Those inheritance provisions are particularly important if you’re considering an immediate payment annuity.

A deferred payment annuity lets someone put money aside each month for the future. An alternative approach, though, is to give the insurance company a lump sum and begin receiving payments immediately. An immediate payment annuity pays an insurance company to manage funds and deliver a regular income for a certain period of time.

Like other kinds of annuity, people usually buy immediate payment annuities to create an additional, reliable, revenue stream to supplement pension payments. But it’s always possible for the owner of the contract to pay themselves that income. So the purchase of an immediate payment annuity represents a gamble. If the owner dies before they’ve received an amount equal to the purchase price of the annuity, they’ll have lost out. If they purchase a lifetime annuity though, and live to a ripe old age, they’ll come out on top.

Joint and Survivor Annuities

There are ways to reduce the risk that an early death will make an immediate payment annuity a poor purchase. One option is to purchase a joint and survivor annuity. That adds a second person to the contract. If one owner dies, the co-owner of the contract will continue to receive payments. Other options include provisions to pay beneficiaries in the event of the death of the owner—at least for a certain period of time—or refunding at least some of the principal to beneficiaries if the owner dies.

All of those options can lower the risk level involved in purchasing an immediate payment annuity. They let you hedge your bets although you can expect them to come with additional feed. But what’s always true is that once you’ve purchased an annuity, you won’t be able to cash it out. If you’re buying an immediate payment annuity, you’ll either get your money back in installments or the funds will go to your heirs. Make sure that you have emergency money available that you can tap if you really need to.

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