Takeaways
- Insurance companies offer immediate annuities to individuals and couples.
- Immediate annuity contracts provide income to holders almost immediately.
- Annuitants can select between monthly, quarterly, or annual income payments.
- Investors often choose immediate annuities to supplement other fixed incomes.
- Insurance companies accept lump sum payments in exchange for providing a guaranteed income stream over the life of the annuity contract.
What Is an Immediate Annuity?
An immediate annuity is a contract between an insurance company and an annuitant -a person who wants the annuity – for the insurance company to begin making guaranteed payments to the annuitant. This guaranteed income can be for a fixed period, such as monthly, quarterly, or annual payments, and lasts for the term of the annuity contract.
Depending on the immediate annuity, a lump sum payment is made by the annuitant to the insurance company, which kicks off the annuity term. Unlike other types of annuities, which defer payments to some point in the future, immediate annuities start payments right away.
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How an Immediate Annuity Works
Immediate annuities, often referred to as single premium immediate annuities (SPIAs), work when an annuitant agrees to pay an insurance company a large lump-sum payment. In exchange for this immediate premium, or payment, the insurance company guarantees to pay the annuitant a regular income under the specific contract.[1]
Annuity payments are calculated by the insurance company based on a variety of variables about the annuitant. Insurance companies factor your age, health, interest rates, and other variables to calculate the guaranteed income payment.
Once the insurance company provides its guaranteed income calculation, you decide how you want to be paid. Most single-premium immediate annuitants choose monthly payments because they want to supplement other fixed income streams, such as Social Security, pension, or other retirement income. However, annuitants can also choose monthly or annual payments.
After the income amount and frequency of income payments are set, you must then determine how long the contract is going to last. Annuitants can choose different terms, ranging from 5 to 20 years.
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Pros of an Immediate Annuity
- Immediate Income – Many immediate income annuities start paying annuitants’ income in the month the contract is signed. For investors who value income streams over holding assets, this immediate income can reduce financial anxiety.
- Supplements Fixed Income –For investors nearing retirement with fixed-income streams, adding an immediate income annuity can boost monthly, quarterly, or annual income. Additional income can help pay for household expenses, such as groceries, medical bills, and transportation costs.
- Fast to Implement – Setting up an immediate income annuity can be executed in a matter of a few business days. Investors who value the immediacy of income payments gravitate to immediate annuities.
- Cost of Living Adjustments – To protect you against inflation and the rising cost of living, many immediate annuities allow you to opt for a cost-of-living adjustment. Soon-to-be retirees like the certainty this feature provides.
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Cons of an Immediate Annuity
- High Fees – Most annuity contracts come with fees to enter the contract and surrender fees, which are hefty penalties to cancel a contract or try to withdraw funds early.
- Low Liquidity – With an immediate annuity, you are given an insurance company part of your liquid cash, stock, CDs, or other investments in exchange for the annuity. Depending on the size of the annuity, this might eat into your overall liquidity, which could be an issue if you need cash quickly to pay for an unexpected expense.
- Loss Upon Death – Many immediate annuities include a provision that, upon the annuitant's death, income payments stop. If there is a remaining principal balance on the annuity, the insurance company keeps the difference. Of course, you can also get around this by purchasing a joint annuity or a survivor annuity. By doing this, your income would be rolled over to the second person on your annuity, such as your spouse.
Smart Summary
Immediate annuities are contracts with insurance companies in which annuitants pay a single lump-sum premium to secure a guaranteed income stream. These annuities can last for a fixed term or until the beneficiaries’ death. Investors consider using immediate annuities to boost their fixed income during times of uncertainty.
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(1) FINRA. Type of Annuities. Last Accessed March 10, 2026.
