What is an ‘Immediate Payment Annuity’
An immediate payment annuity is an annuity contract that is purchased with a single lump-sum payment and in exchange, pays a guaranteed income that starts almost immediately. An immediate payment annuity is especially suitable for retirees who are concerned about outliving their savings. However, one disadvantage is that an immediate payment annuity is irreversible once it has been purchased. This may pose a problem should the annuitant need a large sum to deal with an emergency.
Explaining ‘Immediate Payment Annuity’
Another large drawback of an immediate payment annuity is that it is terminated upon death of the annuitant. This means that in the event of the annuitant’s premature death, the size of the estate left to his or her heirs may be much smaller than it would have been if the immediate payment annuity had not been purchased. Since the annuity payments are terminated upon the death of the annuitant, financial planners do not recommend this type of annuity for retirees who are not in good health.
Further Reading
- Optimal asset allocation during retirement in the presence of fixed and variable immediate life annuities (payout annuities) – patents.google.com [PDF]
- Assessing investment and longevity risks within immediate annuities – www.degruyter.com [PDF]
- Variable payout annuities and dynamic portfolio choice in retirement – www.cambridge.org [PDF]
- In sickness and in health: An annuity approach to financing long-term care and retirement income – www.jstor.org [PDF]
- Behavioral obstacles in the annuity market – www.tandfonline.com [PDF]
- Understanding the role of annuities in retirement planning – books.google.com [PDF]
- Participating payout life annuities: lessons from Germany – papers.ssrn.com [PDF]
- Rational and behavioral perspectives on the role of annuities in retirement planning – www.nber.org [PDF]
