Understanding Immediate Annuities and How They Work

Annuity, InvestmentAccording to usaaedfoundation.org, an immediate annuity is defined as a type of contract which begins paying out within one annuity period — for example, 1 month or 1 year, after it is purchased — and pays principal and earnings to liquidate the principal over some time period.

Key people

An immediate annuity is funded by a tax-sheltered account. This being the case, it means that the best use for an annuity is income. So who are the key people in an annuity contract? These are the owner, annuitant and the beneficiary. The owner is the buyer of the annuity and he pays the premiums and he has the right to the ownership of the annuity. Payouts from immediate annuity are subject to taxes however if financing with immediate taxed funds, the monthly paid principal is not taxed.

Its disadvantage is that the benefits die with the beneficiary.

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