Dispelling The Myths About
Single Premium Immediate Annuities
As seen California Broker article April 2001 issue (PDF Format)

As the head of a national marketing organization which specializes in annuities, I spend a good part of my day speaking with agents around the country. I have found that when the topic is SPIA’s (Single Premium Immediate Annuities) the level of understanding as to where the SPIA fits drops.  I would like to dispel certain myths regarding SPIA’s and hopefully bring this product the respect it deserves.  By having a good understanding of how SPIA’s work and all the payout options available, agents can greatly increase their sales while providing clients with the benefits they didn’t realize were available to them.  A major feature of the SPIA is the exclusion ratio.  Each payment from an SPIA is composed of both principal and interest. The portion that represents the principal is excluded from taxation and received tax free. If a $1000 per month payment has an exclusion ratio of 65% then only $350 per month is subject to tax. A 20% tax payor would pay just $70.00 per month in tax and receive $930.00 per month after tax. This ratio goes to zero at the point of life expectancy and the entire amount becomes subject to tax. This on the surface appears to be a negative event, however, one must realize that what has happened is that the principal has been all used up and all future payments are all income and will continue for as long as the annuitant lives. Any other investment in which principal was exhausted would cease payments.  The SPIA continues. 

With the baby boomers starting to reach retirement age, a fresh look at the SPIA is timely.  The SPIA comes in various forms.  Following is a list of SPIA payout options available from most companies.

  1. Life Only - This will produce the largest amount of income, but  payments stop at death

  2. Life with Period Certain - Payout is made for life, but with some minimum number of years guaranteed (5-50 years).

  3. Life with Cash Refund - A money back guarantee annuity. Payout is made for life, but if death occurs prior to payments totaling at least the premium, then a lump sum cash payment is made.  For example, if $100,000 is invested and payments of $1,000 per month are made for 5 years (60 months) and the annuitant dies, the beneficiaries will receive a lump sum of $40,000.

  4. Life with an Installment Refund- Another money back guarantee annuity. 
    Same as cash refund except the beneficiaries continue to receive the monthly income until the full premium is paid out.  In the above example, there would be 40 more payments made monthly.

  5. Joint and Survivor - This payout option guarantees that payments will continue for the lives of both annuitants.  Period certain options can be added.  This form is used primarily with married couples to provide income as long as either one is alive.  Sometimes the benefit drops upon the death of the first or the primary annuitant.  This option produces a higher initial benefit.

  6. Period Certain Only - This option provides a benefit for a certain period of time, typically 3-50 years with no life contingency involved.

  7. COLA SPIA - This is a life annuity with payments that increase or decrease by a set percentage each year.  Initial benefit can be substantially lower than non-COLA annuities.

Annuity Myths

Myth #1

The greatest concern of senior citizens is safety.

Truth #1
While safety is certainly a concern, the actual answer is “outliving their money”.  This is an important concept for agents.  Their senior clients are worried about having enough money to provide an income they can’t outlive.  The agent has in his arsenal a product which will guarantee to solve the problem  How many times is such a perfect fit overlooked?
Myth #2

If I die the insurance company keeps all the money.

Truth #2

The only time this is true is with “life only” benefit.  This payout ends upon death.  It has the highest payout factors and can be a planning tool when the payout is used to fund life insurance.  Upon death the annuity ends, but the life insurance pays up. 

I suggest to agents that they offer their clients a money back guarantee SPIA.  Basically this is an SPIA with a refund option.  If a client invests $100,000 the client is guaranteed to receive at least $100,000 back in payouts.  Of course, If they live longer the payout will be more. 

Myth #3

Future guaranteed annuity payments will be decimated by inflation. 

Truth #3

Immediate Annuities can be purchased with an annual COLA.  Payments can be increased by 3-7% or more annually compounded.

Myth #4

A mutual fund will outperform an Immediate Annuity as a source of retirement income.

