What is an Immediate Annuity
Jason Stolz CLTC, CRPC
What is an Immediate Annuity? An Immediate Annuity—also known as a Single Premium Immediate Annuity (SPIA)—is a financial product that converts a lump sum of money into guaranteed income payments that begin within the first year after purchase. It’s designed for retirees who want to turn their savings into a steady, predictable paycheck they cannot outlive.
At Diversified Insurance Brokers, we compare income options from over 100 top-rated carriers to help clients see what their money could pay them—today, for life. Whether funded by retirement accounts or personal savings, an immediate annuity can simplify retirement income and reduce market worries.
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How an Immediate Annuity Works
When you buy an Immediate Annuity, you make a one-time premium payment to an insurance company. In exchange, they begin sending you income checks—monthly, quarterly, or annually—almost immediately, usually within 30 days to one year. The payments continue for the duration you select: a set number of years, for life, or for life with additional guarantees.
The simplicity of an Immediate Annuity makes it a popular retirement option. There are no market fluctuations to worry about, no account management, and no ongoing investment decisions. The insurer guarantees the income amount and assumes the longevity and interest rate risk.
Common Types of Immediate Annuities
- Life Only Annuity – Pays income for your lifetime, ceasing at death.
- Life with Period Certain – Pays for life, but guarantees payments for a set period (e.g., 10 or 20 years) even if death occurs earlier.
- Joint Life Annuity – Continues income for two lifetimes, typically a married couple.
- Refund Option – Ensures your beneficiary receives remaining funds if you pass away early.
Advantages of an Immediate Annuity
- Guaranteed Income: Once payments start, they’re locked in and guaranteed by the insurer.
- Protection from Market Risk: No exposure to stock market volatility.
- Simplicity: Set it up once—then enjoy regular income without ongoing decisions.
- Longevity Protection: Lifetime payout options ensure income continues no matter how long you live.
Considerations Before Buying
- Liquidity: Once annuitized, funds generally can’t be withdrawn as a lump sum.
- Inflation: Standard payouts are fixed; some contracts offer optional COLA adjustments for inflation.
- Estate Goals: If leaving a legacy is important, consider refund or period-certain options.
Who Should Consider an Immediate Annuity
An Immediate Annuity is ideal for retirees who want income right away—often those within one year of retirement or already retired. It’s particularly useful for covering essential living expenses such as housing, utilities, and food, allowing other assets to remain invested for growth.
It’s also commonly used for required minimum distributions (RMDs) from IRAs, since lifetime income payments can satisfy part of your annual RMD requirement.
Tax Treatment
Payments from a qualified account (IRA, 401(k), or pension) are fully taxable as ordinary income. For non-qualified contracts funded with after-tax money, only the gain portion of each payment is taxable under the exclusion ratio, which spreads the taxation evenly across expected payments.
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FAQs: Immediate Annuity
When do payments from an Immediate Annuity start?
Payments typically begin within 30 days to one year after purchase, depending on contract setup.
Can I change the payout option after income begins?
No. Once annuitized, the income stream is fixed and cannot be altered or surrendered for cash.
Is my money safe in an Immediate Annuity?
Funds are backed by the issuing insurer’s claims-paying ability and protected up to state guaranty limits.
How are payments taxed?
Qualified contracts (IRA/401k) are fully taxable; non-qualified contracts use the exclusion ratio to reduce taxes on each payment.
Can I add a cost-of-living adjustment (COLA)?
Yes, some carriers offer COLA riders that increase income annually by a fixed percentage to offset inflation.
