How to Find the Best Immediate Annuities: The 3 Step Process

by Rob Phillips, CPA

People buy immediate annuities for one main reason: They want a secure and guaranteed stream of income for some specified period of time, or for a lifetime. Such has been the purpose of annuities for hundreds of years. In exchange for a lump sum of money, they expect to receive periodic payments that include both a return of their principle plus interest.

For those who opt for lifetime payments, they expect to receive them for as long as they live. For such serious expectations, finding the best immediate annuities should begin with finding the companies that are best positioned to meet them.

Why Size Matters

We’re referring to the size of the financial position of the life insurance company that issues your immediate annuity. Here’s why it matters: Essentially immediate annuities are a promise. More specifically, they are a contractual obligation between a life insurer and an individual in which the insurer promises to pay the individual a specific amount of money for a specified period of time in exchange for a lump sum of money.

 If it is for the life of the individual, the payment period is open-ended, lasting for as long as the individual lives. Once the lump sum of money is received by the life insurer, the individual loses all access to it except in the form of the promised periodic payments, so that obligation becomes very important.

In the end, that obligation, which comes in the form of a guarantee, is only as solid as the financial condition of the life insurer that backs it. While it is true that, in the history of the life insurance industry, there has yet to be an instance in which an annuity recipient failed to receive his or her payments, there have been some instances of life insurance insolvency.

To the credit of the industry, when that has happened, it has been the stronger companies that have come in to rescue the troubled companies and their annuity owners. So, with so much at stake, why not simply invest your money with the strongest of the life insurance companies? Aren’t the best immediate annuities the ones that will be able to pay even in the worst of times?

How Life Insurers Deliver on the Promise

When you understand how immediate annuities work, it’s easier to develop an appreciation for the strong company theory. When a lump sum deposit is made, the life insurer takes it and invests it in its general account. Then, applying some actuarial assumptions, it calculates the amount of the periodic payment which, for fixed annuities, are set and guaranteed for the entire payment period.

The payment is calculated so that the entire principle balance is paid out along with earned interest by the end of the payment period. If the payment period is for a lifetime, the number of periodic payments is based on the life expectancy of the individual. If the individual lives beyond his or her life expectancy, the periodic payments continue, unchanged, until he or she dies, thereby extending the life insurer’s obligation.

Going for Payout

For the most part, the competitive feature of immediate annuities is the payout which is the amount of income that its actuarial assumptions will produce for the specified period of time. Quite simply the payout can be compared apples-to-apples from one company to the next.

Given the age of the individual, the number of payment periods, the amount of original principle and a projected rate of interest, the income payment is calculated for a single life annuity. These same parameters can be given to any immediate annuity provider and they will be able to quote a payout.

Certainly, it would make sense to search for the annuity with the highest payout (with important consideration for the financial quality of the provider).

If the annuity is to cover two lives, those of a husband and a wife, a joint life payout is reduced by a percentage as the cost for insuring the additional life. Some annuity providers will quote more competitive payouts on their joint life annuities than on their single life. Additionally, if a refund option is added, in which all or a portion of the remaining principle is to be refunded to a beneficiary, the payout is reduced further, and some providers are more competitive with these payouts than others.

Additionally, certain options, such as inflation protection which links the payout rate to an inflation index, would be important to consider. The cost of these options is paid deducted from the initial payout rate, which can be compared from one company to the next.


The bottom-line is to know exactly what you need your immediate annuity to be able to do for you, apply the same parameters to the top life insurance companies and compare them side-by-side. As long as your search is restricted to the more highly rated companies, your comparisons can then focus on the payout rate. The best immediate annuities are the ones that pay you well while giving you the greatest possible peace-of-mind.

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