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What is an Immediate Annuity?

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  • Written By: Garry Crystal
  • Edited By: Niki Foster
  • Last Modified Date: 24 September 2016
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An immediate annuity is an investment policy that is usually purchased from an insurance company. Immediate annuities are commonly used as retirement investments and purchased with a lump sum. The immediate annuity provides regular income that should continue for the rest of one's life or for a time period that the policyholder selects.

The immediate annuity is also sometimes known as a Single Premium Immediate Annuity. The income should begin within one year from the date of purchase. There are a variety of different options available to you when purchasing an immediate annuity. You can decide whether you would like a set period of payments or a lifetime of payments. You can also decide on whether the payments are solely for the person who holds the policy or also for a secondary person, such as a spouse.

There are a number of factors to consider when purchasing an immediate annuity investment. The minimum payment required for the investment is usually around 10,000 US dollars (USD). The investment can be tax deductible, but it can also be a non-taxable contribution depending on the type of investment you require.

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When you purchase an immediate annuity, the monthly repayments will not vary for the life span of the investment. The interest rates on the investment will also remain the same for the life of either the policyholder or the investment. The insurance company that issues the policy will guarantee that the rates and the payout of the policy will never change. The payments that you receive from an immediate annuity depend on the sum you have paid in, as well as the current rate of interest when you purchased the policy and the type of payout you specify. Payments also vary depending on the age of the purchasers of the policy.

Another point to remember is that, if you buy your policy privately, then a large percentage of the monthly payout will be tax free. This is because the government considers the payout to be a return of capital. Only the percentage of the money considered earnings is taxable. If you receive your immediate annuity within a company pension, it is fully taxable.

An immediate annuity is a sound investment that offers peace of mind for the future. It is not available from all insurance companies and is US State specific. You should always check with a financial advisor and make sure you shop around for the best policy quotes before purchase.

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