Unlocking the Benefits of SPIA Annuities: A Complete Overview

Did you know that as of 2022, just 52% of U.S. retirees were getting pension income, and that percentage is likely to drop in the coming years? Fewer organizations are offering pensions these days, and social security alone cannot be expected to cover your costs of living in retirement. For those who rely on retirement investment accounts, there is a level of risk involved since funds are tied to how the market performs.

That’s why if you’re thinking ahead to retirement and know you won’t have access to a pension, you might be wondering if there’s a safe way to ensure that you’ll have guaranteed income. The answer for some might be a type of insurance known as Single Premium Immediate Annuities (SPIAs). Learn more about what SPIAs are, how they work, the pros and cons, and when opening one might be worth considering.

What are SPIAs?

A Single Premium Immediate Annuity (SPIA), sometimes called single premium life insurance, is a type of annuity contract in which you pay a lump sum of money to an insurance company in exchange for guaranteed periodic income payments. Those payments can start immediately or within a short period, typically within one year. Usually, with an SPIA, payments can continue for your lifetime and/or for your spouse’s lifetime if you pass away first. Unlike keeping the money in an investment account, once you purchase an SPIA, you remove the risk of losing your savings in a market downturn.

How does single premium life insurance work?

With an SPIA, you pay one single, large sum of money (the premium) to the insurance company. In return, that payment guarantees that you will receive regular income payments in the increments of your choice (monthly, quarterly, semi-annual, or annual). These payments can begin immediately or shortly after the premium is paid. 

When you open a SPIA annuity, you’ll decide if you want a fixed or variable income payment. With fixed SPIAs, the payments remain the same throughout the payout period, providing predictability. Variable SPIAs, on the other hand, offer payments that can fluctuate based on the performance of underlying investments. In some cases, SPIAs might start off with lower payments and then increase payments to account for inflation in subsequent years.

The other element of a single premium life policy to consider is the payout period. The payout period for SPIAs can be for a specific number of years, though it’s usually for the rest of your lifetime, referred to as single life. You can also decide that you want the payments to continue for your spouse if he or she outlives you, which is called joint life.

Important to know: Unlike some other types of annuities, SPIAs typically do not allow for the possibility to get your premium payment returned. Once your lump sum payment is made, you forfeit access to that principal amount. As such, it’s important to understand that if you move forward with single premium life insurance, there’s no going back.

For a better understanding of how a single premium life policy works, here’s how it might play out in real life. Take Tom, a 65-year-old retiree who recently sold his home and received a lump sum of $300,000 from the sale. Instead of investing it or leaving it in savings, he wants to use this money to generate a steady stream of income to cover his living expenses in retirement. He decides to purchase a SPIA from an insurance company. 

Tom pays the insurance company a single premium of $300,000 to purchase the SPIA. In exchange for the lump sum payment, the insurance company guarantees to provide him with regular income payments for the rest of his life. He opts for a fixed immediate annuity, which offers a predetermined interest rate and fixed income payments, and he chooses to receive monthly income payments.

Since Tom is primarily concerned about having enough income to last his lifetime, he selects a single life annuity option, which provides income payments for as long as he lives. If he passes away, the payments cease, and there are typically no residual benefits to beneficiaries, unless he chooses certain additional options.

The amount of money Tom actually gets each month will depend on a number of factors that the insurance company calculates. It will consider his age, the amount of the lump sum premium, and the interest rates at the time of purchase. From there, the payments will be structured so that they provide him with a predictable income stream.

Tom now has the peace of mind of knowing that he has a guaranteed source of income to cover his living expenses in retirement. Even if he lives longer than expected or if there are fluctuations in the financial markets, Tom’s SPIA will not change and will continue to provide him with steady income payments for the rest of his life.

Pros of Getting a SPIA Annuity

A single premium policy can be very attractive to some people, mainly due to the following advantages:

• You’ll have guaranteed income for life: The main benefit of SPIAs is that they provide a reliable source of income that is guaranteed by the insurance company. This can help individuals cover living expenses in retirement and mitigate the risk of outliving their savings.
• Pay once, and then there’s nothing else to manage: SPIAs are straightforward and easy to understand. There are no ongoing investment decisions or management required by the annuitant.
• You’ll have a reliable and predictable income stream: SPIAs typically offer predictable income payments that do not fluctuate, providing stability and peace of mind for retirees.
• There could be tax advantages: If purchased within a tax-advantaged retirement account like an IRA or 401(k), the income generated by SPIAs may be tax-deferred until withdrawn.

Cons of SPIA

SPIA annuities are not the best move for everyone because there are some potential drawbacks. These may include:

• Giving up a substantial amount of liquidity: Once the premium is paid, you can’t access the lump sum amount. SPIAs may not be suitable for individuals who might need access to that cash or have unexpected expenses. 
• Inflation can make the fixed payments worth less over time: Fixed SPIAs may not keep pace with inflation, potentially reducing the purchasing power of the income over time. There are some SPIAs that provide an option to adjust payments for inflation, but that would mean lower payments in the earlier years.
• Depending on your timing, you could have a less valuable policy: For fixed SPIAs, the income payments are based on prevailing interest rates at the time of purchase. If interest rates rise after purchasing the annuity, the income payments may be relatively lower than prevailing rates. 
• You may miss out on growth potential that other investment vehicles have: Unlike other retirement investment options like stocks or bonds, SPIAs do not offer potential for investment growth. The income payments are based solely on the initial lump sum amount.

Who should consider getting an SPIA

Anytime you make a decision about your financial future, it’s important to think about the impact on your finances in the short- and long-term. The same is true if you’re considering single premium life insurance. To be a good candidate for that product, you should have one or more of the following characteristics:

• You want guaranteed income in retirement: Individuals who prioritize guaranteed income and financial stability in retirement may find SPIAs attractive.
• You have longevity concerns: SPIAs can be beneficial for individuals who are concerned about outliving their savings and want to ensure a steady income stream for life.
• You are risk-averse when it comes to investing: People who prefer low-risk investments with predictable income may favor SPIAs over other retirement options.
• You have other sources of liquidity: SPIAs are suitable for individuals who have enough liquid assets to cover immediate expenses and will not leave themselves short by using the lump sum amount. In other words, you should only be using a portion of your savings to purchase a SPIA annuity.

SPIA vs. permanent life insurance

Both SPIAs and permanent life insurance offer long-term financial benefits, but they serve different purposes and cater to different financial needs and goals. SPIAs provide guaranteed income payments for retirement, while permanent life insurance offers a death benefit and cash value accumulation for financial protection and wealth-building purposes.

SPIA

• Income payments, no death benefit
• Single lump sum premium payment
• Limited flexibility in that payments are typically fixed and cannot be adjusted, and you cannot get your premium back
• For people who prioritize guaranteed income and funds in retirement

Permanent life insurance

• Death benefit, plus cash value accumulation
• Monthly, quarterly or annual premium payments
• May be able to adjust premium payments, death benefit amounts, and cash value allocation over time
• For people who want to leave money to beneficiaries, but have cash value available if needed

Is a single premium policy a good idea?

Overall, SPIAs can be a valuable tool for retirement income planning, providing a reliable source of income for individuals seeking stability and guaranteed payments in retirement. However, it's essential to carefully consider your financial goals, risk tolerance, and liquidity needs before purchasing a single premium life policy. Consult with your financial advisor and an insurance professional to determine if a SPIA is a good fit for your retirement strategy.