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What Is a Single Premium Immediate Annuity (SPIA)?

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A single premium immediate annuity, or SPIA, is a type of annuity that offers the annuitant a guaranteed stream of income. It is a contractual arrangement between the annuitant and an insurance company that can immediately take effect following a lump-sum payment.

Annuitants can receive regular payments as soon as 30 days following the purchase of the SPIA. The annuity owner can also arrange to have payments deposited a year after the lump-sum payment.

With a SPIA, there’s no accumulation period. All an annuitant has to do is purchase one, arrange for the payout terms, and receive the payments.

As a purely income-generating annuity, the SPIA is arguably the simplest of all annuity types. Of course, you must ultimately decide whether or not it’s the best type of annuity for your situation and risk appetite.

We’re here to make your decision-making easier. Read on to learn more about what a SPIA is; by the end of this article, you’ll know how a SPIA works, the pros and cons, and whether it’s the right move for you.

How Does a SPIA Work?

A SPIA is a type of annuity that annuitants purchase once. Unlike deferred annuities, SPIAs do not accumulate with regular payments. Instead, annuitants buy SPIAs in a lump-sum purchase.

The lump-sum amount is what funds the annuity, and it is payable in as little as 30 days to a year. It all depends on what the annuitant selects.

SPIA payouts can vary from one annuitant to the next. The calculations can vary accordingly based on several factors. The most common determinants of SPIA payouts are the annuitant’s life expectancy and the principal lump-sum payment. Another factor is the annuity’s predicted interest rate.

Using these variables, insurance providers will calculate the total amount of the premium payable as SPIA. Once the insurers determine this amount, they divide the resulting figure over months or years depending on the annuitant and the insurer’s arrangement.

In short, a single premium immediate annuity is a single-purchase annuity. Funded by a one-time lump-sum payment, a SPIA gives an annuitant a steady stream of income that’s receivable until death.

Are the Payments From a Single Premium Immediate Annuity Taxable?

The answer is yes.

Another characteristic that distinguishes a SPIA from a deferred annuity is its classification. More specifically, unlike deferred annuities, SPIAs are not investments. On the contrary, a SPIA is an income-generating contract with an insurance provider.

Because SPIA payments are a form of income, the payments are subject to income tax deductions. However, the calculations for tax deductions will depend on how you funded your SPIA.

If you bought your SPIA using money from investment earnings or pre-tax money, your SPIA will be qualified. Qualified SPIA payments are fully taxable. Some qualified funding sources are 401Ks, IRAs, pension plans, tax-sheltered annuities, and annuity exchanges.

Funding a SPIA with after-tax money will result in the ownership of a non-qualified SPIA. In a non-qualified SPIA, only the portion of the payment coming from interest is taxable. Since you paid for the principal using after-tax money, it will no longer be subject to a tax deduction.

Some examples of non-qualified sources are inheritances and proceeds from mutual funds or money market accounts. Other examples of non-qualified sources are settlements from life insurance policies and deferred compensation.

To sum up, SPIAs are taxable because they are income sources. How much of the payments are taxable will depend on the funding sources.

What Are the Advantages of a SPIA?

For the most part, people who choose SPIAs are individuals nearing retirement. a SPIA is the go-to annuity type for retirees due to its security and simplicity. Here are some of the reasons you may want to consider choosing a SPIA:

Steady and Guaranteed Income for Years

A SPIA gives the annuitant a steady source of income that continues until the annuitant’s death. Since a SPIA is a contractual agreement, the insurance company must deposit payments regularly.

In short, the guaranteed income generated from a SPIA is income no annuitant can outlive.

Now, you might ask yourself what happens to any outstanding balance in the SPIA after the owner’s death. We will answer this question by discussing the next benefit of a SPIA.

Beneficiary-friendly Terms

An annuitant can opt for a Life Only arrangement. It pays the most, but the insurer gets to keep any remaining balance after the annuity owner’s death. The Life Only arrangement is the most common condition annuitants opt for — especially those without beneficiaries.

