Out of the $250 billion in annuity products sold each year, single premium immediate annuities only account for around 10% of them.1 This information comes from Stan Haithcock’s Marketwatch article, “Why immediate annuities still matter.” Since immediate annuities may not be perceived to be as flashy as some of the newer annuity product options, they can often be overlooked in retirement income planning. Mr. Haithcock says that when it comes to annuities, some of the tried and true sayings like “older is better” and “keep it simple” ring true.
Single premium immediate annuities (SPIA) were the only annuities available in the United States for 150 years or so. They even date back to Roman times. It wasn’t until 1952 that there were any annuity options available other than a SPIA. They are a simpler type of annuity product and Mr. Haithcock believes they are one of the best ways to contractually guarantee* an immediate lifetime income stream.. This makes the fact that SPIAs only represent 10% of total annuity sales1 a little bit confusing. It seems logical that single premium immediate annuities would be used more frequently when 10,000 Baby Boomers are retiring daily,1 most of whom are looking to create guaranteed* retirement income for their lifetime.*
There are some advantages when purchasing a SPIA. You know exactly how much you will pay because you make one initial premium payment. Then you just collect your distributions, which begin immediately. The income payments are determined at the time of purchase dependent on the amount of premium and the age you begin receiving payments, and they are guaranteed.* You will know exactly what each payment amount will be. At the same time, there are some disadvantages with the SPIA. Once you purchase the annuity, changes cannot be made, and you no longer have access to your money. Even though expenses may go up due to cost of living and inflation, your income payments remain the same throughout the contract.
An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return, you can receive regular disbursements beginning immediately or at some point in the future. It’s important to understand that annuities are not investments subject to stock market volatility. They may help protect you from longevity risk, or the risk that you will outlive your money. Annuities can help supplement Social Security benefits and any pension you might receive from an employer.
A single premium immediate annuity is just one type of annuity. There are several different types, and there are often optional enhanced benefits available with each annuity through the purchase of riders for additional premium. And many of these can also provide lifetime income.* That is why it could be important for you to consult with an insurance professional before you consider purchasing an annuity. An insurance professional can help you find an annuity that fits in with your retirement goals and objectives.
Written by Rachel Summit
*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.
1 Haithcock, Stan. “Why immediate annuities still matter.” Marketwatch, June 16, 2015. http://www.marketwatch.com/story/why-immediate-annuities-still-matter-2015-06-16
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