When Does It Make Sense To Buy An Immediate Annuity

by Junior Boomer on October 27, 2010

Buying an immediate annuity is a good way to generate an income for retirement. To buy a fixed immediate annuity, you provide an insurance company with a lump sum of cash. They in turn will begin pay out a month income which is payable for the rest of your life, regardless of how long you live.

Buy An Immediate Annuity
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Many boomers are considering these more nowadays so that they can have a more stable and secure income that the stock market has not been able to give them. To compound the problem, interest rates are at all times lows making it impossible to get a decent yield on their money.

With an immediate annuity, you can also establish a joint or a survivor annuity which will continue paying out a percentage of your income after you have passed away to your beneficiary. You can also add in a specified increase in your annuity annually to account for inflation down the road. Both of these options will cost more money.

How to Find the Right Annuity

When you are looking to buy an immediate annuity, there are typically two things to look for including:

  • Prices – you want to understand how much monthly income your investment will buy.
  • Stability – you want to ensure the insurance company you purchase an immediate annuity from is safe and secure for the future to ensure your annuity will continue to be paid as scheduled.

In order to find the annuity that makes the most sense for you, there are several considerations to make.

Shop Around for Immediate Annuity

There are many financial stable insurance companies offering immediate annuities. Find two or three that are offering more income for your money and compare each company’s security in addition to the cost. You want to check the ratings of the insurance companies to make sure they will be around in the future. An immediate annuity is considered a safe retirement strategy but its stability is dependent on the insurance company you use. Use Standard & Poor’s rating system or A.M. Best to find out how insurance companies rate.

Resist High-Pressured Add-Ons

Some insurance agents will try to add on expensive riders or sell additional life insurance policies. If you are not looking for the extras, just say no. Not only can it make it more difficult for you to comparison shop for prices, you will also end up spending more than you intended when seeking immediate annuities.

Take a Lock At Commissions

Agents take commissions from your investment so if you are expected to pay an agent a higher commission, it means you will get less money monthly. You’ll want to ensure the quote you receive includes the charges and commission so you’ll know exactly what you are getting. If an agent is vague about costs and charges, seriously consider taking your business elsewhere.

Diversify

You have the option to spread annuity buys amongst more than one insurance company to prevent the risk should an insurance company go bust. While there are costs to consider, in most cases you’ll receive just as much total income than if you stuck with only one company.

Once you purchase an immediate annuity, you can not make a change if you’ve decided on another avenue. This is why it is urgent you do the legwork before making the decision to buy an immediate annuity or go with a particular insurance company. The rewards for retirement are many if you know what you are getting into with an immediate annuity purchase.

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{ 1 comment… read it below or add one }

DIY Investor October 31, 2010 at 6:41 am

I would consider buying a short term fixed income exchange traded fund such as CSJ for the near term because interest rates are likely to rise. The amount you get for an immediate pay annuity depends on interest rates and age.

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