Income Plans

Single Premium Immediate Annuities

The Nuts and Bolts:

As the name suggests, once immediate annuities are purchased they immediately provide an income stream. The amount of initial premium and the length of time selected will determine the amount of the monthly income. A Single Premium Immediate Annuity contract allows you to turn a fixed asset into a regular source of income in order to pay for expenses over a long period of time. You make one premium payment and in return, receive a fixed, guaranteed income. A Single Premium Immediate Annuity may be paid out either as a “Fixed Period Certain Payout” where income is paid over a specified period or a “Life Payout” where income is guaranteed over your entire lifetime regardless of how long you live. These plans can only be issued by insurance companies and is a contract between you and the insurance company.

Americans are living longer than ever. The idea of living a longer, healthier life appeals to all of us, but for many, the tradeoff is outliving our retirement savings. The crippling costs of healthcare and the constant rise of inflation continue to compound this financial predicament. A single premium immediate annuity (SPIA) may help with this dilemma. As we age and expenses rise, the SPIA acts as a self-funded income plan to help keep up with those demands by improving cash flow. Some companies even offer a provision to receive periodic cost of living raises that are built right into the plan.

If a “Period Certain” payout or a “Life with Period Certain” payout is selected and the owner/annuitant dies pre-maturely, the remainder of the payments will continue to be paid to the beneficiaries, up until the time the “Period Certain” is satisfied. For example, if a person selects a “Twenty Year Period Certain” and dies after only receiving payments for ten years, then the beneficiaries will receive the remaining ten years of payments. This usually results in none of the original premium being lost and additional interest is usually earned in most cases. Check specific plan policy contracts for the exact details as plans vary from company to company and plan to plan.

In another example where a person selects a “Life with Ten Year Certain” payment option and again dies pre-maturely, this time after only five years of payments, the beneficiary will then receive payments for the remainder of five years. In this case, with most companies you and the beneficiary would usually receive slightly less than the original premium back, but it would be a minimal loss. Conversely, if the owner/annuitant lives substantially longer than the “Ten Year Certain Period”, the return on the original premium will usually be substantially more than the original premium. Because it is also a “Life” payout, the insurance company has to continue payments for the life of the owner/annuitant no matter how long they live, even if it is thirty or forty years. Again, check specific plan policy contract details for the exact details of the payout options.

Many SPIA’s also offer options for joint income payouts that will last the lifetime of both spouses and can also, provide some guarantees for the beneficiaries as well. As you are starting to see, one can become very creative with these types of plans. Sometimes they can be combined in more than one plan and with “Tax-deferred Annuities” as well.

Tax Treatment and Advantages:

Thanks to the "exclusion ratio”, immediate annuities offer very favorable tax treatment. In fact, a large percentage of the fixed immediate annuity income is tax-free, if the original funds are Non-qualified after-tax premiums. This is because a large portion of the income payments is considered a return of your original premium principal and cannot be taxed twice. Qualified funds such as IRA's and 401k's are fully taxable because these products represent pre-tax dollars that you have never paid taxes on before. For the non-qualified funds in your portfolio, the tax advantages can be substantial. Consult your accountant or tax advisor for complete benefits.

Disclosures:

All of the above information sounds promising but it does not mean that immediate annuities are for everyone. Purchasing a single premium immediate annuity is a permanent decision that will last for the rest of your life. You should seriously consider all aspects before selecting an immediate annuity product.

It is important to remember that these products are purchased for a reliable stream of income with an emphasis on security. They are not designed for maximum return. You can typically expect conservative returns, but they will do so with considerably more security and guarantees.
 

Immediate annuities are irrevocable contracts. Once you purchase the immediate annuity, it is non-refundable and you no longer own the premium dollars that you deposited with the insurance company. Instead, you own the promise and guarantee of the income stream you have selected. Therefore, you should have other moneys put aside for your other liquidity needs.

Need Help?

Contact us today for a no cost, no obligation, no pressure assessment of your situation. With our resources we can help improve your quality of life!