Single Premium Immediate Annuity
Simplicity Is The Key In A Single Premium Immediate Annuity
The Single Premium Immediate Annuity is one of the most basic components of finance. It is a life insurance product that is usually defined as a series of payments which are of fixed amount and is over an unspecified period of time, like an individual’s lifetime. The core concept of the Single Premium Immediate Annuity involves the time value of money, just as you find with compounding interest rates. The primary benefit if a single premium immediate annuity, however, is that it is a life insurance product where mortality works in your financial favor. This concept of a ‘mortality credit’ as it relates to the immediate annuity will be discussed in more detail shortly.
One of the main uses of a single premium immediate annuity is that it replaces the income lost by an individual upon entering retirement. Other uses include gifting income to heirs or others, or making payments in a settlement, lottery, charitable gift annuities, or lawsuit winnings. Companies and individuals use a single premium immediate annuity in many ways to transfer the risk of future payment promises to an insurance company. Insurance companies in turn invest the single premium into securities, real estate, and other investments to generate the income needed to meet the promised payouts.
The single premium immediate annuity is perhaps the simplest among the many kinds of annuity products available. It works when an individual gets a single premium through lump sum payment, after which that individual receives lifetime payments. It has always been one of the most reliable products and yet the advent of more complex annuity has relegated it to the background.
Insurance companies could make the payments to the individuals on a weekly, monthly, quarterly, semi-annual, yearly, or basically at any type of interval. 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 deferred annuity contracts in that they need not wait for a certain time span for the funds to start flowing. Immediate annuities are generally tied to an individual, or two individuals in the case of a joint survivor, lifetime. 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. And this is where mortality credits comes into play.
Mortality Credits- How Time Is In Your Favor With A Single Premium Immediate Annuity
Few people understand how life insurance companies really work. Thru analysis of lifespans and your current health state, a life insurance company will sell you insurance that pays out a lump sum upon your death. You are buying security for your family and heirs if you die prematurely, and they are betting that you will not die. The numbers usually work in the insurance company’s favor, because that is what they are in business to do- it’s hard to get life insurance if you are a private pilot, a deep sea scuba diver, or a high altitude mountain climber- these high risk activities increase your chance of premature death, and that’s a risk the insurance company doesn’t want to take. Plus the older you get, the more expensive insurance is- as your life expectancy gets shorter and shorter, the likelihood of a claim payout gets higher.
Now, turn this around. Lets say you want to give your money to the insurance company, and get a stream of income in return. The insurance company looks at the same mortality tables and makes a determination of how long, on average, you might live, and contracts to pay you a stream of income based on that calculation. Lets say you are 65, buy a single premium immediate annuity with enough principal up front to get $10,000 per month for life. The insurance company expects you to live to be 75 years old. Now you go on to live to be over 100 years old- the company has to keep paying you that $10,000 per month for your entire life- they bet you’d live only another 15 years at purchase, but you ended up living 35 years. You got 25 years of income that they had to pay for- this is the mortality credit in action.
In life insurance, to benefit from a mortality credit (living less than your expected lifespan) and getting a payout- you have to die. Ouch!
With a single premium immediate annuity, living longer than your expectancy gives you years of extra income. Really, I should call it a non-mortality credit!
Single Premium Immediate Annuities and Survivor Benefits:
Most annuity holders want to gain possession of payments that they feel are due to them, especially if they eventually have a premature death. There are ways to go about this, but you need to do so at the beginning of your immediate annuity contract purchase by buying the appropriate rider. It’s not unlike getting a death benefit. But it does have its drawbacks, as the you will need to lower the amount of the distribution payments, among other things. Other options exist, like having beneficiaries or passing the annuity privilege off to others.
Immediate Annuities and Taxes
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 accumulation, guaranteeing the negligibility of its tax-deferred status. The gains are taxed just like any ordinary income. A single premium immediate annuity has higher costs; 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 an amount can be difficult when presented with unforeseen needs and emergencies.
Altogether the single premium immediate annuity is one of the primary types 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. So, before thinking of getting any quote or using annuity calculators it might be helpful to go to an unbiased advisor to get some assistance on using a single premium immediate annuity One of the best advisors is at http://www.annuitystraighttalk.com