Definition / Examples of Immediate Annuities
How Single Premium Immediate Annuities Work
Types of Single Premium Immediate Annuities
Advantages and Disadvantages of Immediate Annuities
Is a Single Premium Immediate Annuity Worth It?
Definition / Examples of Immediate Annuities
A Single Premium Immediate Annuity (SPIA) is a retirement product sold by life insurance companies to provide guaranteed lifetime income in exchange for a one-time payment. The amount of income received depends on the beneficiary’s age, gender, the amount of money used to purchase the annuity, and the chosen payout option. The immediate annuity starts paying income within a year of the purchase payment.
How Single Premium Immediate Annuities Work
Immediate annuities differ from other investments because you exchange capital for income. Once income begins, you usually do not have access to the money used to purchase the annuity. The actual rate of return depends on how much you recover through the payments. Income from an immediate annuity is considered part of the principal and part of the interest. For other guarantees, the income may be higher than what you would receive from other investments like certificates of deposit or government bonds.
Types of Single Premium Immediate Annuities
There are two types of Single Premium Immediate Annuities:
1. Fixed Immediate Annuity: The amount of the direct payment is determined when the insurance company receives the immediate payment. The annuity amount does not change and is based on the chosen payout option and the age and gender of the beneficiary.
2. Variable Immediate Annuity: Your payments are linked to the performance of the investments you select. Income can fluctuate and be higher or lower in some years depending on investment performance. An assumed interest rate (AIR) is used to calculate the initial variable payments from the annuity, along with the age and gender of the beneficiary.
Advantages and Disadvantages of Immediate Annuities
Advantages:
– Guaranteed lifetime income
– Potential for higher cash flows
– Favorable tax treatment
Disadvantages:
– Low return rates
– Lack of flexibility and liquidity
– No inheritance
Is a Single Premium Immediate Annuity Worth It?
According to a survey conducted by the International Association of Professional Accountants in 2019, “bankruptcy in retirement” is the number one concern for retirees. The immediate annuity aims to address the problem of running out of money by creating a minimum guaranteed income for the rest of your life. It can be used to supplement other guaranteed income sources like Social Security and pensions, or to enhance non-guaranteed income sources like investment funds that pay dividends. However, the feasibility of an immediate annuity depends on personal circumstances, assets, and how the rest of your portfolio is managed. For example, an aggressive investor may benefit from having a guaranteed income source in case of a market downturn.
It is important to remember that when purchasing an immediate annuity, you usually lose access to the entire purchase amount. If you need liquidity – meaning you may need access to that money in case of an emergency, for example – a different guaranteed strategy, such as a CD ladder, may be better, where you can earn interest and withdraw your principal over time or as needed.
Source: https://www.thebalancemoney.com/what-is-a-single-premium-immediate-annuity-spia-5199275
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