how an immediate payment annuity works
individuals typically buy immediate payment annuities by paying an insurance company a lump sum of money the insurance company in turn promises to pay the annuitant a regular income according to the terms of the contract the amount of those payments is calculated by the insurer based on such factors as the annuitant s age prevailing interest rates and how long the payments are to continue payments typically begin within a month of purchase annuitants can also decide how often they want to be paid known as a mode a monthly mode is most common but quarterly or annual payments are also an option people often buy immediate payment annuities to supplement their other retirement income such as social security for the rest of their lives it is also possible to buy an immediate payment annuity that will provide income for a limited period of time such as 5 or 10 years the payments on immediate payment annuities are generally fixed for the period of the contract however some insurers also offer immediate variable annuities that fluctuate based on the performance of an underlying portfolio of securities much like deferred variable annuities still another variation is the inflation protected annuity or inflation indexed annuity which promises to increase payments in line with future inflation immediate payment annuities represent a bit of a gamble annuitants who die too soon may not get their money s worth while those who live a long time can come out ahead special considerationsone potential drawback of an immediate payment annuity is that payments typically end upon the death of the annuitant and the insurance company keeps the remaining balance so an annuitant who dies earlier than expected may not get their money s worth out of the deal on the other hand an annuitant who lives longer may come out ahead there are some ways to get around this problem one is by adding a second person to the annuity contract referred to as a joint and survivor annuity it is also possible to buy an annuity that guarantees payments to the annuitant s beneficiaries for a certain period or that will refund the annuitant s principal if the annuitant dies early known as a cash refund annuity such provisions cost extra however once purchased an immediate payment annuity cannot be canceled for a refund this may pose a problem should the annuitant need the money in a financial emergency for this reason it s smart to have an emergency fund set aside for unforeseen needs before deciding how much money will be placed in the annuity 