The Best Single Premium Lifetime Annuity
A single premium lifetime annuity may help you feel more secure about your retirement. Choosing the best annuity, however, depends on your financial goals, and other factors like your age and the amount of money you have to invest. Make sure you understand how these annuities work before you choose a policy.
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Identification
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A single premium annuity converts your savings to monthly income payments. The monthly income you receive is guaranteed by the insurance company. Contrast this to a deferred annuity. A deferred annuity is an annuity that acts like a savings account. These annuities are also sometimes referred to as "savings annuities." A savings annuity defers the payment of the guaranteed income option (the immediate annuity) until a time you specify. With a savings annuity, you build up a savings over time. With an immediate annuity, you already have that savings. You just need to convert it to monthly payments.
Significance
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Immediate annuities enjoy something called an exclusion ratio. Annuity payments from an immediate lifetime annuity (and received from a non-savings annuity source) are normally taxed as though most of the payment received is principal with a small amount of money being taxed as interest income. Normally, 95 percent or more of the payment is treated as return of principal; 5 percent or less is treated as investment gain. If you are converting a savings annuity to an immediate annuity, then the ratio of exclusion will be smaller, since you may have significant untaxed investment earnings from the deferred annuity.
The best lifetime single premium annuity will be the one that reduces your income tax liability while maximizing your income. In general, you will want to shop around for the highest payment from an insurance company that is financially stable. A.M. Best and other rating agencies publish insurer financial strength and can assist in discovering how stable a company is.
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Benefit
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Because of the exclusion ratio on an immediate annuity, it is possible to reduce your income taxes when compared with other investments. This means more income for you. For example, a dividend from a dividend paying stock is fully taxable as income. Likewise, withdrawals from a savings annuity are fully taxable as income up to the total amount of investment gain you withdraw. You must withdraw investment gain before withdrawing principal from a savings annuity, so any gain represents immediate and fully taxable income.
If you are converting your already existing savings from a non-deferred annuity source (i.e., all of the money has already been taxed), then you receive the highest income payment possible from the immediate annuity. Also, the older you are when you purchase the immediate annuity, the higher the benefit payment will be.
Warning
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There are serious disadvantages to a lifetime annuity. First, you cannot get your original savings amount back. If you later decide you need your savings, you're out of luck. You may be able to sell your annuity payments to a structured settlement company, but you will receive less than your original savings amount. You also cannot pass on your lifetime payment amounts to a beneficiary. Some lifetime immediate annuities offer refund options so your beneficiaries can receive a portion of your original savings when you die.
A lifetime immediate annuity is not suitable at all if you think that you'll need your savings at any point in the future. Also, if you want to pass on any of your savings to your family, an immediate annuity may not be able to do this, unless you have an agreement with the insurer for a refund option at your death.
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