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Single Premium Immediate Annuity: Is a SPIA Right for Your Retirement?

When it comes to retirement, there are many types of accounts you can choose from. These accounts can be selected on the basis of their contribution limits, tax advantages, penalties and withdrawal rules, among other things. Irrespective of the investment instrument you pick, most people primarily aspire to have a steady income in retirement. One of the most common sources of this income is an annuity. There are different kinds of annuities, such as an immediate annuity, a deferred annuity, etc. This article talks about a single premium immediate annuity.

Here’s what you need to know about a single premium immediate annuity and whether it is right for you:

What is a single premium immediate annuity?

A single premium immediate annuity or SPIA is a type of immediate annuity that offers you pay outs immediately after purchasing the insurance annuity plan. As the name suggests, there is a single premium charged for such plans. This implies that you only pay the insurance company once and in return, the insurance provider pays you instant annuities for either a fixed term or the rest of your life. Based on this, the following information will help you decide whether they are a right fit for you.

How does an SPIA work?

There is no accumulation phase in the case of an SPIA. So, the premium you pay to the insurer is directly paid back to you in the form of an annuity. Depending on the plan you opt for, you can receive quarterly, monthly, semi-annual, or annual pay outs. Moreover, you can start receiving your annuities right after purchasing the plan or after a year. In addition to the annuity, there is also an insurance component in such plans. SPIAs can offer twin benefits of insurance and financial security. So, you can protect your loved ones with a death benefit in the unfortunate case of your demise.

Most people use the lump sum from retirement accounts, such as a 401(k) account to fund an SPIA.

What are the pros and cons of SPIAs?

An SPIA can offer many advantages but also poses some shortcomings.

Pros
  1. They offer stability: The best feature of an SPIA is the dependability factor. You receive regular pay outs through life or the chosen term and never have to worry about a shortage of cash again.

  2. They are hassle free: The premium for an SPIA is only paid once, making these plans very convenient and hassle free. On a single premium, you stay covered for life.

  3. They offer insurance: Along with ensuring your financial security, you also safeguard your loved ones with the insurance cover. In case of your absence, your family stays protected against any financial adversities.

  4. They give immediate benefits: Unlike any other traditional retirement accounts or investments, the return on an SPIA is immediate. You can start receiving your annuities right after purchasing the plan or a year from the date of purchase.

  5. They offer low risk: As compared to market instruments like stocks, bonds, exchange traded funds, etc. annuities come with very low risk. This benefits you in two ways – firstly, your retirement remains financially secure with the regular annuities. Secondly, with one stable source of income, you can go ahead and place better bets in the market to gain from higher returns and rewards.

Cons
  1. You may lose out on money: If you opt for lifetime payments, the money will be divided as per your life expectancy and paid to you in proportions. However, if you do not survive the term, your money may be wasted. You will receive smaller pay outs to accommodate the future years, which may seem like a waste if you are not around to enjoy them for the expected duration of time.

  2. You need a significant corpus to buy the plan: Since the SPIA plans work on a one-time payment method you need a large sum to buy the plan in the first place. This may not be ideal for everyone.

  3. You will not have enough liquidity: The annuities may or may not be in sync with inflation, so the pay outs can seem inadequate. Similarly, if you ever need lump sum funds, you may not be able to access them despite owning them.

Should you consider buying an SPIA?

The decision to buy an SPIA will depend on a host of factors. Here are some things to keep in mind:

You can purchase an SPIA:

  • If you need immediate funds.
  • If you do not have other pension accounts.
  • If you prefer low risk and consistent income.
  • If you want to protect your family with insurance.

You may not need an SPIA:

  • If you have another pension plan that offers similar features.
  • If you do not have a lump sum amount to purchase such an annuity.
  • If you are expecting a shorter life span, due to existing illnesses.
  • If you want easy accessibility and liquidity.

If you decide to buy an SPIA, you can consider getting additional riders to enhance the cover of the plan. Some common riders include:

  1. Guaranteed payments: This ensures that a guaranteed number of payments are paid by the insurer to you. For instance, if you fix 15 guaranteed payment but die after receiving the 10th payment, the insurer will pay the remaining 5 pay outs to your heir.

  2. Inflation protection: This increases the payments as per the rate of inflation. As the prices of goods and services increase, the insurance company also increases the pay outs.

  3. Liquidity access: This allows you to withdraw lump sum funds in case of an emergency.

To sum it up

A single premium immediate annuity is a great tool for retirement, but it may not suit everyone. It may be advised to consult a financial advisor to understand if this option is right for you or not.

You can get in touch with a financial advisor in your area to understand how SPIAs can benefit you.

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