Get The Facts On Fixed Immediate Annuities?

Answer 1

While fixed immediate annuities are not designed for maximum return on investment, they do provide an income stream that generally outlives the investor. These are becoming more popular because a great percentage of the population is expected to live well into their 80s. A single premium immediate annuity guarantees a certain monthly income amount, with very little of the money being taxable.

Example Of An Immediate Annuity Investment

If a healthy male in his early 70s invests $100K in a fixed single premium annuity, he can expect to receive approximately $750 per month for as long as he lives. If he should die prematurely, his beneficiary will receive the balance minus payments already made. He can choose a life payout option instead, meaning there will be no endowment of funds but rather a larger monthly payout of the funds. In this case, he would receive approximately $900 per month on a $100K investment.

Taxes On Fixed Immediate Annuities

Most of the money invested is actually returned to the individual. It is therefore considered principal and is not subject to income tax. This in contrast to an taxable IRA because this type of investment is with pre-tax dollars. In the example given above, only about four cents per dollar are actually subject to income tax.

Many individuals purchase a fixed immediate annuity as part of their Medicaid planning process. The purchase of an immediate annuity essentially removes this amount of money from the estate, meaning that the individual is now eligible for Medicaid because the minimum qualification total has been met. However, this minimum requirement varies from state to state, therefore it is advised that individuals work closely with an estate planner or retirement attorney in order to insure the minimum requirements for Medicaid eligibility are realized.

Drawbacks Of Fixed Immediate Annuities

Although the income stream is steady, it does not take inflation into account. The return on investment is quite conservative, and those who purchase an annuity in any form are removing themselves from the potential purchasing power their money would otherwise provide. Those who purchase a life only option annuity have no means of selecting a beneficiary should a premature death occur. Younger individuals who invest in an annuity will receive a lower payout because their life expectancy is greater. And the current interest rates are fairly low. Many are choosing to wait a few years to see if rates increase, resulting in a larger monthly return on investment. Once a single premium immediate annuity is purchased, the interest rate is locked in for life.