A single-premium immediate annuity is an insurance contract that provides a steady income from a lump sum of money. Immediate annuities are used to provide income in your retirement years. The idea behind immediate annuities is simple -- however, the annuity payment choices can make selecting an SPIA more complicated.
Deferred vs. Immediate
Annuities are a type of insurance contract sold by life insurance companies. These contracts are intended to provide regular retirement income. A deferred annuity is purchased with a lump sum of money and earns interest until an election is made to receive income payments at some point in the future. When the election is made to receive payments from an annuity, the contract is said to be annuitized. An immediate annuity provides the annuitized income stream starting immediately when the contract is purchased.
With a SPIA, a lump sum -- the single premium -- is paid to the insurance company, and the monthly annuity payments start immediately. The first annuity payment can be made on the same day the single premium is paid or the annuity buyer can elect a different start date for the annuity payments -- up to one year after the purchase date. The insurance company quotes the amount of the monthly annuity payment based on the amount of the single premium. The purchase of an SPIA can be viewed as the trade of the single-premium amount for the stream of annuity payments. The annuity does not have any principal or cash value.
The standard annuity payment is a single-life annuity; payments last for as long as the person receiving the payments, the annuitant, lives. When the annuitant dies, the payments stop. The SPIA buyer can select other annuity options. A joint-and-survivor annuity continues payments until a second person, such as a spouse, dies. A period-certain annuity option will result in annuity payments for a set period of time or number of payments, such as 120 payments. With a period-certain annuity choice, the payments could continue if the annuitant dies before the set period is up. The period-certain can be combined with the single-life option to provide for annuity payments, which last until the latter of the end of the period certain or until the annuitant dies.
The purchase of an SPIA and the selected-annuity option should be carefully considered before signing the application and paying the premium. Once the annuity is in effect, the terms are irrevocable and can't be changed. An SPIA can provide the valuable benefit of an income that can't be outlived, but the trade-off is a lack of flexibility once the contract is in effect.