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Ten tips

Keys to buying immediate annuity

By HELEN HUNTLEY
Published January 8, 2006

Don't have a pension? You can create your own by buying an immediate annuity that will send you a payment each month for the rest of your life. Unlike a deferred annuity, payments start right away. The chief benefit is the peace of mind from knowing you can't outlive your income. The chief drawback is that payments are relatively low and they're usually fixed for life. Here are some tips on making a smart choice:

1. STICK WITH FINANCIALLY SOUND COMPANIES. You want a company that will be able to meet its obligations to you and other annuity holders. The best way to try to ensure that is to choose a company that has at least an Aa rating from Moody's or an A- from Standard & Poor's. Higher ratings are even better, of course.

2. AGE MAKES A DIFFERENCE. The older you are, the bigger your monthly payments will be. If you are younger, you might want to invest your money in something else and wait to buy the annuity until you are 70 or older.

3. GENDER MATTERS, TOO. An annuity typically pays women smaller monthly payments than men the same age because women are expected to live longer and collect more payments. Some insurance companies use a unisex table to calculate payments, which works to the advantage of women.

4. CHOOSE SINGLE OR JOINT LIFE. An annuity may make payments for your life only or until both you and your spouse have died. In some cases, the payout to the survivor is 50 percent of the original payment. Consider what other resources (such as life insurance) will be available to the surviving spouse before deciding. Monthly payments are highest with the single life option.

5. PREPARE FOR PREMATURE DEATH. Some people worry that they'll die too soon and won't get their money's worth from an annuity. To counteract those fears, annuities come with refund options if you collect less than you've paid in or an option for "10 years certain," which means payouts will take place for at least 10 years and your heirs will collect if you don't live that long. Any guarantee or refund feature comes at the price of lower monthly payments while you are alive.

6. PREPARE FOR INFLATION. Most annuities pay a fixed monthly sum for life. If you have one of those, it helps to have other investments that will increase with inflation. Another option is an inflation-adjusted annuity, which some companies offer. Payments start out smaller than a traditional annuity and increase over time with inflation.

7. COMPARISON SHOP. Monthly payments may vary considerably from one company to the next. On a $100,000 annuity, the difference between the highest and lowest payments might be as much as $50 or $60 a month.

8. TRY THE WEB. You can get information and quotes at sites such as www.immediateannuities.com and www.webannuities.com Unfortunately, many Web sites require you to give your name and contact information to get a quote.

9. DIVERSIFY. Consider dividing your annuity among two or more companies if you are investing more than $100,000. The point is to reduce your risk should one of the insurance companies run into problems and default on its obligations.

10. WATCH INTEREST RATES. When long-term interest rates increase, so do monthly annuity payments. If you think rates are headed up, you might want to postpone your purchase.

[Last modified January 6, 2006, 20:09:02]