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Learn about the four primary concerns that define the financial planning process for retirees.
A Single Premium Immediate Annuity (SPIA) is a financial instrument purchased from an insurance company with single premium payment. In exchange for this lump-sum payment, the insurance company agrees to pay the buyer a series of fixed-income payments for life, for a specified period of time or both. Income payments from SPIA's generally begin within 30 days from the date the policy is issued, but can start later.
Because the buyer (also called the "annuitant") of a SPIA has exchanged a lump-sum payment for these income payments, SPIA's do not provide a cash or surrender value and are considered "irrevocable" contracts, meaning that they cannot be changed or modified in any way once they have been issued by the insurance company.
SPIA income payments vary based on a many different factors. These factors include both the gender and life expectancy of the annuitant, along with current interest rates and the income payout option elected.
Life Only - The life only option provides the annuitant with a guaranteed income for life, regardless of how long he or she should live. However, all income payments stop upon the death of the annuitant, even if their death occurs within a short period of time after the policy is issued. All future payments and/or benefits due to the annuitant are forfeited after death.
Joint-Survivor - While very similar to a life only, this option provides both the annuitant and their surviving spouse with a guaranteed income for life, regardless of how long either spouse should live. Joint and survivor options generally offer two payment options for the survivor. The survivor payment option is elected by the annuitant at the time of policy issue and generally provides the survivor with either 100% or 66.6% of the original income payment paid to the annuitant. Along with other factors, the elected survivor payout option will determine the amount of the annuitant's and/or survivor's income payment.
Period Certain - A period certain annuity provides the annuitant with a fixed-guaranteed income payment for a specified period of time, for example, 5 or 10 years. At the end of the term, payments stop and the contract expires. If the annuitant dies prior to the end of the specified term, all remaining income payments are paid to a named beneficiary.
Life With Period Certain - This option combines benefits of both the Life Only and the Period Certain options by guaranteeing the annuitant payments for life. However, if the annuitant dies prior to the end of the specified term, for example, 5 or 10 years, then payments will continue to his or her named beneficiary for the remaining period of the specified term.
SPIA's can be funded through a variety of different sources. For example, you can use money from a retirement plan, sale of a home, stocks or bonds or you can simply write a check from your checking or savings account. SPIA's are generally appropriate for people looking to establish a fixed, guaranteed monthly income for life or for a specified period of time. Life Only SPIA's can also play a significant role in pension maximization scenarios when used in conjunction with life insurance. They can also play a role in situations where the annuitant has no surviving beneficiary and wants to maximize their retirement income.
For SPIA's funded with non-qualified (non IRA or 401(k)) money, the IRS considers a significant portion of each income payment to be a return of the owner's principal, therefore only the portion considered to be "interest earned" is taxable, not the entire income payment. This can provide a significant tax benefit to the income recipient because it allows for interest earnings to be spread over a number of years instead of being taxable in a single year, often resulting in an overall lower tax rate.
There are numerous insurance companies that offer SPIA products. Coupled with the many payout options available, it can be difficult to know exactly which SPIA is best for you and your circumstances. If you are considering buying a SPIA, let us help you to understand your options and select the best annuity for you and your individual needs. Call us today or speak with your Alliance America Agent-Advisor to find out more.