What Is an Income Annuity?
Let me explain what an income annuity is—it's an annuity contract set up to begin paying you income right when you start the policy. Once you fund it, the annuity annuitizes immediately, and the underlying units could be in fixed or variable investments, meaning your income payments might change over time.
You might also hear it called an immediate annuity, a single-premium immediate annuity (SPIA), or an immediate payment annuity. Typically, you buy it with a one-time lump sum payment, and it's popular among people who are retired or nearing retirement. This contrasts with deferred annuities that don't start paying until years down the line.
Key Takeaways
- An income annuity swaps your lump sum for guaranteed periodic cash flow, like monthly or annual payments.
- It usually starts payments one month after you pay the premium and can continue as long as you're alive.
- These annuities suit retirees worried about running out of savings in their lifetime.
Understanding Income Annuities
If you're considering an income annuity, you need a clear idea of how much income you'll get and for how long. Most pay out until the annuitant's death, and some extend to a spouse's death.
Even though it annuitizes right away, if it's variable, you might get some principal protection through equity market participation. And if everything is fixed, there could still be a boost if a benchmark index does well.
Your return depends on how long you live—the longer you live, the more payments you get, and the better the return. Payments can start as soon as a month after signing and paying the premium, and they might come monthly, quarterly, semi-annually, or annually. Many include a death benefit.
With a cash refund option, if you die before payments equal your initial premium, your beneficiary gets the rest. That's why your age, life expectancy, and health matter when deciding if this fits you.
You can buy one for as little as a few thousand dollars, but larger ones might need extra checks. Some can even be deferred to build income for later.
Who Benefits Most From Income Annuities
The main strategy here is to give retirees a steady income stream they can't outlive—it's basically longevity insurance. A solid approach is to use these payments to replace your wages until you pass away.
You can also use them to cover ongoing expenses like rent, mortgage, food, energy, assisted living fees, insurance premiums, or any recurring needs.
One downside is that once you start, you can't undo it or stop it. Payments might be fixed without inflation adjustments, so their buying power drops over time as inflation rises.
Other articles for you
Ethereum Classic is the original Ethereum blockchain that split after the 2016 DAO hack, maintaining a decentralized platform for smart contracts without reversing the theft.
Registered investment advisors (RIAs) are firms that provide fiduciary advice on investments and manage client portfolios while prioritizing client interests.
Unemployment income provides temporary financial support to eligible workers who lost their jobs through no fault of their own.
A voluntary export restraint is a self-imposed trade limit by an exporting country on the quantity of goods it can send to another country.
A whole life annuity due is a financial product providing lifelong payments starting at the beginning of each period, with funds retained by the insurer upon the annuitant's death.
A fallen angel is a bond downgraded from investment-grade to junk status due to the issuer's financial decline, offering higher yields but increased risks.
Joint tenancy is a form of property co-ownership where multiple parties hold equal shares with automatic inheritance by survivors upon death, bypassing probate.
A bilateral contract is a mutual agreement where both parties commit to specific obligations.
An elevator pitch is a short speech designed to outline an idea and spark interest in a product, service, or project.
PIPE allows public companies to raise capital quickly by selling shares at a discount to accredited investors, bypassing many regulatory requirements.