Legal Definitions - immediate annuity

An immediate annuity is a financial contract where an individual makes a single, lump-sum payment to an insurance company. In exchange, the insurance company begins making regular, guaranteed income payments to the individual almost immediately, typically within one year of the initial payment. These payments can continue for a set number of years or for the rest of the individual's life, providing a predictable stream of income.

Here are some examples to illustrate how an immediate annuity works:

• Example 1: Retirement Income Security
  Sarah, a 65-year-old retiree, has a substantial amount of savings from her career. She is concerned about market fluctuations and wants to ensure a stable income stream to cover her living expenses throughout her retirement. She decides to use a portion of her savings to purchase an immediate annuity.

  How it illustrates the term: Sarah makes a single, lump-sum payment to an insurance company. Within a month of this payment, the company begins sending her a fixed monthly payment, which will continue for the rest of her life. This provides her with immediate, guaranteed income, demonstrating the core function of an immediate annuity.

• Example 2: Managing a Windfall
  David, 50, unexpectedly inherits a significant sum of money. While he is still working, he wants to ensure a portion of this inheritance provides a reliable income supplement for his future retirement, without having to actively manage the investment himself. He decides to invest a portion of the inheritance into an immediate annuity.

  How it illustrates the term: David makes a single, large payment from his inheritance to an insurance provider. The annuity then starts paying him a fixed quarterly amount, beginning the very next quarter. This arrangement immediately converts a lump sum into a predictable, ongoing income stream, aligning with the definition of an immediate annuity.

• Example 3: Structured Settlement for Injury
  Maria receives a large settlement payment after a personal injury lawsuit. Instead of receiving the entire amount at once, her legal team advises her to use a portion of it to purchase an immediate annuity to cover her ongoing medical expenses and living costs for the next 15 years.

  How it illustrates the term: A portion of Maria's lawsuit settlement is used as a single, lump-sum payment to an insurance company. The company then immediately begins making regular monthly payments directly to Maria, which are guaranteed for the next 15 years. This provides her with a structured, immediate income to manage her long-term needs, perfectly demonstrating an immediate annuity.