retirement

Immediate annuities: Do-it-yourself pensions

"I don't think you should ever put all your eggs in one basket because you'll end up making an awful big omelet if something goes wrong," says Peter D'Arruda, author of "Financial Safari."

Although immediate annuities are primarily used as a vehicle for retirement, they may also be suitable for people who have received a settlement from a personal injury lawsuit, an inheritance from an estate or money from a divorce case.

Lange also sees immediate annuities as a way to leave money to heirs who aren't financially sophisticated. A mentally challenged daughter or a spendthrift nephew can benefit from an immediate annuity that is set up at one's death based on instructions left to the estate's executor.

Annuity considerations

As the buzz increases over immediate annuities, companies providing them are getting more creative and flexible with them, such as continuing payments beyond death. These variations have broadened their appeal.

Variations on the immediate-annuities theme:
  • Set terms. Instead of buying a single-life annuity that lasts as long as you do, you can buy annuities for terms of five, 10, 15 years and so on. At the end of the defined period, the payments cease. If you die before the set period has elapsed, the annuity passes on to your heirs. (For example, if you die in the fifth year of a 10-year annuity, it would continue for an additional five years.) Generally a term-certain annuity will generate higher monthly payments than a single-life annuity and is useful for retirees who don't expect to live long.
  • Survivor benefits. Married couples often buy an immediate annuity with a spouse benefit. Payments continue until the survivor dies. The disadvantage: Monthly payments are smaller than with a single-life annuity.
  • Variable payments. Some immediate annuities allow subscribers to draw larger sums than their regular monthly stipend at set times (for instance on the anniversary of your purchase).
  • Inflation component. You can add an inflation rider to your immediate annuity so payments keep pace with inflation.
  • Variable rates. Payments on variable annuities are based on the type of investments you've chosen, unlike fixed immediate annuities.

Some immediate annuity contracts also allow you to withdraw some of the principal or cancel the annuity outright in case of an emergency. This flexibility comes with a price: lower monthly payments.

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For married couples, D'Arruda suggests that rather than investing in a spouse benefit that lowers your monthly check, buy a single-life annuity plus a life insurance policy to finance the purchase of an annuity for your spouse, should he or she outlive you.  

Shopping annuities

Insurance agents, financial planners, banks and life insurance carriers sell annuities. However, only life insurance companies actually issue policies, according to the Insurance Information Institute. Annuities developed by life insurance companies are often sold through banks, some investment management firms and stock brokerage firms.

It pays to shop around. According to Berman, annuities with a survivor benefit purchased today for a male age 70 would pay anywhere from $516 up to $769 per month based on a lump sum of $100,000.

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