What’s an Immediate Annuity – (SPIA)?
This is the most fundamental, pure form of an annuity. Single Premium Immediate Annuities, acronym – SPIA, date back a couple of thousand years and it is what we today commonly call an immediate lifetime annuity. Essentially, the way an immediate life annuity works is by paying a lump sum of money in exchange for an income stream based on a lifetime repetitive income stream. In essence, you are purchasing a **guaranteed stream of income. [continue reading below calculator…]
[continued] …With a lifetime immediate annuity, the insurance institution risks that you may outlive your statistical life expectancy. This forces them to payout more than they received originally, including their investment earnings on the money they collected for the immediate annuity. The purchaser of the immediate annuity risks dying early and losing the hoped for benefit of a long-term income stream. Since insurance companies primarily manage risk, they know that statistically they are likely to come out ahead financially by spreading their risk over large numbers. As the insured, you also have an advantage since immediate annuities are purchased without answering underwriting questions concerning your personal health and family longevity. You may know that the odds are in your favor to live longer than the insurance company would have ever expected, touché, you win! If you want some type of **guarantee in case you croak early – known as period or term certain – it will lower your payout. It is also possible to start with a lower initial income to incorporate an inflation-adjusted increasing payout, **guaranteeing more income on the future payments.
Immediate lifetime annuities have waned in popularity recently with the introduction of the newer living benefit rider offered on many deferred fixed index or hybrid annuities that also can provide a lifetime income **guarantee; and if the insured dies prematurely, the unused account balance is paid to the heirs instead of being paid to the insurance company. Now, that is a lot like having your cake and eating it too! This innovative approach to that cannot be outlived has been very popular and is now incorporated into main stream retirement planning on a large-scale. It is actually in all practicality, a self-directed personal pension. Many deferred annuities now offer both options… an income rider or annuitization.
History of Immediate Lifetime Annuities
This was not the earliest form of annuity. For that, we have to go all the way back to the Roman Empire over two thousand years ago. Speculators in ancient Rome sold what was called Annua, which was an annual payout; thus Annua is the root word for what we term an annuity today. The annuity has proven to be one of the most reliable and oldest financial tools in use throughout the world.
In 1912, Pennsylvania Company Insurance was among the first to begin offering annuities to the general public in the United States. Annuities have continued to grow in popularity and prove their value over and over as individuals, organizations and businesses look for secure ways to **guarantee retirement income.
Immediate Fixed and Variable Lifetime Annuity Attributes:
- A portion of a non-qualified immediate annuity is tax-excluded. This is considered the immediate annuity exclusion ratio
- All income from a qualified immediate annuity is taxable (IRA, 403 B, etc.)
- Lump-sum contributions only
- Immediate fixed annuities are invested in mostly high quality A-AAA treasuries and investment-grade bonds
- Immediate fixed annuity, to client. Insurance company assumes all risk
- Immediate variable annuities# are invested in sub-accounts chosen by the client
- Immediate variable annuity#, client assumes all investment risk
- Immediate fixed annuities provide a stable income
- Immediate variable annuities# may have fluctuating income
- The longer the term, the lower the income payout
- Younger clients get lower payouts (based on life expectancy)
- Payout normally begins within 30 days to one year of purchase
- A 1% to 2% internal rate of return on immediate fixed annuities are typical with a normal life expectancy
- Internal rate of return is based on market returns and life expectancy with immediate variable annuities#
- Purchase for 5- 10- 15- 20- 25- 30-year and lifetime payouts
- Immediate fixed annuities are predictable & simple
- Immediate fixed annuities typically have no annual fees
- Immediate variable annuities# have varying fees
- Immediate variable annuities# are more sophisticated with more moving parts
- Immediate Annuities are Creditor-protected in most states
The two categories of annuities, fixed and variable – with their variations of immediate or deferred – each serve a particular purpose. It is important to look at your age, size of assets, future income needs and inflation and then do a cash flow analysis over your life expectancy during retirement. This will help you choose which annuity is right for you. Financial planner/educators can be valuable when you are close to making a decision on an annuity. Avoid insurance salesman that are just pushing their higher commission products. There is typically no cost to you when using a licensed planner or insurance agent; hence, it is always in your best interest to use an experienced planner/educator to avoid irreversible retirement mistakes. State laws all require annuity purchases to be made through a licensed agent. Use the form below to obtain current immediate annuity quotes.
Question: How long do you have after purchasing a lifetime immediate annuity to begin the income?
Answer: Thirty days is normal; however, it does vary somewhat between annuity providers. One year used to be the maximum time from purchase until your first income payout would begin but that has changed with recent legislation allowing much longer deferral periods.
** Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. Annuities are not FDIC insured and it is possible to lose money.
They are insurance products that require a premium to be paid for purchase.
Annuities do not accept or receive deposits and are not to be confused with bank issued financial instruments.
During all video segments, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
*Retirement Planning and annuity purchase assistance may be provided by Eric Judy or by referral to a recommended, experienced, Fiduciary Investment Advisor in helping our website visitors. Dick Van Dyke semi-retired from his Investment Advisory Practice in 2012 and now focuses on this website. He still maintains his insurance license in good standing and assists his current clients.
Our vetted and recommended Fiduciary Financial Planners are required to be properly licensed in assisting clients with their annuity and retirement planning needs. (Due diligence as a client is still always necessary when working with any advisor to check their current standing.)
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- MarketFree™ Annuity Definition: Any fixed annuity or portfolio of fixed annuities that protects principal / premium and growth by remaining market risk free.
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