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You provide a lump sum of money to an insurance company and, in return, they promise to send you a monthly check for the rest of your life, regardless of how long you live, similar to a pension.
Another option is taking a lump sum and using it to purchase a private annuity from a life insurance company. However, this option — sometimes called a pension annuity — doesn’t make sense ...
For example, a lottery winner may opt to receive a series of payments over time instead of a single lump sum distribution. This can also be called an annuity. Two terms related to annuities are ...
An immediate retirement annuity is an annuity that is purchased in a single lump sum, and payments on it begin immediately (30 days to 12 months), after the entry into force of the contract (there is no accumulation phase). An immediate annuity is good for turning a large amount of money into a source of permanent income (some kind of pension).
The most important thing to know is that if you choose the lump sum option, you’ll owe income tax on the entire amount unless it’s rolled over to an IRA or other qualified retirement plan.
Annuities can be purchased to provide an income during retirement, or originate from a structured settlement of a personal injury lawsuit. Life annuities may be sold in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (flexible payment annuity), prior to the onset of the annuity.
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