How Immediate Annuities Work

Single Premium Immediate Annuities (SPIAs) are purchased by an annuitant with a one-time single payment. Once the annuity is annuitized, payments are made once a month to you. The annuity payment starts 30 days from the date of deposit; but payments may be deferred to a subsequent date.

It is crucial to understand what happens when an immediate annuity insurance is purchased. The insurance company who issues the annuity, takes the lump sum money investment and guarantees to make regular payments to either the owner or annuitant (if different) for a certain period. Normally, people choose to receive payments for life. Once the payment term is chosen, life, 10 years, 15 years, 20 years, etc., no further changes can be made to the payout terms in the future. Once the terms of the guaranteed schedule of payments are accepted by you, the right to your original deposit is forgone. For it is, once payments start the contract can’t be altered or cashed in.

These are some advantages of investing in immediate annuities:

1. Security – guarantee of lifetime income which can never be outlived
2. Simplicity- professional investment management of your funds
3. Principal Safety- funds are secure as the investments aren’t tied to the stock market
4. Fixed Investments – no/low risk investments generate interest rate return on assets
5. Tax Deferral- qualified annuity earnings accrue tax-deferred

Single Premium Immediate Annuities (SPIAs) are attractive for these situations:

1. Retirement
2. Pension terminations
3. Estate planning
4. Personal injury settlements
5. Divorce settlements
6. Sports contracts for professionals
7. Life buyouts-retirement

Characteristics of immediate annuities:

• Guaranteed life payments

• Professional investment management

• No/little risk as an investment vehicle, assuming the insurance company’s financials are strong. Principal guaranteed, earnings not tied to financial markets

• Annuities are tax-efficient. If annuity is funded with tax-deferred funds you pay taxes only on your monthly checks rather than the entire lump sum.

Immediate annuities are another great way to fund your retirement. Rarely, are there investment vehicles that guarantee no loss of principal.