It’s possible to increase your monthly cash flow with a fixed immediate annuity. An immediate annuity is simply the payment of a premium to an insurance company. In exchange, the company converts your premium to a monthly cash payment for life or term of years. (Monthly payments are based on the claims-paying ability of the insurer, so picking a financially solid insurance company is important.) As each payment consists of principal and interest, each annuity payment is partially excluded from taxation as described by IRS Publication 590. Premium taxes could apply in some states.
Here’s a hypothetical example. A 70-year old gentleman paid $250,000 in premium to an insurance company for a fixed, immediate annuity. In return, the insurance company makes annuity payments of $1,598 per month. Of this payment, $1,302 will be considered a return of investment and only $296 will be subject to federal income taxes. Assuming this taxpayer is in a 25% tax bracket, the income tax for each payment would come to $74 per month. Any payments received after the tax payer exceeds his life expectancy are completely subject to federal income taxes. That’s $19,176 each year of checks in the mail. Please note that these annuities cannot be surrendered for value and payments will usually cease at the insured’s death. Please note that your actual results will vary based in part upon your age and premium paid.
For whom may a fixed immediate annuity be suitable?
- A retiree needing increased monthly cash flow;
- A person with no heirs or who is not concerned about leaving an estate;
- Someone who has set aside other funds to leave to heirs if they desire to leave an inheritance; and
- A retiree desiring the fixed payment and wanting to avoid maturities, rolling over investments and the maintenance and administration often required of investing on one’s own.