What is an Immediate Annuity?
What is an Immediate Annuity?
An immediate annuity, is a financial contract between an insurance company and an annuity holder. As the name suggests, the annuity holder will receive payments from the insurance company soon after the signing of the contract. The payments almost always run for the life of the annuity holder.
Immediate Annuities which are also known as single premium immediate annuities or immediate income annuities were originated in the 1860s by the Equitable Life Assurance Company. Way back then they had a different name though, they were called tontines. The individual paid a lump sum to the Equitable and in return received guaranteed, lifetime income payments.
As one could certainly imagine these contracts became enormously popular as time moved on. Over the course of the next 40 – 50 years, the tontine, or financial contract, took on the name of its plan of payment – annuity. And that is how you and I know it today.
Then came another twist happened the twentieth century. The insurance companies learned they could also defer the payment of annuities. That is, they could accept either a lump sum payment or regular payments over a period of time and not have to begin paying out immediately.
This gave annuity contracts a dual personality. These new annuities were called deferred annuities because the payment to the contract holder was deferred out to some future point in time.
With a deferred annuity there are two phases. The first is known as the accumulation phase, in which the company invests the payments made by the holder. The second is the distribution phase, also known as the annuitization period, in which the company distributes the invested earnings to the holder over the remainder of his or her life.
Annuities lacking this payment postponement feature are immediate annuities. The first payment in an immediate annuity contract is made in accordance with the payment-frequency terms stipulated in the contract. They could be made in monthly, quarterly, semi-annual or annual payments.
A holdover from the last century that still exists today is the standard distribution plan. This being a lifetime distribution meaning the annuity holder receives level payments for the remainder of his or her life.
When the holder dies, the insurance company claims any remaining undistributed funds. The insurance company calibrates the annuity payout to the holder’s life expectancy. That is just one method the insurance company uses to guarantee a life time payout.
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