Definition of a Single Premium Immediate Annuity


A single premium immediate annuity is one of the tools used to provide a steady, guaranteed stream of income during retirement. Single premium immediate annuities come in many different forms that allow you to structure your income to suit your needs. This article will go over how a single premium immediate annuity works, its benefits and when it is appropriate to use.

How Does A Single Premium Immediate Annuity Work?

The term “single premium immediate annuity” describes exactly what the annuity does. You give an insurance company a single, up-front payment and they immediately start paying you an income. The amount the insurance company pays you is based off of actuarial tables that calculate your average life expectancy and what kind of returns the insurance company expects to achieve through investing your up-front payment over your expected lifetime. The company will invest in a mix of equities and bonds and will enter into various secondary insurance and hedging agreements to ensure they can make the payments throughout your lifetime. Those hedging and secondary insurance agreements are one of the main drivers of the higher costs of annuities.

Fixed Single Premium Annuity

Single premium immediate annuities come in a lot of different forms depending on what you would like to accomplish. The most common type is a fixed payment single premium annuity. These annuities provide a monthly or quarterly check for the exact same amount for the rest of your life. They have the highest initial payment but they have some drawbacks that can be addressed by some of the other types of annuities.

Other Types of Single Premium Annuities

Some people require more flexibility when it comes to the structuring of payments so different forms of annuities have been created and marketed over the years. For example, if you want to make sure the payments come after your death so your spouse can continue living in the lifestyle he or she has become accustomed to, you can elect to have a joint survivor benefit. If you are worried that you might die five years after you put in the lump sum, you can buy an annuity that has a guaranteed minimum number of payments or refunds the balance if you die before a certain period. If you’re worried about the cost of inflation, you can also elect to receive a payment that is pegged to CPI and increases based on the inflation rate. All of these options provide extra security but the trade-off is premiums that are initially lower.

What are the Benefits of a Single Premium Immediate Annuity?

A single premium immediate annuity has quite a few benefits if you are in a particular situation. If you do not have a pension, are getting ready to retire or are already in retirement and social security payments are not going to cover all of your basic living expenses, then a single premium immediate annuity makes a lot of sense. With a correctly structured single premium immediate annuity, you do not have to worry about running out of money for basic expenses in your lifetime.

Word of Caution

You do not want to put all of your money into an annuity, just enough so that the resulting payments, in combination with social security, can cover all of your basic living expenses such as utilities, food, housing and some entertainment. If an emergency comes up and you need access to a large amount of money, you will be penalized if you withdraw a lump sum from your immediate annuity. By only investing enough to cover your basic expenses, the rest of your assets are free to be used to invest on your own. By investing the rest of your assets on your own, you will stand a better chance of keeping up with inflation.

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