It’s easy to get confused by annuity terminology.
In some cases, the same kind of annuity may be called several different names. In other cases, you’ll notice that two different products have almost the same name.
Today, we’ll focus on clarifying SPIAs. Keep reading to learn more.
The Basics of SPIA Annuities
SPIA stands for single-premium immediate annuity. If you hear the terms immediate annuity, immediate payment annuity, or income annuity, those all describe the same thing.
An SPIA annuity is different from other annuities because it doesn’t have an accumulation phase. You simply pay in one lump sum from your 401(k) or investments.
The distribution phase (also known as the annuitization or payout phase) works the same way as any other annuity; you still get a regular stream of payouts. But instead of being deferred for a long time, an SPIA annuity typically starts paying out within a year.
Pros and Cons of an SPIA
Pros
SPIAs are attractive to folks with a substantial nest egg. They’re typically simple (you get a guaranteed payout monthly) and incur low fees, making it easy to know what you’re going to get each month. That not only simplifies budgeting; it also prevents nasty surprises.
You can get an inflation rider, also known as a cost of living adjustment (COLA), which protects your annuity payouts against the damage inflation can wreak on the value of the dollar. You’ll pay a fee and get lower initial payouts, but it’s still a decided benefit.
It’s possible to opt for an SPIA with variable payouts. The downside of being exposed to market volatility is that you could end up losing money; the upside is you could end up getting more than you otherwise would.
SPIAs allow one to make large contributions not subject to the usual limits on IRAs and 401(k) plans, and 401(k) plans can even be subsumed into an SPIA annuity.
The income from an SPIA acts as a supplement to Social Security and pension plans to ensure that one has sufficient retirement income.
SPIA annuities offer the option of a joint and survivor account, which pays out for two annuitants, and will continue to provide income even upon the death of one annuitant.
A period certain annuity is limited in terms of how long it pays out, and is sometimes used as bridging income until one is eligible for Social Security.
Cons
Many of the cons of SPIA annuities are related to the pros mentioned above. You don’t get something for nothing, which means that guaranteed income for life – or protection against inflation – comes with costs.
Payout amounts depend on initial lump sum investment, contract terms that guarantee income for life, and terms that allow heirs to be beneficiaries. Annuity providers also use actuarial life tables to assess your expected lifespan, to calculate how long it’s likely you’ll need payouts.
Get Professional Advice Today!
As with any investment vehicle, an annuity is affected by many factors.
Speak to an insurance company today to get the advice you need to make decisions regarding your financial future.
