Immediate and Deferred Annuities

Now that we've discussed annuitization, we can talk about the two general types of annuities.

Immediate Annuities - If you want to invest a large sum of cash and receive "immediate payments" over a period of time, then you want to invest in an immediate annuity.
Like the name implies, annuitization occurs at the start of the annuity, and the big decisions with this type of annuity include selecting an interest rate, payout plans, and death benefit.

Did you know? All state lotteries pay their jackpots based on the immediate annuity concept. For example, if the lottery advertises a $5 million jackpot, they are actually advertising a $3 million Immediate Annuity. Reading the fine print you find out that your $5 million will be paid to you over a 20 year time period (which is actually a $3 million investment with compound interest), however if you opt for a full pay out when you win, they would be all to happy to give you say $3 million today, which by the way is fully taxable by all levels of government. You would be lucky to keep $2 million after taxes, so enjoy your $2 million while you can.

Deferred Annuities - All other annuities are considered to be deferred annuities. Payout or annuitization of these annuities can be initiated based on the investor's decision. Many people will invest in deferred annuities and never annuitize (most annuities require annuitization by age 90 or higher). Instead, they use the annuity as an inheritance vehicle to pass money on to their beneficiaries.

Next we will talk about the three major kinds of annuities.

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