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What Do You Really Earn For Interest When Purchasing An Immediate Annuity?

As interest rates go up, so do immediate annuity quotes – and vice versa. Let’s consider what sort of interest rate you’d earn on an immediate annuity and the ramifications to you.

When you want a regular monthly payment for a term of years or for a life income, you may consider purchasing an immediate annuity. You may pay for it with one lump sum – called a premium – or with the value that your deferred annuity has accumulated over the years you contributed to it.

An immediate annuity is an investment. You pay a lump sum and the annuity company pays you a monthly payment for a given term of years – or for life (called a life annuity). It’s like making a loan to the annuity company where they will return your money in addition to some interest – if it’s for a fixed term. Each payment is made up of both a return of your premium and some interest earnings.

The amount of money you receive – as for a fixed term of years – in excess of what you initially paid represents your interest earnings. In fact, these earnings represent an annual interest rate you earn through the contract. Any money the annuity company can earn on your money beyond what they pay you goes to their profit – which is why they’re in business.

Of course, you can earn money on your lump sum by buying CDs, bonds, or interest income investments. But these pay you only the interest earned; you don’t get your principal back until the contract term ends. That makes the payments you receive during the year much smaller than what you would receive for an annuity of the same investment (premium) amount.

So, annuities pay you back principal and interest earnings in every payment. These characteristics are unique to annuities. And, of course, a life annuity will pay you as long as you live, but for this assurance, they don’t return all your principal if you die early before you’ve receive back all your principal paid. *Recognizing the annuity interest rate:

But unlike interest rates advertized for CDs and bonds, immediate annuity quotes simply give you the monthly payment you’ll get for a lump sum payment for a set term of years – or for life. It’s not obvious what earnings you’re getting on your immediate annuity payouts.

But the effective interest you earn can be worked out as if the immediate annuity is a loan whose interest and principal is paid back to you through a constant monthly payment. You can use that interest rate to compare the annuity to other interest rate investments.

*Interest rates and monthly payout versus annuity term for a $ 100,000 Immediate Annuity:

For a $ 100,000 (premium) immediate Annuity, below is shown the interest rate that you would earn followed by the monthly payments for 10 year and 20 year terms, respectively:

– 2% gives $ 920, $ 506

– 4% gives $ 1,012, $ 606

– 6% gives $ 1,110, $ 716

You can roughly interpolate for intermediate rates. The interest rate you may be earning on an annuity is often less than you may think. But then, you’re getting a payment scheme that’s unique to annuity investments. That’s their benefit!

If you’re interested in a life annuity, evaluate its earnings for you as a term annuity that’s equal to your remaining life expectancy. If you live longer than that you’re making more money; if you don’t live that long, you needn’t care about it!

Shane Flait helps you with your financial legal, tax, and retirement goals.
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Image from page 154 of “The romance of the British Post Office : its inception and wondrous development” (1897)
annuity
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Identifier: romanceofbritish00bowi
Title: The romance of the British Post Office : its inception and wondrous development
Year: 1897 (1890s)
Authors: Bowie, Archibald Granger
Subjects: Great Britain. Post Office Postal service
Publisher: London : S.W. Partridge
Contributing Library: Smithsonian Libraries
Digitizing Sponsor: Smithsonian Libraries

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Text Appearing Before Image:
g which may serve to encourage the habitof saving, is constantly offering fresh facilitiesfor the convenience of depositors. After the FreeEducation Act was passed, arrangements weremade whereby part of the saved school fees mightbe collected at the schools by the use of stampslips, the attendance of the children and others at adistant savings bank being rendered unnecessary, aplan that has been taken much advantage of by thepersons for whom it was intended. Navvies, too,employed on the construction of public works areafforded, at the place where they receive their wages,the opportunity of depositing money in the postalbanks, as well as of procuring money orders, anarrangement that has proved of marked value to the THE POST OFFICE OF TO-DAY. 153 class of men whose character for improvidence hasever been conspicuous. There also exists an arrange-ment under which the amount of scholarships awardedby the Technical Education Board of the LondonCounty Council are paid into the savings bank

Text Appearing After Image:
NAVVIES AT A POST OFFICE SAVINGS BANK. accounts of the scholars, as well as a plan for thedeposit of the deferred pay of soldiers leaving thearmy. Both systems are much used. The Life Insurance and Annuity business of the PostOffice is now an important adjunct of the Savings 154 THE BRITISH POST OFFICE. Bank Department. Originally instituted in 1864,under the auspices of Mr. Scudamore, the systemwas taken but little advantage of by the public, andfor nearly twenty years it lingered with very meagreresults accruing. In 1882 Mr. Fawcett determinedupon popularising the system if possible, and actingupon an ingenious suggestion made by Mr. James J.Cardin, C.B., the present Comptroller and Accountant-General to the Post Office, he amalgamated it withthe savings bank system. The scheme was legalisedby the Government Annuities Act of 1882, andbrought into operation in 1884. Briefly put, underthat plan every insurer and annuitant becomes a PostOffice Savings Bank depositor, and thus secures a

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