What Are The Disadvantages And Advantages Of Single Premium Immediate Annuities?

This website has already discussed some advantages of immediate annuities for retirement savings. However, some time and passed and the economy has changed. I decided it would be worthwhile to re-visit the topic.

I also wanted to point out this single premium immediate annuity calculator you can use for free.

For this discussion, we are talking about fixed, single premium retirement annuities. Please understand that contracts can differ wildly, and it is up to you to discuss the details with a professional. However, we will narrow down our thoughts to annuities with the following characteristics.

• Fixed Annuities – That means we are not discussing variable annuities which are much more risky, though may also have bigger returns in good years. A fixed annuity may have a fixed interest rate (like a bank account), or it may be set to a market index. Fixed annuities that are set to a market index, like the S&P 500, still should have a guaranteed minimum return.
• Single Premium – This means you fund the account with one lump sum of money. You may, for example, get a distribution from your workplace when you retire, or you may decide to use money you have saved in your bank, money market, CD, etc.
• Immediate Annuity – This means that you plan to fund your account, and then immediately start taking income out of it. This is a typical thing that a retiree might do. He or she funds the annuity with one lump sum of money, and then plans to take income for some set period of time, or for a lifetime.

Who Offers Annuities?

Annuities are insurance company products. Life insurance companies know how to make the calculations to estimate lifetime payments.

Single Premium Immediate Annuity Disadvantages

There are two big drawbacks to immediate annuities. If these concern you, you may want to consider an alternative way to save your money.

• You will have to have a large enough lump sum of money in order to fund the account. If you want lifetime income payments, you cannot expect to get very far if you can only invest $5,000.
• You will also have to give up control over this large sum of money for a long period of time. Most annuities have long surrender periods, so you will be penalized if you do decide to withdraw your money before the time period is up.

Single Premium Immediate Annuity Advantages

So why would people ever want to give up control of a large sum of money? There are several advantages of these types of accounts to consider.

Few Alternatives – The biggest reason that many people decide to use an annuity to invest their money, and provide retirement income, is that they do not like the alternatives. Bank products, like savings accounts and CDs, are paying very low returns these days. Market investments, like stocks, can be very risky.

Minimize Risk and Maximize Rewards – So what you get in return for giving up control of your money is a way to maximize your returns while minimizing risks. While most annuities are not FDIC insured like a savings account, they are backed by top insurance companies and state regulations.

Related posts:

1. Advantages Of Single Premium Life Insurance
2. Single Premium Life Insurance Explained
3. Immediate Annuities for Retirement Planning

What Are Immediate Annuities?

We are discussing something called single premium immediate annuities (SPIA). In return for one large, lump sum payment, the contract will start payout out a regular income right away. Actually, in some cases, that payment can be deferred. As we learn more about annuities, you find there are lots of choices and variables like that. But for now, consider purchasing your fund with one lump sum payout, and then getting regular payouts as income from that investment.

(Note: We also published this article: Explain Annuities)

A common use of an SPIA is to fund a retirement income from some lump sum payout. This payout may be a retirement distribution from work, or another accumulated investment account. Of course, there are other uses for SPIAs, but retirement income is a very popular example.

Advantages of Immediate Annuities

In exchange for this payment, an insurer will agree to make regular payments for a specified period of time. Example of this time period could be lifetime, joint survivorship (both spouse’s lifetimes), or some number of years (i.e. 10). In genereal, this is a binding contract, but owners may have some exceptions built into the contract. For instance, I have seen nursing home or terminal illness riders which would allow an owner to “break into” the account to withdraw the cash.

How much money will you get paid?
Of course, that depends upon many factors like the investment, rerturn rate, and length of the payout term. In general, the more money that finances the annuity, the more it can pay out, but that is also just common sense. The same is also true of the length of time an owner could get monthly payments.

How Are Returns Set?

Again, you can select a variety of options when you purchase your contract. A set return rate will simply be more like a bank CD where the rate is stipulated in the contract. An indexed rate is different though, and it uses a large market to set rates. One very common example of a market would be to tie rates to the S&P 500 index. During growth years, the fund will earn more money.

Fixed Annuities Can Remove Risk

But one big advantage to fixed annuities is the ability to buy a contract where you are guaranteed not to lose money! That’s right, you can purchase contracts with a guaranteed minimum return, even if the index is tied to a market index.

Tax Advantages of Annuities

Of course, the second major selling point is the tax favored treatment that your investment will have. Even non-tax qualified plans can grow on a tax deferred business. If you have a tax qualified plans, you may not be taxed on your payouts at all.

Learn more: Free Immediate Annuity Quotes

Related posts:

1. Retirement Planning Life Insurance Products To Consider
2. Single Premium Immediate Annuity Advantages
3. Early Retirement, Under 65, And Health Insurance