An immediate annuity is a retirement investment. The way this works is that you pay in a certain amount of money in one lump sum as a premium. In exchange, the annuity pays you a certain amount of money in a stream on a monthly, quarterly, or yearly basis.

Immediate annuities are generally considered as a method of distributing savings in a manner that defers taxes. The tax savings is realized because the tax law recognizes part of the annuity payment as principal being returned and another part as income, not capital gains.

Because people don’t know how long they will live, they don’t know at what rate they should access their savings. By purchasing an immediate annuity, they get a guaranteed stream of income for the rest of their life. This is a lot like making a loan to the insurance company that is “repaid” to the individual at a set rate every period. The insurance takes the lump sum payment and invests it, hopefully earning more than what is ultimately paid to the purchaser.

Variations of the immediate annuity exist that serve different purposes. For example, there is a period certain variation that makes a definite number of payments used to fund a need with a definite end. This type of annuity would not be good for retirement for obvious reasons.

Another kind of immediate annuity is the survivorship. In this case, a rider is added to the annuity policy that makes provision to continue annuity payments to the annuitant’s spouse or other survivor after the annuitant dies.

One potential issue with immediate annuities is that the annuitant can die before receiving back the initial investment. Unless options like survivorship are added to the policy, such a premature death results in forfeiture.

People who are interested in immediate annuities can use an immediate annuities calculator on the Internet to figure out how much needs to be paid into the policy in order to get a desired regular payment. The way this works is you enter in your state of residence; your age and gender; and your spouse’s age and gender. If you know how much money you have to invest, you enter that amount, click “calculate” and then you see the monthly payments available for all the immediate annuity options available to you. If you know how much income you want to receive every month, you enter it in the box, click “Calculate” and you’ll find out how much initial investment you need for the various annuity options.