Exploring Single Premium Annuities

The world economy is yet to recover from the overwhelming effects of financial depression and is still largely unstable. So it’s no wonder that annuities, being a safe investment option, are gaining popularity these days. They are an effective vehicle to build a finally secure and debt free future. Annuities are flexible in terms of payment options. There are a number of ways to pay for an annuity. Here, we shall focus on single premium annuity.

What is a single premium annuity (SPA)

Single premium annuity requires you to make a one time lump sum payment. This usually needs a minimum investment of $5000-$10,000. Whereas some annuities can be purchased through employer sponsored retirement plans, a single premium annuity is purchased directly from an insurance company.

Immediate and deferred single premium annuities

SAP allows you to choose between immediate and deferred annuities.  Let’s go into the details.

If you opt for single premium immediate annuity then payments will begin from the month following the purchase or the following year, in case of annual payment. If you are above 59 and ½ years old you can purchase single premium immediate annuity with the proceeds from a qualified plan (For instance, an employer sponsored 401k or IRA). This will help you to enjoy tax advantages. People below the mentioned age can purchase it with after-tax dollars. Once you start receiving payments, your tax status will be favorable both at central and state level because the lump sum you paid was taxed. It is worth mentioning that in this type of single premium annuity there is no IRS penalty in case of withdrawal of funds before 59.5 years of age.

It is also possible to defer the payment of single premium annuities for many years. In that case you will receive the payment either in lump sum or as a series of payments after a certain period of time. Meanwhile the annuity collects interest which will be eventually paid back to you. The money that you invest in a deferred annuity is tax sheltered. When you receive payments, only the interest is taxed.

Usually people who are retired or are on the verge of retirement invest in single premium immediate annuity as they are looking for a guaranteed income. Young people can afford to wait and prefer deferred annuities to reap its benefits.

A few advantages of single premium annuity

The payment can be set up in various ways. Single premium annuities can provide guaranteed income either for a specified period of time or for the life of the annuitant (life annuity).

They usually have fixed interest rate (rates are often higher than a traditional CD). So you need not be concerned about the market fluctuations.

There can be joint policyholders. In case of demise of one person, the surviving policy holder will receive payments. You also have the option to have a beneficiary who will receive payments after the annuitants death.

Is single premium annuity for you?

This kind of annuity is a good choice for someone who has just inherited money, reached the maturity date on a CD or retirement account, sold some property etc. In short, if you can afford to pay a lump sum then single premium annuity can give you good results.

People who often get sued like lawyers, doctors etc. can consider single premium annuity to shelter a part of their income because single premium annuities are not considered as a part of an estate during the lawsuit.

People who have contributed maximum permissible amount to employer sponsored retirement plans and want to supplement it can think about single premium annuity. The tax sheltered growth in case of single premium deferred annuities is another advantage.

Single premium annuities can be a great option for you if it is a part of a well thought out financial plan. Just make sure that you know the important details and understand it well before you put your right foot forward.