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Pros and Cons of SPIAs

Stan Haithcock
May 5, 2024
Pros and Cons of SPIAs

Hi there. Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. Today's topic is a very good one. We're going to go over the pros and cons of SPIAs, Single Premium Immediate Annuities, and then some of the payout options that you should consider, as well as how they work, which is very, very important.

Understand, Immediate Annuities are contracts, just like all annuities. These are contracts for lifetime income that start as soon as 30 days from the policy being issued and as far out as one year. If you need income to start soon, i.e., immediately, a Single Premium Immediate Annuity is your choice. Please do not let anyone else convince you otherwise to get a higher commission. These are very simple products. Transfer-risk products, no moving parts, no annual fees, and no market attachments.

The Bad

Let's talk about the pros and cons of the Single Premium Immediate Annuity product. There are many different types of annuities. They have good and bad benefits and limitations. Well, let's start with the bad. The bad thing about an Immediate Annuity is that it's an irrevocable contract. Once you lock it in, you're locked and loaded. There are no liquidity provisions. 99.9% of the cases, the ones that we recommend, there are no liquidity provisions. You can't pivot. In essence, think about it like this. You've ripped the knob off a water faucet. Think about when you grew up. There was a water faucet in the backyard. If you rip the knob off it, what's going to happen? Water, water, water, water. There's nothing you can do. When you buy an Immediate Annuity, once the income starts, it's coming. It's on the way. It's going to happen, period. We can structure it so that 100% of any unused money will go to the family and pay you for as long as you live.

You can also do an Immediate Annuity for a period certain, just a specific period of time. You will have to convince us why you want to do that, if that's a specific gap fill for a specific period of time. However, I think the true value proposition of a Single Premium Immediate Annuity, SPIA, is the lifetime income transfer risk. So, you look at the positives and negatives. The negative is the irrevocable nature of the contract. But in essence, the positive is that the irrevocable nature of the contract. You're going to get a lifetime income stream. You're, in essence, buying a personal pension. That's what a SPIA is. Think about it as that. If your company doesn't provide a pension payment, then you need to buy a pension for yourself. That's an immediate annuity. You already own the best inflation annuity on the planet, which is Social Security. That functions similarly to a Single Premium Immediate Annuity.

The Structure

However, what I also want to talk about are the payout options. Most people out there, most journalists, unfortunately, say, "Well, SPIAs are good, but if you die, the annuity company keeps the money." That is such misinformation; I can't even see straight. My hat started popping off the top of my head. That's called life only. That's one of about 40 ways to structure it. Life only is most likely going to be the highest payout because you're shouldering that risk, and when you die, money does go poof. But most people don't do that. Most people will want to put a life contingency on the policy but have a backstop, whether it's a life with cash refund or life with installment refund.

Life With Cash Refund

Let me explain those. Life with cash refund means it will pay you as long as you live, but when you die, whatever's left in the account goes lump sum to the beneficiaries. The annuity company doesn't keep a penny. Remember, lifetime income from an Immediate Annuity is a combination of return of principal plus interest, so if you live forever, it might draw down the account to zero. However, the annuity company is still on the hook to pay if it's life. And remember, you can do life only, joint life only, life with cash refund, joint life with cash refund. What joint life means is that when you die, the surviving spouse will get the income to continue uninterrupted and unchanged for their life. And when they die, with joint life with cash refund, whatever's left in the account goes 100% to the beneficiary. Life or joint life with installment refund means that what's ever left in the account goes to the beneficiaries in the same payment form until the money's exhausted.

Now, we can go to life and joint life with a period certain, five-year period, certain 10-year period certain, 20, 30, whatever. What that means is, if you live past the period certain, or one of you do if it's joint life, then there's nothing left for the beneficiaries. But if you die early in the contract, that period certain, whatever's left will be paid to the beneficiaries. And then finally, you can structure just period certain. "Stan, I just need 20 years of payment." Or I had a client the other day pushing 90, and we did a 10-year period certain to take them to 100. And so, let's say they died at age 93. There were seven more years of payment because the 10 years was the guarantee.

To synopsize all of this and put this in a nice little Annuity Man bow, Single Premium Immediate Annuities are pensions. They're personal pensions. They're irrevocable. They're very rigid from a contract standpoint. That could be good, in my opinion. There are no moving parts. There are no market attachments. To add one more caveat to that, you can add a Cost-of-Living Adjustment increase to it for the income to increase but understand that the annuity companies don't give that away, and typically, they'll lower that payment by as much as 30% to make up for that.

I suggest you go to The Annuity Man. I have a Single Premium Immediate Annuity owner's manual. I've done tons of videos on SPIAs. You can run quotes using our calculator. You can run a lump sum quote for an Immediate Annuity. You can reverse engineer the quote for a monthly income amount that you want to achieve. You can run those quotes using our calculators 24/7/365. And then, if you really want to engage and have a good, non-sales information, no-pressure conversation with my team or me, book a call. We'll call you right on the dot when you want us to call you, and it will be a 30-minute conversation with us using our ears and mouth in proportion, listening to you. We'll tell you if you don't need an annuity, and we're going to use as little amount of money as humanly possible and contractually possible to solve for the goal that you want to solve for from an income standpoint.

In my opinion, Single Premium Immediate Annuities are pro-consumer. They're easy to understand. You can explain them to a nine-year-old; no offense to nine-year-olds. I love that. There's no gotchas. There are no hidden agendas with a product. It's a straight transfer-of-risk pension that you can customize the structure from the standpoint of the death benefit, etc. And those are the conversations that we need to have. My name is Stan The Annuity Man, and I'll see you on the next blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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