Immediate Payout Annuity: What Is It and Do You Need It?

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Depending on who you’re around, sometimes you have to watch your words.

I’m not talking about avoiding certain four-letter words in the presence of children. I’m talking about saying the word “annuity” in front of money expert Clark Howard.

For the most part, Clark considers “annuity” to be a curse word. Annuities can often line the pockets of insurance salespeople while offering you a potentially poor financial product. However, an immediate payout annuity is a rare exception.

In this article, I’ll explain what an immediate payout annuity is, how it works and why Clark thinks they’re acceptable.


Table of Contents


What’s an Immediate Payout Annuity?

An immediate payout annuity takes an upfront, lump-sum payment and creates a steady, predictable income stream for a period of years or for life.

Just as the name indicates, the payouts are immediate. Most begin after one month, but you can wait up to one year on some policies. Payouts typically are monthly but are available quarterly or yearly as well.

Immediate payout annuities are also called “life annuities.” They’re similar to deferred annuities, which include an “accumulation period” of years before you start to receive payouts.

Immediate payout annuities may earn about 1%-1.5% interest per year. They’re not intended to increase your wealth. However, they do have some Clark-approved uses, which I’ll discuss later in this article.


How Do Immediate Payout Annuities Work?

You typically need a minimum of $100,000 to purchase an immediate payout annuity. Then you start getting checks — usually every month and usually right away.

Depending on how you structure your annuity, you could get paid out in a specified length of time (typically a five-year minimum) or for life. When you die, the payments stop (with rare exceptions).

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Usually, the payouts will be tied to inflation in some way. So even “level” payouts may rise a bit over time.

The money you put into one of these annuities grows tax-deferred. If you put in dollars that have already been taxed, your payouts will be partially (or mostly) tax-free.

Types of Immediate Payout Annuities

You can customize your immediate payout annuity. Here are a few of the options that most insurance companies give you.

Fixed Immediate Annuity: Aside from a potential inflation-related increase, your payments will stay the same with this type of annuity. So you can pretty much expect the same check to roll in every month, which is nice for budgeting purposes. It also takes away risk that the volatility of the markets will hurt you.

Variable Immediate Annuity: With this type of immediate payout annuity, you put your money into sub-accounts such as stocks, bonds and money market funds. Depending on the performance of those investments, your payouts will rise and fall, so they won’t be as predictable.

Life-Only: Also called a “single-life annuity,” your payouts end when you die. In exchange, you may get slightly higher monthly payouts. With this policy type, there’s a risk you could die the next day and your family would lose the entire lump sum.

Fixed Period: Also called “period-certain” or “term-certain,” this is a life annuity with an end date. You’ll get all your payouts during this specified window — say, 15 years — and nothing after that. This provision reduces your monthly benefit payment compared to an annuity with no end date. But if you die within the specified time period, your heirs get a guaranteed payout.

Joint-And-Survivor: This feature allows a beneficiary (such as a spouse) to inherit your remaining funds. At a cost, of course.

50% Joint-And-Survivor: You and your spouse can enter an immediate annuity together. If one of you dies, the payments continue, but they get cut in half.


Do I Need an Immediate Payout Annuity?

To be fair, this is a trick question. There’s more than one path to a financially successful retirement.

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However, if you have a stockpile of retirement money in a 401(k), IRA or brokerage account, and you’re risk-averse, turning a portion of that money into an immediate payout annuity can be a nice option. That way, no matter what happens to the price of your stocks and bonds, you’re getting a set amount of income.

“The beauty of the immediate payout annuity is it’s like setting up your own pension,” Clark says. “For whatever money you put into it, you’re going to have your own made-to-order pension that gives you a check every month for as long as you live.”

When you retire, you want to avoid getting into a situation where you can’t pay for your monthly needs with your savings. An immediate payout annuity helps guard against that by providing you with reliable income.

If you’ve retired but you’re waiting to claim your Social Security benefits, a fixed-period immediate payout annuity can help you cover the gap until you do. That way you have at least one set, reliable income stream.

Another way to hedge against market volatility is to bank three years’ worth of liquid expenses. So if you spend $50,000 a year, that’s $150,000. It includes any money you get from, say, Social Security as well as anything you have in savings or otherwise liquid and not exposed to market risk.

Again, Clark considers “annuity” to be a curse word.

But immediate payout annuities are one of Clark’s two annuity exceptions.

Clark recommends shopping for immediate payout annuities at ImmediateAnnuities.com or USAA if you’ve served in the military. And he says you should look for an A.M. Best rating of A+ or A++ before agreeing to any annuity contract.


Immediate Payout Annuity Pros

Here are some of the benefits of immediate payout annuities:

  • Consistent, predictable payments. Knowing you’ll have the same amount of money rolling into your bank account each month can help you budget, control your spending and rest easy when it comes to stock market volatility.
  • Easy to manage. Immediate payout annuities involve a single step, and that’s paying a lump sum. After that, you’re done. There’s no tax-loss harvesting or figuring out which shares to sell.
  • Protection against longevity. If you get a policy that pays out until you die, rather than for a specific number of years, you now have some protection against living to an especially old age.

Immediate Payout Annuity Cons

Here are some of the drawbacks of immediate payout annuities:

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  • Payments stop when you die. Pass away one week after handing a stack of cash to the insurance company? That’s a shame. Your family usually won’t get any of that money back. So there is risk involved.
  • Major opportunity cost. If your annuity is especially generous, you may make close to 2% interest a year. Even with a more conservative mix of stocks and bonds early in retirement, the odds are good you’ll outperform that mark.
  • Loss of liquidity. For the most part, the money you hand over won’t be accessible to you. If you fork over $200,000 and then six months later decide you want all of it back, you may be out of luck (outside of the monthly payments). Also, not everyone has at least $100,000 laying around in cash.
  • Eats away inheritance money. Because the insurance company gets your lump sum, and your payments stop when you die, immediate annuities tend to shrink the inheritance you’ll be able to pass to your children or grandchildren.

Final Thoughts

If you’re a long-time listener to Clark on the radio, on TV or on his podcast, you may be trained to bristle at the word “annuity.” But an immediate payout annuity can be a great way to take some risk out of your retirement strategy.

That’s especially true if you’ll still have a good-sized investment portfolio even after paying out a lump sum.

The best part? Clark approves of this type of annuity. Just make sure you don’t get tripped up by jargon and sales tactics and that you are actually getting an immediate payout annuity.

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