SPIA / DIA

What is a Single Premium Immediate Annuity / Deferred Income Annuity?

These types of annuities are designed to maximize retirement income.  Deferred annuities generally cost less, because the insurance company gets to keep the deposit money for a while before paying out anything, so it can invest and grow it.

Why would a client need a Single Premium Immediate Annuity / Deferred Income Annuity?

Longevity annuities allow you to take a lump sum and turn it into income later.  These income annuities usually provide the highest contractually guaranteed payout of any type of annuity if you need income now.  They also have no fees.  They can generate valuable income in retirement, and — best of all — if the lifetime annuity payout option is chosen, payments will be received for the rest of the client’s life. This is very reassuring for many people who worry about running out of money.

Who needs it?

With fewer people covered by traditional pension plans, annuities can fill a critical gap in retirement portfolios by providing a guaranteed monthly check for as long as the client lives, no matter how the markets perform. The US treasury department and IRS have endorsed this type of annuity in recent years and made them more accessible in 401(k) plans.

How best to approach/sell to your clients?

Annuity income can be preferable to income generated through a stock portfolio for at least two reasons. It’s much more reliable. It’s also appealing because managing investments as people get older takes time and skill, and as people age they’ll likely be less able to manage money or perhaps less interested in doing so. Annuity income spares a lot of work and just keeps paying out.

Where it might not always apply?

Annuity distributions are taxed as ordinary income, which is a higher rate than that for the capital gains from other types of retirement accounts. The income stream is fixed and does not automatically increase with inflation, and the principal is locked in and no longer available for emergencies.

Things to consider

The income that annuities guarantee is backed up only by the insurance company, and to a certain extent, the state. Every state has a guarantee association that each insurance company doing business in that state has to pay into, which guarantees a certain level of protection for policyholders. In general, the amount protected varies from $150,000 to $300,000, depending on the state.  This is not an inheritable asset.