RETIREMENT PLANNING ANNUITIES
Income Annuity
By
JULIA KAGAN
Reviewed by
ERIC ESTEVEZ Updated May 11, 2021
What Is an Income Annuity?
An income annuity is an annuity contract that is designed to start paying income as soon as the policy is initiated. Once funded, an income annuity is annuitized immediately, although the underlying income units may be in either fixed or variable investments. As such, income payments may fluctuate over time.
An income annuity, also known as an immediate annuity, a single-premium immediate annuity (SPIA), or an immediate payment annuity, is typically purchased with a lump sum payment (premium), often by individuals who are retired or are close to retirement. These annuities may be contrasted with deferred annuities that begin paying out years later.
KEY TAKEAWAYS
Understanding Income Annuities
Investors seeking income annuities should have a clear picture of how much income will be received and for how long. Most annuities pay out until the death of the annuitant, and some pay out until the death of a spouse.
Although the insurance product may be annuitized immediately, variable investments can allow for some principal protection by participating in equity markets. Even if all income units are in fixed investments, there may be a provision allowing for a higher return if a specific benchmark index performs exceptionally well.
The return an annuity buyer gets from their income annuity is based on how long they live—greater longevity equals more payments and a better return. Payments may begin as soon as a month after a contract is signed and a premium payment is made. Income annuity payments may be monthly, quarterly, semi-annually, or annually. Many income annuities offer a death benefit.1
If a cash refund option is chosen, the designated beneficiary of an annuitant who dies before receiving enough payments to equal their initial premium will receive the balance. As such, an annuitant's age, life expectancy, and health are relevant to deciding whether such an annuity is suitable.
Income annuities may be purchased for a little as a few thousand dollars. More significant income annuities may require special vetting, however. Some income annuities may be deferred to build income for use later in life.
Who Benefits Most From Income Annuities
The strategy behind an income annuity is to create a steady stream of income for a retiree that cannot be outlived. In effect, an immediate annuity may act as longevity insurance. A good rule of thumb is that payments backed by an income annuity should replace a retiree's wage payments until they pass away.
Another strategy utilizing an income annuity is using them to provide income to pay a retiree's expenses—such as rent or mortgage, food, and energy—assisted living facility fees, and insurance premiums, or provide the cash for any other recurring payment needs.
One disadvantage of income annuities is that once they are initiated, they cannot be rolled back or stopped. Also, payments for such annuity may be fixed and not indexed to inflation, and will thus stay the same. As such, the purchasing power of each payment will decrease over time as inflation takes its toll.
ARTICLE SOURCES
Related Terms
Years Certain Annuity
A years certain annuity is a retirement income product that pays a continuous periodic income, generally monthly, for a specified number of years. more
What Is a Hybrid Annuity?
A hybrid annuity is a retirement income investment that allows investors to split their funds between fixed-rate and variable-rate components. more
Deferred Annuity
A deferred annuity is an insurance contract that promises to pay the buyer a regular stream of income, or a lump sum, at some date in the future. more
Pension Plan Definition
A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. more
Investment in the Contract
Investment in the contract as applied to annuities is the principal amount the holder has invested. more
Digging into Annuity Due
Annuity due is an annuity with payment due at the beginning of a period instead of at the end. See how to calculate the value of an annuity due. more
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