Longtime listeners know that annuities are a four-letter word in my mind. Most annuities have massive commissions and massive expenses. That’s why they’re pushed by commissioned salespeople, especially those in banks who target customers complaining about low CD interest rates.
But there’s one annuity that may be a great deal for a lot of people. It’s called an immediate payout annuity (aka life annuity).
Why do I like immediate annuities?
When you retire, you may not have enough money to provide for your monthly needs from savings. So there are companies that turn a supply of money into a lifetime stream of income. Immediate payout annuities are entirely legitimate, but they have so little in the way of commissions that they’re never pushed by salespeople.
As with anything else, there are good providers and bad providers of life annuities out there. You always want an insurer with an A.M. Best rating of A+ or A++. Smart Money has ranked the top immediate annuity providers, based on who gives the highest monthly income and who is the financially strongest insurer. (Editor’s note: This article no longer appears to be active on the Smart Money site.)
One knock that I often hear is, what if you pour all your money into an immediate payout annuity and then you die next week? It’s true that all the money will be gone and there will be none for your heirs.
That’s why you can opt for a special provision called “period certain,” which means that you’ll get a guaranteed payout (typically for 20 years) even in the event of your death. Your monthly benefit will drop by about 10 percent if you take the period certain option, but at least it provides something guaranteed to your heirs.