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SPIAs: The Simple Way to Create Retirement Income

There are a lot of different types of annuities.  A single-premium immediate annuity is the simplest form of these income products.  In “Income for life – the old fashioned way,” Anthony Petsis of The Intelligencer says that while SPIAs might seem boring and outdated to some, there is a reason that they have been around for so long.  The author broke down the wording of a SPIA to make the products even easier to understand.  Single-premium means that you pay a one time amount to an insurance company in exchange for regular payments back from them.  Immediate annuities begin payments right away.  These payments usually start about a month after you purchase the annuity.  This is the opposite of deferred annuities that don’t start payments for years.  An annuity is an investment that liquidates the principal and interest systematically over a certain time period or the life of the annuitant.  The person purchasing the annuity is the annuitant.  Annuities are a good way for many people to generate income during retirement.  It’s often income that lasts for as long as you live.

The time frame of your annuity can be one of three options.  It can be for a certain period, like 25 years.  You can opt for a lifetime annuity, that pays you for as long as you live.  Or you can have a life annuity with a period certain guarantee.  This last type of annuity guarantees that it will pay your heirs money if you die before receiving 20 years of payments, or whatever period was pre-chosen.  Be sure to understand that your heirs will not be paid for 20 years after you die, but the difference between how long you received income payments and 20 years.  You will get the highest income payments with the life-only annuity, but you will not leave money to your heirs.  These annuities are often chosen by single people or those who have a significant amount of life insurance that they plan to leave their heirs.

A few examples of payments were listed in Mr. Petsis’ article.  A 60-year old man buying a $100,000 SPIA would receive $519 each month from a life-only annuity and $480 each month from a life with 20 years certain annuity.  A 70-year old man buying the same annuity would get $671 for the life-only and $531 for the other annuity.  An 80-year old man’s payments increase to $986 and $555, respectively.  Obviously, the older the person purchasing the annuity product, the higher payout that they will receive.  Examples for women purchasing single premium immediate annuities follow the same trend, but overall payouts are lower.  This is because women have a higher life expectancy than men do.  It’s important to consider two other things that the author points out to readers.  Annuities are not FDIC insured, so look for an insurer with high financial strength ratings.  Also, older people purchasing life-only SPIAs are risking dying soon and losing all of their premium.  They might want to reconsider a period certain option if they are concerned about this.  Some people choose another option called Life with Installment Refund where any leftover premium after the annuitant passes on is paid to heirs on a monthly basis.  This is similar to the period certain option, but guarantees the entire premium amount instead.  Speak with an expert to get all of your annuity questions answered and make sure that you purchase the product that is right for you.

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