Single-premium annuities are purchased with a lump sum of money, and offer a guaranteed source of income for retirement. They can be immediate or deferred, but once purchased, can’t be returned, and surrender fees are steep.
An immediate annuity, also known as an income or single premium immediate annuity (SPIA), is a contract between you and an insurance company designed for income purposes only. Unlike a deferred annuity, an immediate annuity skips the accumulation stage and begins paying out income either immediately or within a year after you have purchased it with a single, lump-sum investment.
Individuals approaching retirement age may choose this type of annuity because they will be able to make large contributions without the limitations of 401(k)s, IRAs and other popular retirement plans. Single premium immediate annuities allow seniors to supplement Social Security income and pension plans, which might not provide enough to cover retirement living expenses.
Immediate annuities can provide periodic payments for a fixed period of time or for the rest of your or your spouse’s life, depending on which option you choose. Distributions may be received monthly, quarterly or yearly, and will consist of a combination of your account’s principal and any earnings it has accrued.
If the immediate annuity is non-qualified, meaning you have purchased it with after-tax dollars, only the earnings will subject to income tax, which you must pay each year at your ordinary rate.
Similar to a deferred annuity, the interest rate on an immediate annuity can be fixed, adjusted annually according to an outside index, or variable with earnings based on the performance of its sub-accounts. If it has a fixed rate, each of your distribution checks will be the same. If the annuity is variable, the amount of each check will differ. These options help protect payments from inflation rates.
Yes, you are able to sell your single premium immediate annuity. Unlike a structured settlement, the payments from an immediate annuity can be sold for cash without going through the hassle of going to court for a judge’s approval.
Because you purchase this investment product on your own — rather than accepting it as a result of a lawsuit — you have the freedom to sell payments for cash if you’re experiencing financial difficulty.
The advantages of an immediate annuity are certain guarantees that protect the principal you invested and the benefits contingent upon the annuitant’s age. These advantages include:
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While an immediate annuity can provide a consistent income stream in your retirement years, there are drawbacks. Purchasing immediate annuities can prevent you from being able to afford other investments. Here is a description of these disadvantages:
Total annuity sales in the U.S. soared to $167.6 billion in Q3 2013. In that same time period, fixed immediate annuity sales alone reached $5.7 billion. But even if you decide that an immediate annuity is a good investment choice, most experts advise you to not put all of your available assets into one, but rather leave enough in stocks, bonds and ready cash for unexpected needs.
Also, you should make sure the insurance company that issues your annuity is highly rated by any of the financial institution rating agencies like Moody’s, Fitch, Standard & Poor’s or A.M. Best.