What is an 'Immediate Variable Annuity'?

An immediate variable annuity is an insurance product where an individual pays a lump sum upfront and begins to receive payments 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 the underlying portfolio

BREAKING DOWN 'Immediate Variable Annuity'

The immediate variable annuity is unique because most annuities have payouts that begin after an accumulation phase and end when a specified age limit is reached. The immediate variable annuity skips the accumulation phase by requiring the holder to contribute a lump sum after which the annuitization phase begins. Immediate variable annuities are not typical, but they can be a wise investment particularly when an investor is older and concerned that they might outlive their savings.

Immediate variable annuities carry the same risks as a normal variable annuities because the payouts vary and may fall when the value of the underlying assets drop. The difference between an immediate variable annuity and a standard variable annuity is the lack of an accumulation phase. Instead, the period is compressed into one lump sum investment, which introduces the risk of making market timing. If an immediate variable annuity is bought at the height of a bull market, for example, future income will drop as the market reverts to the mean. This could mean that the annuity holder is unlikely to see a sizeable 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 guaranteed 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 typically be accompanied by higher fees. This is a general rule that is true for annuity investments – the greater the guarantees, the higher the price.   

Immediate annuities are typically 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 of other retirement accounts. For example, before-tax retirement plans such as 401(k)s allow the individual to defer taxes on investment gains and to reduce their current taxable income. However, immediate variable annuities do offer consistent income until death with a potential bonus on top depending on the performance of the underlying assets.
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