Truth #4

A mutual fund might outperform the Immediate Annuity. I have no bias against mutual funds.  I do, however, feel that clients looking for retirement income should recognize and evaluate the risk/reward trade off.  If a mutual fund is used to provide income certain risks must be identified.  The following example is one I have used in agent and client seminars.  In looking at the SPIA - mutual fund comparison we need to make certain assumptions.  With the SPIA, a deposit of $100,000 for a 72 year old male will be about $1,000 per month for life.  To be fair to the mutual fund, I will assume an annual return of 10% each and every year except one year in which the fund will drop by 10%.  (Some feel this is too generous to the fund.)

Basically with the SPIA the client receives $1,000 per month for life.  If we start with $100,000 in the fund and withdraw $1,000 per month we would use $12,000 in the first year.  If we also lost 10% ($10,000) we would find a balance of $78,000 at the at the end of year one.  The client has used 22% of his retirement savings in the first year.  Even though the fund will now earn 10% per year forever, each withdrawal will further invade principal until it is all used up.  The SPIA also invades principal each month, but once the client’s principal is exhausted (determined by life expectancy), the insurance company will continue to make payments for the life of the client, no matter how many years the client lives.

The issue is whether the risk of running out of money in later years is a fair trade off to the reward of perhaps higher payments in the future.  I would rather have deflated dollars than no dollars.  I don’t think most agents nor clients have looked at the risk/reward equation in this way.  Risk is fine as long as the client understands why he is taking that risk and what reward he can expect for that risk.

Myth #5

If an SPDA is annuitized, the company will waive surrender charges.


Truth #5

Before a client annuitizes internally, a comparison should be made.  I have seen many situations where the client would be better off (i.e. getting a higher payout) by surrendering the Deferred Annuity (actually a 1035 exchange to an Immediate Annuity) paying the surrender charge and buying the SPIA from a more competitive company. If the charge is 3%, but another Immediate Annuity carrier’s rates are 7% better, it pays to exchange. The clients only concern if he wants to annuitize, is how much his payments will be. The existing Deferred Annuity carrier will provide a quote and then we can shop the surrender value amount to get a competing quote.  If the internal annuitization under the Deferred Annuity is better, the client will accept that approach.  If not, he can 1035 to another Immediate Annuity.

Medicaid Immediate Annuity

In some situations, the purchase of a restricted SPIA can help an individual to qualify sooner for Medicaid assistance, and potentially pass on a greater estate to their heirs at death.  In effect, the assets placed in such an annuity are no longer considered as assets that must be “spent down” prior to Medicaid eligibility.  Then at death any remaining payments are paid to the beneficiary and may be shielded from Medicaid collection.

Split Annuity (Combo)

A very useful approach is the Split Annuity.  In this structure an SPIA is used to provide income for a period of years, generally 5-10 years and a multiple year guarantee is used to get back the original principal in the same number of years.  Many seniors have CD’s on which they withdraw the interest each year.  They want to leave the principal to their heirs.  A split annuity can greatly increase the income side and still guarantee a return of principal at the end of the term.  This idea works so well because most of the income is received tax free based on the exclusion ratio and the growth side is helped by the deferral.

Deferred Start Immediate Annuity

Sometimes clients want to start a payment stream at a certain time in the future.  An SPIA can be purchased with a guaranteed payment stream that starts as far out as perhaps 20 years.  This can be a valuable planning tool where a 60 year old client may want $1,000 per month for life starting at his 65th birthday.  An SPIA can guarantee both the premium and benefit.

Life Insurance and LTC Funding

More and more the SPIA is being used to fund the premiums on life and LTC policies.  Funds in an SPDA can be exchanged to an SPIA and life insurance purchased to offset taxes on the built up gains.

I suggest that all agents become familiar with SPIA’s and their possible uses.  The key element is that all aspects carry the magic word “guarantee”.  For conservative clients with income needs, a guarantee may be exactly what is desired.  An income which can’t be outlived.  By shopping many carriers agents can get their clients the best deals available.

Bob Affronti is president of FSD Financial Services, Inc. Bob has been in the insurance industry since 1969. He was a field rep and National Annuity Director for a large insurance company. FSD is a national annuity marketing firm. Bob can be reached at FSD Financial Services (800)373-9697 or at



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