29 Sep Annuities Exposed: SPIAs
SPIAs, or single premium immediate annuities, are a great way to ensure you have lifetime income.
If you’re looking at SPIAs (which we’re betting you are because you’re reading this), there are a few things you need to know before signing on the dotted line.
Before you get locked into a contract that costs you more than you bargained for, keep reading for everything you need to know about SPIAs.
What Are SPIAs?
Like other types of annuities, SPIAs are a contract between you and an insurance company.
They are often referred to as income annuities or immediate annuities, and are designed for immediate income purposes rather than accumulation.
They differ from other annuities in that you deposit a large, single lump sum into it, and they are NOT funded with smaller payments over years. This means you need to have a large sum of money saved to purchase a SPIA.
How Do SPIAs Work?
With SPIAs, you begin taking income immediately – usually within 30 days to a year after depositing the money.
Another way they differ from other annuities is that they often earn lower rates of return because they can’t take on as much market risk as other annuities.
SPIAs are one of the simplest annuities to understand because they resemble income from pensions and/or Social Security.
But, like all financial products, you still need to do your homework and read AND understand the details of the contract before you sign.
How Are They Used?
SPIAs are used more for immediate income versus accumulation.
When set up properly, the income from a SPIA can be for the lifetime of the individual or jointly covering both husband and wife.
Many retirees move some money from their IRA or 401(k) to SPIAs as a direct rollover for tax-deferred growth, as they are only taxed each year as payments come out.
What Are SPIA Rates?
Each company has different rates. We recommend you research multiple websites that regularly update SPIA rates, sometimes daily. Make sure you also compare rates, as this will help build your wealth over the long haul.
What Are the Payout Options?
The income amount received is based on the age of the insured, their sex, the amount of money used to purchase the annuity, and the payment option chosen.
SPIAs offer a few different payout options:
Lifetime Only – This is the highest payout since it is based on life expectancy only. No payments are made after your death. If the contract is joint, the payout continues for the life of both parties on the contract.
Life and Period Certain – This provides a lifetime payout based on your life expectancy, but the payout is guaranteed for the number of years chosen (like 10, 20 years).
Life with Cash Refund – This provides a lifetime payout, but, if you haven’t received your principal payment back in income at your death, the difference is refunded back to your estate.
Fixed Period (or Period Certain) – The payout continues for a fixed period of time, chosen at issue.
Some individual insurers may have other withdrawal options than those listed above. As with any annuity contract, make sure to read the fine print and ASK before signing on the bottom line.
What Are the Death Benefit Options?
Depending on how you set up your payout options, this will usually dictate the death benefit options.
Each annuity contract, as well as any annuity insurer, will have specific contract language regarding death benefit options – so read your contract details closely.
If you are a spouse of the deceased, you may have different death benefit options, including the right to continue the contract in your name to full term.
If you have a current adviser, have them run the scenario to see if this option makes sense versus transferring the assets into your name with a new annuity.
Caution: It may be to your benefit to receive a second opinion in this case.
What Are the Risks with SPIAs?
Since SPIAs are backed by the issuing company, or the insurer, your main risk is with the claims-paying ability of this company.
This is why you need to research the ratings of these companies, prior to the purchase.
Here are a few places where you can research:
- AM Best: https://www.ambest.com
- Fitch ratings: https://www.fitchratings.com
- Moody’s: https://www.moodys.com
- Standard and Poors: https://www.spglobal.com/ratings/en/sector/insurance/insurance-sector
Advantages of SPIAs
- Simple – You decide how much income you want – and for how long – and the annuity company tells you how much you need to deposit.
- Guarantees – When you set up a SPIA, you set up a guaranteed income stream for the term chosen.
- Predictability – The income from a SPIA provides peace of mind. You know each month that your income is predictable and can pay your expenses without draining other assets.
Disadvantages of SPIAs
- Loss of liquidity – Once your lump sum premium has been deposited into a SPIA, and payments begin, there are usually no liquidity options in case you need funds for an emergency. Some SPIAs have a one-time lump sum payout, but it will change the income payouts for the future of the contract.
- Loss of control – Once your income payments have begun from a SPIA, you now have no control of your money. The money will pay out according to how the contract is written.
- Loss of purchasing power – The lifetime income from a SPIA may not keep up with inflation. An option to offset this is to purchase an INFLATION (or COLA) rider for an additional fee.
Are SPIAs Safe?
Yes, they are safe.
When you open a SPIA contract with an insurer, you will be guaranteed your principal first, and then your rate you were offered to sign up.
Insurers must belong to state guaranty associations, and if they default, the guaranty associations must pay you up to your states limit. (average is $250,000)
How Are They Taxed?
SPIAs are taxed based on if the funds used to purchase are Qualified or Non-Qualified.
If You Used Qualified Funds – like from an IRA, 401(k) – you will be taxed when you withdraw the funds. It will be considered income, and you will be taxed on both the principal and interest earned.
If You Used Non-Qualified Funds – like cash from your bank account – you will be taxed only on the interest earned.