People save and invest towards the future. As we grow older and closer to retirement, we become more concerned about how much income we will depend on when out of regular employment.
People buy investment stocks and or life assurance policies to secure the future. Income annuity is one of the investment options many people choose.
What is Income Annuity?
Income annuity is one of the two main categories of annuities, and it is also known as Immediate Annuity. It is also called Immediate Annuity because this type of annuity is specially designed to begin annuitizing (pay income) as soon as the policy is initiated.
If you went to an investment company to purchase an income annuity policy, you would be required to make a lump sum payment. The insurance or investment company will then offer you a contractual document which indicates the terms of the policy – how much you paid and how much or how often you would be paid.
Although income annuity policies are not meant for old people only, it is often purchased by people nearing retirement. Income annuity policies provide an assurance to pay subscribers some amount of income till their death or for a specified period of time. Hence, a lot of people begin purchasing income annuity policies when they are nearing the retirement age – so they can earn some income even in their retirement.
There is an option to make another person the beneficiary of the Income Annuity policy. In other words, you can purchase an Income Annuity policy and make your spouse or sibling the beneficiary. At any time you want to change such an arrangement, all you have to do is inform the insurance or investment company.
Types of Income Annuity
If you were to ask for an Income Annuity policy, you would be provided with three policy options which are; Immediate Variable Income Annuity, Immediate Fixed Income Annuity, and Deferred Income Annuity.
Immediate Variable Income Annuities offer an immediate flow of income. The amounts of income payment for this policy vary – they are dependent on how well the annuity’s underlining assets will perform. This means there is room for growth/increase in payments which helps to ward off the effect of inflation. However, payment amounts may be very low when assets perform badly.
Immediate Fixed Income Annuities offer an immediate flow of income too but unlike Immediate Variable Income Annuity, they offer a predictable or predetermined amount of income payment. No matter the level of market volatility, the guaranteed income to be paid to subscribers is not affected.
Deferred Income Annuities do not provide immediate income payment as the other types do. There is a deferral period after which subscribers will begin to receive payments. In comparison to the two other types, this policy provides higher income payments to its subscribers because of the deferral period.
Why is it important?
People prefer to purchase annuities because they consider them as a safe investment which provides more income than what they would earn from a similarly safe investment in U.S bonds.
Also, since people know they may outlive their lifetime savings, they prefer to have an investment which can guarantee them income payment till their death.
Usually, investors have very limited or no control over the assets used for purchasing income annuity. Subscribers who choose to relinquish all control over their funds enjoy the highest monthly income payment. On the other hand, subscribers who retain more control over their funds earn lower monthly payments.
