Video FAQ: Do I Need an Immediate Annuity?

Video FAQ: Do I Need an Immediate Annuity?

This week’s question is, “do I need an immediate annuity?” And, the answer is that it depends on how much risk you want to take on, what your time horizon is, and what your other assets are. 

An immediate annuity is a contract between you and an insurance company in which you are giving them a lump sum of assets, and in return, they’re giving you an income stream. This income stream can be set up to last for the rest of your life. It can also be for both you and a spouse. There are many different stipulations you can have in the contract.

The key benefits of the income annuity are:

  • You’re not going to have any longevity risk.
  • If you have a large gain and a deferred annuity, and you don’t want your surviving spouse or beneficiaries to have income in respect of a decedent, you can spread out those payments over a longer period of time.
  • It’s non-market correlated.

Some of the negatives include:

  • A lack of liquidity, so you may not have access to capital when you may need it if you needed a large lump sum.
  • You’re putting a lot of weight in the insurance company to make sure that they’re making the payments. They are regulated by the state Insurance Commissioner, so the risk is not really that high, but you probably do want to go with a big name brand company for an immediate annuity.

It is important to note that the distribution yield and the actual rate of return are two different things. You want to look for the IRR or “internal rate of return” when you’re comparing various immediate annuity providers. The IRR will give you what the true investment return is to you, not the distribution yield.

The approach that I would recommend when you are evaluating an immediate annuity is to first identify the essential core expenses that you want to make sure that you have covered (ie. pension plans or social security). You generally want to make sure that at least 50% of those expenses are covered from a planning perspective. If you’re more aggressive, this percentage may be lower, and if you’re more conservative, you might choose to increase coverage to 75%, 85%, or even 100%. Also, some may be in a situation where their pension income is more than their essential expenses.

Your approach will really depend on your risk tolerance. If you have questions about setting up an immediate annuity, please do not hesitate to reach out to us at We’re here to help!