SPIA structures for life with installment refund are a great way to ensure a contractual income stream that you cannot live without. Many people refer to this solution as a way to solve the “longevity risk.” Since Roman times, SPIA structures have been used as retirement-type products and were the only type of direct insurance sold in this country until 1952. One could argue that the insurance industry has regressed since 1952 with a complicated and unregulated sales message involving more than 15 different types of insurance. The world would be better if SPIA structures were the only type available. Let’s go back to the 1950s!
Understanding the Basic Structure of SPIA
There is a common belief about SPIAs that if you have one and die early in the contract, the evil insurance company keeps that money and that is why they have those big buildings. What people are referring to is a SPIA structured as “life only.” However, there are more than 15 different ways to structure SPIA payments contractually, and “life only” is just one of them.
Life SPIA with Installment Refund Structure
For those who want to guarantee lifetime income but want the money to stay in the family, the most common option to structure a SPIA is called “life with installment refund.” “Life with installment refund” provides the highest guarantee of income for life, with a contractual guarantee that 100% of the remaining original premium will go to someone in your family or another designated beneficiary. This structure ensures a lifetime income stream, no matter how long you live. If you live to be 150 years old or more, the insurance company is obligated to pay. This is the benefit proposition of the SPIA strategy.
Betting on Life Expectancy
With the “life with installment refund” SPIA structure, you are betting on life expectancy with the issuing insurance company. They are obligated to pay regardless of how long you live.
However, if you or your spouse live beyond your life expectancy, there will be no money remaining in the SPIA account. Remember that the SPIA payment is a combination of premium return and interest, and it depends on your life expectancy at the time you start the income stream. Even if your SPIA account is worth zero dollars… you will still receive your payment.
Many people who have had SPIA accounts worth zero for over a decade continue to receive payments. This is risk transfer!
When requesting a quote for a SPIA, request quotes for both “life only” and “life with installment refund” so you can see the difference in payment between them. With these two quotes, it should be possible to make an informed SPIA purchase decision.
Source: https://www.thebalancemoney.com/spia-structure-life-with-installment-refund-145952
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