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While attending the Financial Planning Association\u2019s annual convention in San Diego in mid-September, I happened to attend a presentation where an annuity expert described the advantages and disadvantages of single-premium immediate income annuities, or SPIAs. SPIAs are contracts where you pay an irrevocable lump sum to a life insurance company and the insurer pays you a guaranteed income\u2014for as long as you live, or (optionally) as long as either you or your spouse is living.<\/p>\n
The expert knew his subject, no question about it. But he also helped perpetuate a myth about income annuities\u2014a myth that unfortunately makes many people unnecessarily afraid of buying them.<\/p>\n
He said that when you buy an immediate annuity<\/a>, if you happen to die within a few years of buying the contract, you forfeit whatever portion of your investment hasn\u2019t been paid to you yet.<\/p>\n That\u2019s true\u2014but only if you purchase a pure life annuity. Most people, however, do not buy pure life annuities. Instead, they protect themselves from the forfeiture scenario by modifying their contracts.<\/p>\n Some buy so-called \u201clife with period certain\u201d SPIAs, which means that payments will continue to their beneficiaries if they die before receiving monthly payments for a specific period, such as 5, 10, 15 or 20 years. Others buy \u201clife with cash refund\u201d SPIAs, which means that their beneficiaries will receive a lump-sum refund of the difference between the original investment and the amount already paid out.<\/p>\n Many people continue to avoid SPIAs, which can serve as personal pensions and provide anchors of financial security in an insecure world, because they think they might get hit by a bus and lose most of their money. But that\u2019s not necessarily so.<\/p>\n