Single Premium Immediate Annuity
A single premium immediate annuity is a contract funded with a single lump-sum payment (premium) in exchange for guaranteed income payments. Designed to supplement retirement income, a single premium immediate annuity insures the purchaser against outliving their money or exhausting it within a certain timeframe. A single premium immediate annuity can begin paying income immediately, bypassing the accumulation phase and going directly to the annuitization phase.
The Market for Single Premium Immediate Annuities
Single premium immediate annuities make up just a fraction of all annual annuity sales—just $6B of $254.8B in 20211—but as bond rates continue to decrease, clients who’ve traditionally sought reliable income through bond strategies may need to explore new options to secure similar or higher rates.
DPL's View: Single Premium Immediate Annuities
These measures are created within the context of insurance products.
How Single Premium Immediate Annuities Work
Like certificates of deposit2 (CDs) or money market funds, single premium immediate annuities provide a consistent stream of income over a specific period or for the life of the annuitant depending on the payout options available, and may often be used by risk averse clients nearing or in retirement. Where single premium immediate annuities differ is they can be highly customized to provide income payments monthly, quarterly, or annually for the annuitant's life or a defined period. Single premium immediate annuity payout rates are determined by the insurance company and are based upon the life expectancy and gender of the annuitant at time of purchase. Once payments begin, they will continue at a fixed rate until the end of the payout period or annuitant's life.
Because clients are living much longer in retirement, some single premium immediate annuities offer increasing payout options to protect purchasing power typically lost to inflation. Choosing this option can increase annual payouts by a compounded interest rate of 1%-5% but will reduce initial income payments. Some single premium immediate annuities also offer commutation benefits, which provide access to the present cash value of the future payouts in the form of a lump-sum payment. This can help clients address emergency situations if other sources are not available, but will result in a reduction of future payouts.
Problems with Commissioned Single Premium Immediate Annuities
In a commissioned single premium immediate annuity sale, the compensation paid to the agent results in a reduction of the income payout rate.
In a commission-free single premium immediate annuity sale, there is no built-in agent compensation to recover, resulting in higher income payments for the life of the contract.
How to Think About Commission-Free Single Premium Immediate Annuities
When your client needs:
GUARANTEED LIFETIME INCOME: Single premium immediate annuities are explicitly designed to manage longevity risk by generating an income stream that clients cannot outlive. Single premium immediate annuities also help reduce sequence of returns risk by generating a guaranteed income stream that cannot be impacted by market volatility.
FIXED INCOME: With interest rates at historic lows, single premium immediate annuities have the potential to provide a higher rate of consistent income payments than a fixed income strategy.
1LIMRA Secure Retirement Institute
2Annuities are not FDIC insured and are not deposits in, obligations of, or guaranteed by any bank or other financial institution.
All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.
The purchase of an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefits. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to recommending the purchase of an annuity within a tax-qualified retirement plan. In addition to surrender charges, withdrawals are subject to income tax.
Withdrawals prior to age 59 1/2 may also be subject to a 10% federal tax penalty.
Have more questions about the Single Premium Immediate Annuity?
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