# Immediate Payment Annuity: What It Is and How It Works

![Person presenting a pen to sign a contract](https://www.investopedia.com/thmb/l6znaXRI4QINrdc6LVk8pkKoAU0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-946934494-5722d17a44ed4fa2b21fffb628aa50e7-2aab7171a0a3433c810b7cdbf203cd34.jpg)

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> **Definition**
>
> An immediate payment annuity is a contract with an insurance company that provides the annuitant with guaranteed income payments that begin as soon as a lump sum payment is made.

## What Is an Immediate Payment Annuity?

An immediate payment annuity is a [contract](https://www.investopedia.com/terms/a/annuitycontract.asp) between an individual and an insurance company that pays the [annuitant](https://www.investopedia.com/terms/a/annuitant.asp) a guaranteed income starting almost immediately. It differs from a [deferred annuity](https://www.investopedia.com/terms/d/deferredannuity.asp), which begins payments at a future date chosen by the annuity owner. An immediate payment annuity is also known as a single-premium immediate annuity (SPIA), an income annuity, or simply an immediate annuity.

### Key Takeaways

*   Immediate payment annuities are sold by insurance companies and can provide income to the owner almost immediately after purchase.
*   Buyers can choose monthly, quarterly, or annual income.
*   Payments are often fixed for the term of the contract, but variable and inflation-adjusted annuities are also available.

## How an Immediate Payment Annuity Works

Individuals typically buy immediate payment annuities by paying an insurance company a lump sum of money. The insurance company, in turn, promises to pay the annuitant a regular income, according to the terms of the contract. The amount of those payments is calculated by the insurer, based on such factors as the annuitant's age, prevailing interest rates, and how long the payments are to continue.

Payments typically begin within a month of purchase. Annuitants can also decide how often they want to be paid, known as a mode. A monthly mode is most common, but quarterly or annual payments are also an option.

People often buy immediate payment annuities to supplement their other retirement income, such as [Social Security benefits](https://www.investopedia.com/terms/s/social-security-benefits.asp), for the rest of their lives. It is also possible to buy an immediate payment annuity that will provide income for a limited period of time, such as five or 10 years.

The payments on immediate payment annuities are generally fixed for the period of the contract. However, some insurers also offer [immediate variable annuities](https://www.investopedia.com/terms/i/immediate-variable-annuity.asp) that fluctuate based on the performance of an underlying portfolio of securities, much like deferred [variable annuities](https://www.investopedia.com/terms/v/variableannuity.asp). Still, another variation is the [inflation-protected annuity](https://www.investopedia.com/terms/i/inflationprotectedannuity.asp), or inflation-indexed annuity, which promises to increase payments in line with future inflation.

> **Important**
>
> Immediate payment annuities represent a bit of a gamble: Annuitants who die too soon may not get their money's worth, while those who live a long time can come out ahead.

## Special Considerations

One potential drawback of an immediate payment annuity is that payments typically end upon the death of the annuitant, and the insurance company keeps the remaining balance. So an annuitant who dies earlier than expected may not get their money's worth out of the deal. On the other hand, an annuitant who lives longer may come out ahead.

There are some ways to get around this problem. One is by adding a second person to the annuity contract (referred to as a [joint and survivor annuity](https://www.investopedia.com/terms/j/jointandsurvivorannuity.asp)). It is also possible to buy an annuity that guarantees payments to the annuitant's beneficiaries for a [certain period](https://www.investopedia.com/terms/p/periodcertain.asp), or that will refund the annuitant's principal if the annuitant dies early (known as a [cash refund annuity](https://www.investopedia.com/terms/c/cash-refund-annuity.asp)). Such provisions cost extra, however.

Once purchased, an immediate payment annuity cannot be canceled for a refund. This may pose a problem should the annuitant need the money in a financial emergency. For this reason, it's smart to have an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) set aside for unforeseen needs before deciding how much money will be placed in the annuity.

## What Is an Immediate Annuity?

An immediate annuity is named for how quickly you can receive payments from the insurance company. With an [annuity](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp), you pay an insurer a sum of money in exchange for a stream of income, typically for the rest of your life.

## What Is the Downside to an Immediate Annuity?

An annuity can come with high fees and low [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), which can eat away at your income and make it difficult for you to access your funds in a pinch. Many annuity contracts contain provisions for [surrender fees](https://www.investopedia.com/terms/s/surrenderfee.asp), which are charges that disincentivize you from cancelling the contract before a specified period of time.

## Do You Pay Tax on an Immediate Annuity?

Yes, you must pay taxes when you withdraw funds from an immediate annuity. The withdrawals are treated as income and are taxed at your [income tax bracket](https://www.investopedia.com/terms/t/taxbracket.asp).

There are two types of annuities that impact how withdrawals are taxed: [qualified annuities](https://www.investopedia.com/terms/q/qualified-annuity.asp) and nonqualified annuities. Qualified annuities are funded with [pretax](https://www.investopedia.com/terms/p/pretaxcontribution.asp) dollars, whereas nonqualified annuities are funded with [after-tax](https://www.investopedia.com/terms/a/aftertaxcontribution.asp) dollars. With qualified annuities, the entire withdrawal is taxed. With nonqualified annuities, only part of the withdrawal is taxed: the earnings.  

## Can You Cash Out an Immediate Annuity?

You typically cannot cash out an immediate annuity without paying hefty surrender fees. That's one disadvantage of annuities: they're not particularly liquid.

## The Bottom Line

With an immediate payment annuity, you pay the insurance company and then begin receiving income relatively quickly. This income can come at various intervals, from monthly to annually. A deferred annuity, in contrast, holds off on payments until a future date.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Annuities](https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities)."