The immediate fixed annuity is one of the most basic forms of annuity contracts offered by insurance companies. Of the various insurance products, the immediate annuity tends to be rather straightforward and easy to understand. On the surface this product can be a bit overwhelming for new investors, but once the basics are explained the concept becomes much easier to grasp.
Before explaining the immediate variety of this insurance product, it is probably prudent for us to discuss annuities in general first. The fixed annuity is one of the oldest financial products on the market and can trace its roots to Roman civilizations. In more recent times, the annuity was first seen in America in the mid- to late- 1700s, and was offered publicly in the early 1900s.
An annuity is simply a contract between an insurance company and an individual. The individual pays premium payments to the insurance provider in return for a future monetary benefit paid out in return. This payment back to the individual is the income portion of the annuity and is often referred to as the distribution out of the account.
Among fixed annuities, there are two major categories that they all fall under. This includes deferred annuities and immediate annuities. The deferred annuity refers to the distributions that begin at a point in the future. The immediate annuity, on the other hand, begins distributions immediately after the account is funded. Actually, a more accurate description would be that the distributions begin one time period after the creation of the account. With an annual annuity, the payments begin one year after account creation, and a monthly annuity begins distributions one month after creation.
Because an immediate annuity begins distributions payments immediately, they will almost always require a lump-sum payment to fund the account. Deferred annuity may allow either a lump-sum premium payment or allow you to spread the funding over a couple of months or years.