• Joshua Crowe, CONTRIBUTOR
  • Hi, I am Josh Crowe the owner and founder of Sunpath Financial, a retirement specialist firm in Newport Beach. I hope you find our website and services useful!
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March 22, 2018 views: 30,239

Looking for the highest life-time, tax deferred income stream that keeps on paying for the rest of your life irregardless of market conditions? Then an immediate annuity just might be right for you… But don’t be fooled by sales jargon, there is downside as with everything.

Why do people buy immediate annuities?

Because they’re the highest paying guaranteed lifetime income annuity on the market, but there are several other reasons:


Immediate annuities offer two choices. A guaranteed lifetime income that can never be outlived, or an income stream guaranteed for a period of time. Either can be a good choice for those who fear outliving their retirement savings. In addition, many states also guarantee a percentage of payment if the company bellies-up.


The old motto when buying an immediate annuity is “Set it and forget it”. No need to watch the market, or speak with a broker. Just sit back and collect the checks. Especially useful when medical conditions become overwhelming.

Higher returns

The calculated interest rates by insurers are generally higher than Treasury or CD rates, and since part of the principal is returned with every payment, greater amounts are received that would be provided by interest alone.

Safety of principal

Funds are guaranteed and backed by the assets of the insurance company, and not subject to market volatility.

Special options

You can extend the coverage to your family through a cash refund, period certain, or joint life. With a cash refund, you’ll receive a reduced annual income and your remaining account balance will be passed to the beneficiary after you die. With period certain, your beneficiary can receive several years of income if you die before the period has ended (usually 10 years starting form the day you begin taking income). Joint life offers lifetime income on two lives for a reduced monthly benefit.

No sales or administrative charges

Immediate annuities do not have annual broker fees, management fees, loads, maintenance charges or any other fees. Your full premium is used towards your monthly income.

When immediate annuities are a bad investment?

An immediate annuity is NOT for everyone. The primary reason is that the account doesn’t offer a death benefit. In other words, if you die after receiving your first payment, the insurance company keeps your investment. There are several other reasons:

Rate of return

Although higher than a CD or Treasury rates, when compared to the overall market, they’re considered to be conservative.


Once you annuities your contract and begin taking income, you cannot access the capital in your account. This can be likened to a Pension or Social Security. There are exceptions as some insurers allow lump-sum withdraws at the fifth, tenth, and fifteenth anniversary of the first payment, however, this will reduce future payments.

Death benefit

After the 10-day free-look period ends and income begins, it’s tough luck for any heirs you had in mind. This is the biggest downside. It’s the tradeoff for offering you a high lifetime income stream. However, as mentioned in the benefit section above, there are some special options that’ll extend your coverage to your loved ones.

Funding an immediate income annuity with Qualified or Non-qualified Funds.

How you’ll pay tax on your annuity depends rather the money you used to fund it is qualified or non-qualified.

Qualified Immediate Annuities

If the annuity is funded with money that has not been taxed, it’s considered a “qualified” for IRS execution from income taxes. The whole monthly payment received from an immediate annuity (since income tax has not been paid). Qualified annuities can be funded from corporate-sponsored retirement plans such as Defined Benefit or Defined Contribution, Lump Sum distributions from such retirement plans, or from individuals arrangements like IRAs, SEPs, and Section 403(b) tax-sheltered annuities, or Section 1035 annuity or life insurance exchanges.

Non-qualified Immediate Annuities

Non-Qualified annuities are funded with monies that has not enjoyed the benefit of a tax-free status or exception and for which taxes have already been paid. Each payment received is considered a repayment of of previously taxed principal and therefore excluded from taxation. Non-qualified annuities are traditionally purchased by individuals investing their money market accounts, CD’s, after-tax savings, proceeds from the sale of a property, mutual funds, business, other investments, or from a life insurance payout.

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