Deferred Annuities: Single Premium vs. Flexible Premium

How Annuity Premiums Work

A deferred annuity premium is the payment a customer makes in exchange for receiving income at a later date. When you purchase an annuity, you can pay the premium in a single payment or multiple installments.

Key Facts About Annuity Premiums

1. With deferred annuities, you can choose between a single premium or flexible premium. 
2. A single premium deferred annuity is funded with one lump-sum payment when the contract is issued.
3. Purchasers of flexible premium deferred annuities can pay their annuity’s premium over time with multiple payments.
4. Each has unique benefits and drawbacks, so you should consult a financial advisor to determine which premium option makes the most sense for you and your goals.

According to the Insurance Information Institute, people often fund their single premium deferred annuities with money from a different qualified account, such as a 401(k) plan or IRA, or from the sale of an appreciated asset.

Flexible premium deferred annuities are funded with a series of smaller payments, which can be set up as automatic transfers or paid directly by annuity owners at their own discretion. This is a helpful option for people who may not have a large sum of money to contribute right away but can afford smaller payments spread out over a longer period.

The flexible premium option is available only for annuities with deferred income start dates. Deferred annuities have an accumulation period before the contract annuitizes and the owner begins receiving payments. 

“During the accumulation period, the annuity earns interest or increases in value and, in cases of flexible premium annuities, the annuity owner adds money in the form of additional premium payments.” Brian Kaplan, Certified Financial Planner^TM professional and Senior Vice President of Lenox Advisors, told Annuity.org.

Immediate annuities are also known as income annuities and include single premium immediate annuities (SPIAs) and deferred income annuities. They do not have an accumulation phase. However, when you buy a deferred income annuity (DIA), you select the income start date when the contract is issued and can make additional premium payments as your annuity contract allows.

I help clients each month with hybrid annuity options. One of the most popular options is a fixed index annuity where the contract value is dependent on the index’s growth, while the guaranteed income stream provided by an income rider is guaranteed, no matter what the index does.

It is important that when selecting an income rider that the client’s main focus is income, not growth. If the person wants growth, they should choose a non-hybrid annuity that will give them more on the growth side and less on the income side.

John Stevenson, CFFOwner and Advisor at Stevenson Retirement Solutions

John Stevenson, a Certified Financial Fiduciary®️, specializes in securing retirements with tax-free accounts. With a focus on guaranteed retirement, he’s ensured none of his clients suffer from market fluctuations. As a renowned educator and podcast host, John empowers thousands weekly, sharing his expertise in minimizing taxes and protecting against financial downturns.

Pros and Cons of Single Premium Deferred Annuities

SPDAs are ideal for some, but they may pose challenges for others. Before deciding, ask yourself if you have a large sum of money that you can contribute now or if you might need access to that money in the short term.

SPDAs are significantly more popular than their flexible premium counterparts among today’s soon-to-be retirees, according to Mark Cavalieri, Associate Director of Multi-Year Guaranteed Annuity Sales for Senior Market Sales. Many people approaching retirement have savings to use as a lump-sum premium payment or money from a qualified retirement plan like a 401(k) that they wish to roll over into an annuity.

Pros of Single Premium Deferred Annuities

Principal protection

Your original contribution can be protected from losses, unlike investments made directly in the stock market.

Optimizing compound interest

More funds in the annuity equate to higher potential compounding gains.

Cons of Single Premium Deferred Annuities

Potential surrender charges

The larger the premium payment, the more money you will have tied up in the contract. If you encounter a pressing financial obligation that requires you to withdraw funds during the surrender period, you will have to pay surrender charges.

Lack of capital for other investments

This is referred to as “opportunity cost.” Your funds are held in the annuity, so they do not have the opportunity to potentially grow with other products or accounts.

Many SPDAs have a minimum premium, and they provide higher payments with a longer accumulation phase or a longer period during which the lump sum premium can earn interest.

Pros and Cons of Flexible Premium Deferred Annuities

Flexible premium deferred annuities may suit you if you prefer to divide up your premium payments into smaller amounts. Cavalieri told Annuity.org that most providers require an initial premium of at least $2,000 for a flexible premium annuity, so there is often an established financial responsibility prior to the scheduled payments.

Pros of Flexible Premium Deferred Annuities

Less capital tied up

Smaller payments made over time mean more money at your disposal for immediate needs.

More time to pay

If you do not have the full premium amount, you can make payments over time for the product best suited to you.

Control over premium payment structure

You set the schedule based on your income and comfort level.

Cons of Flexible Premium Deferred Annuities

Less interest accrued and loss of compounding benefits

With less money in the annuity, you miss the compounding interest that accompanies a larger premium.

Maximum premium amounts

Like single premium annuities, flexible premium annuities may impose a maximum premium amount.

Cavalieri, a life underwriter training council fellow, explains, “Today, the number of single premium annuity products far outnumber the ones with flexible premiums.”

Which Should You Choose: Flexible Premium or Single Premium?

Your time horizon and risk tolerance should influence your decision regarding premium options.

As Cavalieri explained, single premium annuity products tend to be better options with broader features if someone has a lump sum and a diversified portfolio. Conversely, flexible premiums can be suitable for conservative savers who may not have a lump sum saved but want a low-risk product with a guarantee of lifetime income.

Tax penalties and surrender charges for early withdrawals are considerations common to both single and flexible premiums. It can be costly to change annuity products or contract terms, but you may be permitted to exchange your current contract for a more suitable option under the 1035 annuity exchange rule, as long as you meet certain criteria.

The right premium choice depends on your goals and current financial limitations. Reputable annuity providers and your financial advisor can guide you toward the right solution for you.