An SPIA is a Single Premium Immediate Annuity. Single, meaning you put the entire contribution into the contract in one lump sum. Premium, a term usually associate with life insurance, means the amount you put into the annuity for a given benefit. Immediate means you start to receive payments out of the annuity within a month or two after the premium is paid in. Annuity means a guaranteed series of payments to you, usually for life.
Single or Periodic – Immediate or Deferred
You can mix and match these types of annuities depending upon your long term goals.
Single or periodic refers to how you put money into the contract. Immediate or deferred refers to how you take money out.
If you are in your 30’s or 40’s, you may want to save for retirement by entering into an annuity contract with an insurance company. You might not have any money sitting in a savings account that you can spare, so you start making monthly contributions of whatever amount you can afford. This could be $25, $100 or even $1000 per month depending on your salary. These are periodic premium payments, and this method is designed for average people to save gradually for retirement when they will begin to receive their annuity payments. When you put money in and don’t start to receive payments until much later, you have a deferred annuity contract as opposed to an immediate contract.
A single premium was designed for people who have a larger sum of money and want to now get guaranteed payments for life. You may have saved each month by putting amounts in a mutual fund or individual stocks over the course of your career to get potentially better investment returns. Now you want to retire, so you take the entire amount, or a good portion, and buy an annuity. This would be an immediate annuity since you are starting to receive payments immediately after you pay the premium.
Single premiums are also used by investors who want to buy an annuity contract for the tax deferral advantages and possible investment gains. This could be a person buying into a variable annuity contract. Normally this type person is not interested in getting guaranteed annuity payments at retirement; rather he wants the annuity for investment purposes. However, legally this person would be buying a single premium, deferred annuity contract since payments, if any, are intended to be made much later on.
Why Buy a Single Premium Annuity
Many financial planners advise against putting money into a deferred annuity throughout your working career. Even if you have only a relatively small amount to save or invest each month, you may be better off putting this money in a high quality mutual fund each month.
Over 20 – 40 years, stock market investments should perform better than the guaranteed interest rate offered by an insurance company. With investments over such a long period of time, you should not need guarantees. Guarantees come at a cost. So in having each of your contributions receive a guarantee of interest and principal, you are paying expenses which are much higher than if you put your money in a mutual fund.
The situation at retirement is much different. Your salary is most likely about to stop, and you will be living off your savings and Social Security payments. If you are not covered under a defined benefit pension plan at work, the lack of money coming in at retirement will leave you with a very insecure feeling. Even if your savings is a very large amount, the lack of guaranteed income will always leave you with the worry that you may outlive your savings.
This situation is perfect for the purchase of a single premium immediate annuity. Just before retirement, you take a good portion of your total savings to buy an immediate annuity contract. You will now have the security of having guaranteed payments coming in, which will help alleviate that constant feeling of insecurity.
Buying this type of contract at retirement saves you from paying for the insurance guarantees during your career. You will pay for the guarantees at retirement, but this is the time when you need the guarantees.
Payout Options with an Immediate Annuity
You can select a number of different payout options when you enter the contract.
One type isLife Income with Period Certain. With this option, monthly payments are madefor your lifetime, but are guaranteed to be paid forat least a minimum number of years you select, such as 5 or 10. So if you have a life with 5 year certain annuity, and you die in year 3, your beneficiary will continue to receive monthly payments for 2 more years.
Another option is the Life Income with Cash Refund. Monthly payments are made for your lifetime, with the guarantee that the total of all benefits paid to you and your beneficiary will at least equal the total amount you put into the contract.
The most popular payout option is the Joint and 100% Survivor option. Monthly payments are made to you and your spouse for your combined lifetimes. So, if you should die in year 3 of the contract, your spouse will continue to receive the same monthly benefit for the remainder of his or her life.
Tax Considerations with an Annuity
Payments you receive each month will consist partly of a return of your own contributions and partly interest earnings. The earning portion of the monthly payment will be taxed at ordinary income tax rates. If you leave your money in a mutual fund rather than buying an annuity, any withdrawals from the mutual fund will be considered capital gains. The capital gains tax is lower than ordinary income tax. Then again, if you keep your retirement savings in a mutual fund, you won’t receive guaranteed payments for life.
Annuity Asset Protection
If you buy a single premium immediate annuity, you are removing the money from your assetsas far as Medicaid is concerned. In other words, Medicaid will not look at the amount you have in an annuity when it is determining if you are eligible.
Also, the courts in most states consider your fixed immediate annuity as being exempt from attachment bycreditors.
Disadvantages of a Single Premium Immediate Annuity
Buying a single premium immediate annuity is along term decision that can’t be undone. You need to be very sure that this approach is what you want before committing your money.
These annuities are very conservative and are designed for safety and guaranteed income. This income may not outpace inflation as might be done with equity investments. Should inflation rise dramatically, you are still committed to your fixed annuity
You are also committing a large amount of money for a relatively low monthly payment. While you get a life income, you lose all flexibility in the handling and investment of your retirement assets. Should your financial situation change for some reason, you are still committed to the annuity.
SPIA as Part of Overall Financial Plan
The guaranteed life payments and the peace of mind this can offer the retiree should make the SPIA a consideration for most peoples’ financial plans. It does not have to be all or nothing. You do not have to either put all your assets into an SPIA or all in mutual funds. You can merely take a portion of your assets and commit to an SPIA. In doing this you will get the benefits of having a guaranteed income stream, and also a good portion of your money that will have more investment flexibility.
Give an SPIA careful consideration.