DEFINITION of 'Immediate Variable Annuity'

An immediate variable annuity is an insurance product where an individual pays a lump sum upfront for payments that begin right away. The payments from an immediate variable annuity continue for the lifetime of the annuity holder, but the amounts fluctuate based on the performance of an underlying portfolio

BREAKING DOWN 'Immediate Variable Annuity'

The immediate variable annuity is unique in that most annuities have payouts that begin after an accumulation phase and that end when a specified age limit is reached. The immediate variable annuity skips the accumulation phase by having the holder contribute a lump sum, and then starts in the annuitization phase. Immediate variable annuities are less common, but can make sense particularly when the investor is older and worried about outliving his or her savings.

Immediate variable annuities are prey to the same risks as a normal variable annuity in that the payouts can fall when the underlying assets drop. The difference between an immediate variable annuity versus a standard variable annuity is the lack of an accumulation phase. Instead, this time period is compressed into one lump sum investment, making market timing a risk. If an immediate variable annuity is bought at the height of a bull market, for example, the income in the future will drop as the market reverts to the mean. This could result in a situation where the annuity holder is unlikely to get a great return on the variable portion of the annuity.

Immediate Variable Annuities versus Immediate Fixed Annuities

Immediate fixed annuities payments, by contrast, will not change if the market takes off after the initial lump sum investment. This is because they are guarunteed by the annuity provider. Some providers of immediate variable annuities will also guarantee a percentage on the variable portions, but these types of guarantees will generally be accompanied by higher fees. This is a general rule that is true for annuity investments – the more guarantees you get, the higher the price you will pay.   

Immediate annuities are commonly used by investors who have maximized other retirement options such as 401(k)s and IRAs. Immediate variable annuities do not offer the tax advantages that other retirement accounts do, but they can offer consistent income until death, with a potential bonus on top depending on the performance of the underlying assets.
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