If you haven't given retirement planning a thought yet, the time to start doing so is now. Annuities are some of the best insurance options for your retirement future. It is an insurance product which will pay the annuitant, fixed or variable payouts for his entire lifetime, after he has bought it with a lump sum payment or through periodic installments.
The important part to be noted here is that you are paid throughout your entire lifetime. This is what makes them popular as investment options. Let us look at single premium immediate annuity as an investment for the future.
How it Works
There are several adjectives attached to the term - 'annuity' here. Let's explain each one of them and provide a definition in the process.
Firstly, it is an 'immediate' annuity, as your payments start immediately (in a month) after you have paid for it in full, and then they continue for your entire life or a fixed period of time, depending on the terms of agreement with the insurance company. There are single premium deferred annuities which start paying after a fixed period of time.
The term 'single premium' means that you will pay for the annuity in a single installment or through a lump sum payment. The size of payment and an evaluation of your life expectancy by the actuaries of the insurance company will decide the size of your monthly payouts.
Such an insurance product could be a fixed or variable annuity. In the former case, the size of your payments will be limited by a fixed interest rate, while in the latter case, it may be related to the performance of an equity index. Rates are decided by actuaries from insurance companies, considering the financial risk involved in selling you the annuity.
So a single premium immediate annuity is ideal for anyone who has the ability to make a lump sum payment and wants the payouts to start immediately. In the event of the death of an annuitant, the payout may or may not continue to a beneficiary.
If they do continue, the scale of promised payments is reduced accordingly. These kinds are known as joint-and-survivor's annuities. Some people opt for a single life annuity, in case there are no dependents for the annuitant to think about.
Pros and Cons of Buying One
One of the obvious pros is that payments start immediately and they continue for a lifetime, in the span of which, the annuitant can accumulate a substantial sum of money. The payments often come adjusted for inflation, which ensures that the size of payouts continues to be sizable.
One of the few cons lies in the fact that you can never touch the principal sum invested, ever in your lifetime. That is because, you have relinquished control of it, for your entire life. You need a good healthcare plan, that can take care of any large emergency hospitalization expenses and have sizable savings tucked away.
You cannot entirely rely on an annuity for survival. The last point is taxation. Your payouts will be taxed and hence you need to account for taxes, when evaluating the size of future payouts.
Weigh all your other options before opting for this type of annuity. It is certainly a sound investment, which will secure your future. Project the scale of payouts that you will receive in the future and read the terms and conditions carefully, before you sign the dotted line.