Immediate Variable Annuity

How an Immediate Variable Annuity Works

In some ways, immediate variable annuities are not all that different from standard variable annuities. Whether deferred or immediate, these products typically invest your money into things like mutual funds, resulting in payments that can fluctuate with the performance of those investments.

However, immediate variable annuities skip the accumulation period, during which you pay into the annuity over time, and those payments are invested and can grow or shrink, similar to traditional investments.

After the accumulation period, you enter the payout period, during which you can begin receiving the money and investment gains from your annuity in guaranteed payments.

According to the U.S. Securities and Exchange Commission, you can generally choose between receiving fixed, predictable payments or payments that fluctuate based on investment performance.

Immediate variable annuities are unique because they begin with the payout phase.

You don’t pay into the annuity over time; instead, you purchase it with a lump sum payment and begin receiving payouts immediately.

These payments, like a deferred variable annuity that has entered the payout phase, can vary based on the performance of the investments within your annuity.

Why Choose an Immediate Variable Annuity?

Immediate variable annuities are potentially beneficial for those who are looking to convert an existing lump sum into a stream of payments now and are comfortable with those payments being subject to — and potentially benefiting from — market risk.

By avoiding the accumulation phase, you don’t have to wait for a distant date in the future to begin receiving your payments.

You can typically customize this income stream as well. Some buyers want payments that last the rest of their life, while others may choose a set period.

However, there are potential drawbacks to be aware of.

The accumulation period for most variable annuities allows your money to grow. As you pay into the annuity over time, it gains additional value through its investments.

Additionally, immediate variable annuities may not offer the same tax advantages that make standard variable annuities popular.

There may be more limited payout options as well. When a deferred variable annuity enters the payout phase, some products offer the option to receive the money you have put into the product along with its investment gains as a lump sum instead of as an income stream.

This option would not make sense for an immediate variable annuity because you would have just placed a lump sum into a product that has not had time to grow.

 Immediate variable annuities, as the name suggests, offer an immediate income stream. This income stream can fluctuate based on the fund’s performance. Some have fees baked in for the underlying mutual fund, which can also reduce the income amount you receive. Additionally, they do not provide a tax benefit since you must pay taxes on the money taken out immediately. Despite this, some of my clients prefer this product, especially when the market is performing well, as the interest rates used can potentially be higher. Many of my clients enjoy feeling market participation, which is why they opt for immediate variable annuities.

Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance Group

Aamir M. Chalisa is the GM at Futurity First, leading Oak Brook’s top branch. With 30+ years’ expertise, chairs GAMA Global, driving diversity worldwide.

Immediate Variable Annuities and Taxes

One other major area to be aware of when considering an immediate variable annuity is how taxes affect the product.

Tax deferral is a highly touted benefit of many types of annuities, and it is a key part of what makes deferred variable annuities appealing.

You typically don’t owe taxes on the money in your variable annuity until you begin taking payments, allowing for increased growth during the accumulation period. 

Since immediate variable annuities pay out immediately and skip the accumulation period, you may not benefit from tax deferral.

If tax deferral is important to you or a major part of why you are considering an annuity, then an immediate variable annuity may not achieve all of your objectives.