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Single Premium Immediate Annuities (SPIAs) were first introduced during the Roman Times as a pension lifetime income stream reward to the dutiful Roman soldiers and their families. That’s where the annuity world started. Hail Caesar! The Latin word “annua” means “yearly payment,” and is the obvious origin of the word “annuity.”
SPIAs have been sold in the United States for hundreds of years, and are still the best personal pension plan for lifetime income if you need those payments to start immediately. SPIAs are still the foundation of most retirement income plans or retirement plans that need a guaranteed income floor in addition to Social Security payments or employer pensions (if you are so fortunate).
SPIAs are classified as a fixed annuity, and a life insurance product. All SPIAs are issued by a life insurance company, and they are regulated at the state level. This type of annuity is a simple transfer of risk strategy for immediate income needs. The primary pricing mechanism of a SPIA is your life expectancy (or life expectancies...if joint) at the time the payments start. Contrary to popular opinion, interest rates play a secondary pricing role. Most people mistakenly believe that interest rates drive the SPIA pricing train. The truth is that life expectancy drives the SPIA pricing train.
Below are some key benefits that SPIAs contractually provide:
*Lifetime income stream you can never outlive
*No annual fees
*No moving parts
*Can also be set up to pay for a Period Certain
*Can be used in IRAs, non-IRAs, Roth IRAs
*No market attachments
*Cost of Living Adjustment (COLA) can be added
*Can be set up for one life or joint life
*Can be used a legacy income planning tool
*Can be used for “Laddered Income” customized strategies
SPIA income payment guarantees are a combination of return of principal plus interest. The true benefit proposition of an Immediate Annuity (SPIA) is when the account goes to zero. At that point, you are in the annuity company’s pockets with them still being on the contractual hook to pay regardless of how long you live. I always say that with SPIA lifetime income guarantees, there is no ROI (Return On Investment) until you die. Up until that point, a SPIA strategy is a pure transfer of risk. That’s why SPIAs should not be compared with typical market investments.
Annuities have a monopoly on lifetime income guarantees. No other financial product can contractually guarantee payments regardless of how long you live. Annuities, with SPIAs leading the way, are the only product category that provides lifetime income. For some reason, the annuity industry has not driven that marketing message home. Go figure. Just remember this. Annuities = Lifetime Income. Lifetime Income = Annuities.
SPIAs are typically funded by a lump sum payment to the annuity company, with monthly income able to start as soon as 30 days from the policy issue date. Once the SPIAs start paying, that long term contractual income stream will continue for the rest of your life (i.e. “life annuity”), or for a specific period (i.e. “period certain”)...or a combination of both. It’s important to remember that you can customize your SPIA contract to match your specific goals.
There are 2 ways to use our annuity calculators to find the best contractual guarantee. The first way is to provide a lump sum dollar amount to see what the contractually guaranteed income stream would be for your specific situation. The other way is to reverse engineer the quote. Instead of a lump sum, you run the quote and use the calculator to contractually solve for the desired monthly income amount. I am a big fan of the reverse-engineered quote strategy because it allows you to use as little of your money as possible to contractually solve your income goals.
SPIAs can also be used as a deferred annuity because you can defer the income start date for up to one year. Income can be structured for monthly, quarterly, semi-annual, or annual payments. You make that choice at the time of application. You can also decide to add a COLA (Cost of Living Adjustment) percentage increase at the time of application. However, if you add a COLA increase to the income stream, the annuity company will significantly lower the payment when compared to the same SPIA without a COLA.
If you need immediate income and want the highest contractual guarantees, you will always buy a Single Premium Immediate Annuity (SPIA). Do not let advisors steer you to any other annuity product types.
Before you buy an annuity of any type, you need to fully understand the benefits and limitations before making a decision. You also need to schedule a call with Stan The Annuity Man himself to have a full discussion so you can make an informed decision on your terms and time frame.