What is Income Annuity?
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An income annuity is an annuity contract that is designed to start paying income as soon as the policy is initiated. Once funded, an income annuity is annuitized immediately, although the underlying income units may be in either fixed or variable investments. As such, income payments may fluctuate over time.An income annuity, also known as an immediate annuity, a single-premium immediate annuity (SPIA), or an immediate payment annuity, is typically purchased with a lump sum payment (premium), often by individuals who are retired or are close to retirement. These annuities may be contrasted with deferred annuities that begin paying out years later.
Definition
An income annuity is a type of annuity contract designed to start paying out income immediately upon the contract's initiation. Once invested, the annuity begins payments right away, although the underlying income units may be fixed or variable investments, causing income payments to fluctuate over time. Income annuities are also known as immediate annuities, single premium immediate annuities (SPIA), or immediate payment annuities, typically purchased with a lump sum payment, often by individuals who are retired or nearing retirement.
Origin
The concept of annuities dates back to ancient Rome, where individuals would pay a lump sum to receive lifetime income. The modern development of income annuities began in the 20th century, as they became a common tool for retirement income with the rise of retirement planning.
Categories and Features
Income annuities are primarily divided into fixed income annuities and variable income annuities. Fixed income annuities offer stable payments, suitable for investors seeking predictable income. Variable income annuities have payments linked to investment performance, appealing to those willing to take some risk for potentially higher returns. The main difference lies in the stability of payments and potential income fluctuations.
Case Studies
Case Study 1: A retiree purchases a fixed income annuity at retirement, receiving a fixed monthly payment to cover basic living expenses. Case Study 2: Another investor opts for a variable income annuity, where payments fluctuate with market performance, potentially yielding higher returns when the market performs well.
Common Issues
Investors often worry about whether income annuity payments will keep up with inflation. Fixed income annuities may lose purchasing power over time, while variable income annuities can result in unstable payments due to market volatility. Choosing between them requires balancing personal risk tolerance and income needs.
