the economy and financial markets, few are eager to commit to this type of plan.  But when the economy is suffering, the markets are volatile and fear is more prominent than prosperity, the number of annuities sold increases.

Also, many of these annuities do not have inflation protection built in, and the amount of your monthly check remains constant for your entire life.

The reliability of the income from the annuity is backed by the strength and financial condition of the insurer that you choose.  Obviously, making sure that your provider is in good financial health with a long-term track record is important.

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John P. Napolitano
U.S. Wealth Management
uswealthcompanies.com
Phone: (781) 849-9200
 
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