Understanding Immediate Annuity Terms: Key Factors to Consider

An immediate annuity is a contract between an individual and an insurance company. With this contract, the individual gives the insurance company a lump sum of money, and then the insurance company immediately starts making annuity payments to her every month. This type of contract can be affected by a number of variables. Here are some factors that can affect immediate annuity terms.

1. Joint or Single Life

One of the biggest factors with an immediate annuity is whether it is covering a single person or a couple. Some immediate annuities will make payments for the life of only one individual. Other annuities will make payments for as long as either member of a couple is alive. When the annuity is set up to make payments for the lives of two people, it will provide lower payments. The insurance company knows that there is a longer amount of time that it will have to pay, and it lowers the payment as a result. If you want a larger monthly payment, then you may consider putting only one person on the annuity contract.

2. Minimum Guaranteed Payout Period

Another factor that can affect immediate annuities is the length of the minimum guaranteed payout period. Some types of annuities will have a specific amount of time that they will make payments to the individual. The longer the payout period, the smaller the payment becomes. When you are setting up an immediate annuity, you need to think about the length of time that you need to receive a payment. If you ask for a term of payments of only 10 years, you will get a much bigger monthly payment than if you asked for a 20-year term. 

3. Inflation-Adjusted Payments

When you sign up for an immediate annuity, you may be able to choose an option that provides you with inflation-adjusted payments. With this feature, the amount of your payment will increase by a certain amount of money depending on the level of inflation. This will cost you additional money to purchase this feature, but it can increase your monthly payment.

4. Size of Payment to Insurance Company

The size of the payment that you make to the insurance company will also make a big difference in the terms of the annuity. If you make a substantial payment, you will most likely get a better interest rate on your money. This will increase the amount of money that you can earn on your payment as well. Most insurance companies will have lower rates and different programs for smaller deposits.

5. Costs

The costs that the insurance company charges can also drastically affect the immediate annuity. Some insurance companies will charge you a fee at the beginning of the annuity based on a percentage of how much you pay them. Other insurance companies will take a certain amount out of the investment returns that are generated from your money.