Your Annuity Resource

Simplicity is the Key in Choosing a Single Premium Immediate Annuity

An Annuity is one of the most basic components of finance. It is usually defined as a series of payments which are of a fixed amount and is over a specified period of time. The concept of the annuity involves value of money over time. The primary use of an annuity is to replace the income lost by an individual upon entering retirement.

Among the many kinds of annuity products available, perhaps the simplest and most basic is the single premium immediate annuity. It works when an individual pays a single premium through a lump sum payment, after which that individual receives lifetime income payments. It has always been one of the most reliable products and yet the advent of more complex annuities has relegated it to the background.

Insurance companies generally make the payments to the individuals, who are known as annuitants, on, monthly or quarterly basis. Once the holder makes the lump-sum payment, the insurance company then proceeds to invest this premium in order to generate the necessary income for funding the annuity payments. Emphasis is then given to the single premium immediate annuity’s distribution.

The distribution of the single premium immediate annuity differs from other annuity schemes like the single premium deferred annuities, in that they need not wait for a certain time span for the funds to be disbursed. Immediate annuities have one of the most basic plans of distribution, usually the lifetime of the annuitant. This simply means that the holder receives payments until their death, at which time the insurance company takes possession of the payments that were not distributed.

The drawback of the Immediate Annuity comes in the event of the premature death of the annuity holders.  Remember, you are giving up your money with the purchase in exchange for an income stream over time.  Heirs to annuity holders often want to gain possession of payments that they feel are due to them, especially in the event of a premature death. Without proper planning or specifying a secondary beneficiary, there are no easy ways to go about this.  Immediate annuities, unlike life insurance, do not generally have a death benefit.  And specifying an additional beneficiary does have its drawbacks, as the annuitant would receive a lower amount in the distribution payments, among other things.

In terms of its tax situation, the single premium immediate annuity does have its consequences. This is immediately apparent since there is no prolonged period of deferred accumulation, guaranteeing the negligibility of its tax-deferred status. The gains are taxed just like any ordinary income. A single premium immediate annuity does not have higher costs however, and its taxable part is relatively smaller compared to other annuities.

The single premium immediate annuity might be the simplest annuity around, but it still has its few limitations. One particular criticism is that it is not flexible enough. A holder is obliged to turn over a considerable amount to an insurance company to ensure income for the duration of that individual’s lifetime. Surrendering your capital limits your options in times of unforeseen needs and emergencies.

Together with deferred annuities, the single premium immediate annuity is a foundational product in the world of annuities. It affords retired individuals the benefit of regular payments long after they have retired, thus becoming a form of security. It does need to be studied carefully, regardless of its simplicity.

Single Premium Immediate Annuity