Understanding Immediate Annuities
Gaurav Bhola, MSM, Managing Editor
Single Premium Immediate Annuities (SPIAs) are bought by the annuitant with a single payment. As the name insinuates, the annuity makes payments regularly every month to you immediately after you fund the annuity. The payment begins 30 days from the date of deposit; but you may be able to defer the date that payments begin.
It is important to understand what occurs when you purchase an immediate annuity. The insurance company takes a lump sum of your money and guarantees to make regular payments to the owner or annuitant (if different) for a certain period. Generally, annuitants choose to receive payments for life. Once you choose the payment term, life, 10 years, 20 years, etc., you are unable to make changes to the terms in the future. Once you accept the guaranteed schedule of payments you forgo your right to your original deposit. For it is, once annuity payments begin the contract can’t be altered or cashed in.
Here are some advantages to purchasing immediate annuities:
- Security- can offer guaranteed lifetime income that can never be outlived
- Simplicity- your funds are managed for you, hence effortless professional investment management
- Principal Safety- funds are not tied to the fluctuations of the financial markets
- Fixed Investments – no/low risk investments are used to generate interest rate return on your immediate annuity assets
- Tax Deferral- on qualified annuities you can accrue earnings that are tax-deferred, meaning that the major portions of payments are nontaxable return of principal
Single Premium Immediate Annuities (SPIAs) can be attractive in the following situations:
- Retirement
- Pension terminations
- Life buyouts-retirement
- Estate planning
- Divorce settlements
- Personal injury settlements
- Sports contracts for professionals
Summary of characteristics of an immediate annuity insurance policy:
- Guaranteed payment for life
- Professional investment management of your funds
- No/low-risk investment vehicle, assuming the insurance company is financially secure. Your principal is guaranteed not to lose value, not tied to financial markets
- Annuities are tax-efficient. If you fund your annuity with tax-deferred monies you pay taxes only on your monthly checks rather than the entire lump sum.
Immediate annuities can be a great way to fund your retirement. They are one of the few investment vehicles that guarantee no loss of principal.
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