Immediate Annuities Have Their Benefits
Immediate annuities have been a part of our American financial structure for centuries, although most people would confess that they know little about them. Many pension programs, structured legal settlements and even lottery payments can involve immediate annuity payments.
The origins of the immediate annuity are found in ancient Rome where a one-time payment to the “annua” would provide a lifetime of payments made once a year.
In later years, various European states needed money to pay for on-going military conflicts. The warring states provided something called a “tontine,” a promise to pay income for a extended period of time in exchange for immediate cash to the crown.
In early 18th century America (1759), a company in Pennsylvania was formed to accept contributions from Presbyterian ministers in exchange for a lifetime of income payments. The Pennsylvania Company for Insurance on Lives and Granting Annuities eventually made immediate annuities available to the general public in 1912.
An attractive feature of an immediate annuity is the ability to provide a set periodic payment (usually monthly) for a specified period of time or a lifetime. The steady income will not change during the specified period of payment to the owner. Over a longer term this can pose a problem in that inflation could outstrip purchasing power. Thus, it may be a good idea to have some but not all of an individual’s assets committed to an immediate annuity payment.
Immediate annuities usually provide several different income options. A “life only” payment will usually provide the highest monthly income, but will usually stop at the death of the contract owner. This presents a bit of a gamble in that a premature death will dramatically reduce the total amount paid to the owner, but a long lived life could provide much more income than expected based on normal life expectancy tables. The “life only” option is often used when there are no beneficiaries or when individuals have other assets set aside to provide for beneficiaries. When the owner stops, the payment stops.
A “period certain” payment will provide an income for a set period of time, i.e. five years (60 equal payments) 10 years (120 equal payments), etc. The period certain is often used in conjunction with an overall income strategy where an individual may want to have a guaranteed income for a set time for a specific reason. An individual may want to set aside income for successive five-year periods to have a predictable income but also have the ability to increase a monthly payment in future five-year blocks in order to adjust to inflation. This strategy would allow an individual to re-set the income to a higher payment by initiating new immediate contracts every five years or for any other set time period.
Lottery winning payments usually involve a period certain payout vs. a lump sum payment as an option to receive income over a period of years instead all at once. But it appears that most lottery winners take the lump sum option.
Structured settlements often use a type of period certain immediate annuity to distribute court ordered settlements that may serve to “protect” a person who is not accustomed to having a large amount of money on hand.
We wanted to establish a bit of extra income. There was a good recommendation about ImmediateAnnuities.com on CNN. We also liked that we could see excellent reviews about them on Google. They were very thorough from our first inquiry to when we decided to buy our annuity from Mass Mutual. They always answered our questions promptly and followed up with the insurance company, too. We have been receiving our monthly payments since last November and couldn’t be happier. What more can we say?
A third option and probably the most common is the “life with a period certain.” This provides for a beneficiary payment of some sort if the owner dies before the period certain, but will provide a lifetime income if the owner lives beyond the stated “period certain.” For example, Jane Doe took a 10-year life with a period certain immediate annuity payment. If Jane died in year five, her beneficiary would get the remainder of the five years of income to complete the “period certain” payment guarantee period. If Jane lives past 10 years, she would get an income for the rest of her life where upon her death the payments would stop.
Immediate annuities may also provide some protection when involved in Medi-Cal planning and skilled nursing home qualification for long-term care. A married couple can set up an immediate annuity to provide income for the community spouse (the spouse who is at home), but has to name the state of California as the secondary beneficiary after the spouse. The immediate annuity is not considered a countable asset when qualifying for Medi-Cal because the asset has been committed to an income and the asset actually no longer exists. This type of choice is irrevocable and has to be Medi-Cal compliant. This generally means that the immediate annuity income cannot exceed the life expectancy of the contract owner.
The advantage of this type of immediate annuity is an income to support the community spouse while the other spouse receives needed custodial care.
Immediate annuities have been available for generations and may not be for every financial plan. Any decision to enter into an immediate annuity should be done so in consultation with qualified financial professionals as well as qualified tax professionals.
Source - redding.com - 11-14-2010