Things To Know About An Immediate Annuity (SPIA) – 6 Experts Weigh In

Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed.  Learn more

Last Updated on: 6th September 2019, 08:42 pm

An immediate annuity, or single premium immediate annuity (SPIA) is an annuity contract whereby an investor pays a lump sum in exchange for a lifetime income stream in the form of monthly, quarterly, or yearly payments. In this article, 6 experts discuss things to know about an immediate annuity (SPIA) so you can decide whether or not they are an investment you should include as part of your portfolio.

A Lifetime Income Stream, But The Potential Downside To These Is The Lump Sum Liquidity

“Immediate Annuities-The contract is through insurance companies. You take a lump sum of payments and you're buying the payments for a designated period of time. The most common one is a lifetime income stream. You can insure the payments in a variety of ways such as single life, joint life, life with a period certain, refund, etc. There are typically no fees or charges and the funds are guaranteed by the insurance company's assets.

Potential Downside – The potential downside to these is the lump sum liquidity. Someone can invest substantial amounts, then have an unforeseen circumstance where they need money. Accessing two years worth of payments means not receiving a check for the next two years.”

Chane Steiner, CEO, Crediful 

Once You Make The Investment, You Cannot Take It Back

“A single premium immediate annuity (SPIA for short) is an insurance contract between an investor and an insurance carrier. In layman's terms, the investor will give the insurance company a lump sum dollar amount in exchange for a series of monthly, quarterly, or yearly payments. These payments can be structured in many different ways, some including but not limited to: life only (pay as long as the investor lives), joint life (pay as long as the investor and spouse live), life with a period certain (pay as long as the investor lives for a minimum of a certain period), etc. The reason many people exchange a lump sum dollar amount in exchange for a series of payments is because they want to ensure they won't outlive their money. The investor is essentially transferring this risk to the insurance carrier, which allows for the investor to have peace of mind during retirement.

The downside to investing in a SPIA is that once you make the investment, you cannot take it back. Unlike other forms of annuities that have surrender charges for ending the contract early, SPIAs do not give you the option to surrender the policy and recover your initial deposit. Another downside is that many SPIAs do not adjust for inflation. As these contracts pay for longer periods of time, the purchasing power of each dollar will diminish if an inflation rider is not included in the contract initially.”

Jordan Sester, Founder / Investment Advisor Rep, J.S Financial Group

Annuity Company Rating Should Be A High Priority

“Most SPIA payouts are roughly in the same ballpark (company to company) so annuity company rating should be a high priority. You are going to be stuck with them for a long time. You should be stuck with a highly rated company.

You should expect to earn between 1 – 1.5% in interest while in the contract.

Immediate annuities can issue from 0 all the way up to age 100.

You can start your income immediately or defer up to 12 months prior to turning on the income stream.

Any income from an immediate annuity is irrevocable.

Immediate annuity payments fulfill Required Minimum Distributions for that specific portion of qualified funds only.

You can actually lose money if you choose a short term period certain annuity, typically 5 years in length.

You can purchase a Cost of Living Adjustment (COLA) on some immediate annuities, and you should to help with inflation over the years.”

Shawn Plummer, Director of Advanced Annuity Sales, The Annuity Expert, Unkefer & Associates

Since The SPIA Is Guaranteed Income, It Is Not Affected By Volatility In The Financial Markets

“In conjunction with IRAs, in my opinion, SPIAs can and should be used as a primary if not the sole source of income while longer-term assets remain invested and thus able to weather any storms in the financial markets. If income is generated from longer-term investments such as mutual funds and there is an ongoing decline in the financial markets, the funds that are used for income never have an opportunity to recover as the market rebounds. Additionally, since the SPIA is guaranteed income, it is NOT affected by volatility in the financial markets.

I do not really think that SPIAs have any other role in IRAs except to generate current and sustainable income and acting as a buffer to withdrawing funds from longer-term assets.”

Cliff Caplan, CFP(r), AIF(r), Neponset Valley Financial Partners

There Are A Few Factors That Should Be Taken Into Consideration When Purchasing A Single Premium Income Annuity (SPIA)

“Immediate annuities are good as they provide a guaranteed source of income during retirement when all other income sources dry up. They are especially good if you expect to live well beyond the normal life expectancy age or prefer guaranteed income as opposed to such other less certain options like business income. There are however a few factors that you should put into consideration when purchasing the Single Premium Income Annuity (SPIA):

i. SPIA is a risk management service, not an investment: When you buy the SPIA, you get a guaranteed monthly/quarterly/annual payout that is totally different from the yield or rate of return associated with most other investments. Understand that an annuity is an insurance and thus a safety net for your retirement that shouldn’t be approached as an income-generating fund.

ii. You cannot back off an SPIA agreement: Before buying an SPIA, note that it is irrevocable. You cannot cancel the SPIA two years into receiving its fixed, variable or inflation-adjusted annuities. The best you can do is sell it to third-party annuity companies at a discount. You, therefore, get less than you deposited.

iii. Death benefits can be costly: If you bought an annuity today and passed on tomorrow, the insurer gets to keep all the money. The only way of ensuring this guaranteed income extends to your beneficiaries post-mortality is by buying a death benefits annuity and naming an annuitant in a rather costly process.

iv. The insurance company can go belly up: Annuity providers can also go bankrupt or face similarly severe cash challenges that threaten your annuities. To avoid this, conduct background research to check whether your insurer has reinsured themselves with the state and federal re-insurance corporations like FDIC. And even if insured, you can only recoup the maximum state/federal reinsurer’s coverage that currently averages $250,000.”

Edith Muthoni, Chief Editor, Leanbonds.com

Take Advantage Of A SPIA Creditor Protection Status

“While annuities are often not used this way, the primary purpose of an annuity is to provide a guaranteed income stream; typically based on the account owner's life expectancy and often other parameters (such as a minimum number of years or a minimum total dispersal amount). An example might be a life with 20-year certain payout, where the annuity will pay out a guaranteed amount for the life of the owner, but cannot be for less than 20 years, so if the annuitant dies prematurely there will still be income to heirs for a period of time.

A single premium immediate annuity (SPIA), as the name implies, begins paying out the income stream almost immediately after the account is originated. The SPIA is normally used to provide one's self a pension income from one's retirement savings. This is particularly useful when an individual has all of his retirement assets in traditional instruments but wants to ensure a regular income that he cannot outlive.

Another reason to use a SPIA is to take advantage of its creditor protection status. In most states, the entire amount within an annuity is exempt from liability to creditors. Most other states offer substantial exemptions from creditor liability. This allows the annuitant to take a regular income from assets that might otherwise be lost in a lawsuit or bankruptcy.”

Rob Drury, Executive Director, Association of Christian Financial Advisors 

Akin to any investment, there are advantages and drawbacks – immediate annuities are no different. If you are interested in a SPIA, take into account what the financial experts have discussed here, do your due diligence, and consult a financial professional.