However, a Life Only condition is only one of several ways to structure a SPIA. An annuitant can arrange to have 100% of any outstanding balance deposited to the beneficiaries.

By doing this, the annuitant creates an obligation for the insurance company to pay the beneficiaries. For many SPIA owners, doing this minimizes risk and gives peace of mind.


SPIA owners and insurers can tweak the payout terms of the annuity however the owner chooses. Before consolidating the SPIA, the owner and insurer can add conditions to the contract. The terms and conditions can cover payout dates, beneficiary listings, and what happens to the money after the owner’s passing.

Mortality Credits

When someone buys a SPIA, the insurance company adds the new owner’s payment to a pool of funds created for payouts. Some of the annuitants will pass away and have Life Only conditions in their contracts.

The money from the policies of these annuitants goes into a “risk pool fund.” This fund allows the insurance company to pay annuitants who outlive their calculated life expectancy. The proportion of the fund added to the living SPIA owner is the mortality credit.

Hence, you can earn more on your SPIA by living past your calculated life expectancy.

All of the Ease Without the Fees

SPIAs are simple:

You get a quote and pay a lump-sum amount depending on the estimates and your desired income. Because SPIAs are not investment funds, you don’t have to pay any fees for account management.

What Are the Drawbacks of a SPIA?

Despite the security and simplicity that a SPIA offers, you need to be aware of several things before making your final decision.

SPIAs Are a Fixed Income Source — Not an Investment

SPIAs are not investments that deliver yields when your principal profits. For this reason, SPIA payouts do not increase, barring mortality credits. It’s not the best option if you’re after the greater yields seen in an investment.

If you are someone who already has a source of income after retirement, a SPIA may not be for you. You may be better off with an investment fund or a deferred annuity if you have an appetite for investment risk.

A SPIA Requires a Large Lump-Sum Payment

When you buy a SPIA, you must pay a large lump-sum amount depending on the quote issued to you. Because the SPIA needs to suffice throughout your retirement, expect the lump-sum payment to be very high.

Speak to a licensed agent about how much you’d need to pay for a single premium immediate annuity.

A SPIA GIves Control to the Company

Once you have agreed to the terms of the SPIA and paid the lump-sum amount, you lose control of your money. Your money will now return to you as regular income payments based on the SPIA’s payout schedules.

Steps to Take Moving Forward

So far, we’ve established that a single premium immediate annuity gives you a guaranteed source of income after retirement. a SPIA is also a low-risk option for retirees who dislike investment volatility. However, SPIAs will not deliver greater yields than their principal amounts. Let’s also not forget that a large lump-sum payment is necessary when purchasing a SPIA.

The drawbacks represent the risks that go into the purchase of a SPIA. If you’ve decided to opt for a SPIA, take these steps to minimize your risks going forward:

Check out Different Insurance Companies

Different insurance companies will offer different valuations of SPIAs. Instead of choosing one right off the bad, get SPIA quotes from several companies to compare.

Of course, be aware that once you’ve secured a quote from one company, its effectiveness only lasts for about a week. After a week, you’ll have to get another.

Research State Guaranty Associations

At the state level, insurance products are under the regulation of state guaranty associations. These associations also protect policyholders. Under the protection of these associations, you can receive reimbursements if your insurance company faces insolvency or fails.

Various states have different associations. The coverage often ranges between $250,000 to $300,000. Consult your state’s guaranty association and inquire about its protective services.

Diversify Your Portfolio

Your SPIA should only comprise one portion of your investment portfolio; never allocate all of your disposable income to a SPIA. Have your money in several investment funds to spread and mitigate risks.

Speak to a Licensed Agent Today

A SPIA is a low-cost and low-risk way to guarantee income during your retirement. It’s also a highly customizable plan you can tailor to your preferences. In short, it’s an excellent option if you desire a steady source of income that fills the gaps during retirement.

However, like any long-term insurance policy or investment, it does come with risks. Speak with a licensed agent to learn more about SPIA risk mitigation and other insurance products.

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About the Author: Benjamin Hulburt

Benjamin Hulburt - Safe Wealth Plan