There are an overwhelming number of potential ways to put your money to work, and when it comes to annuities, most people gloss over them unless they are looking for a way to pay for their retirement.
However, annuities, especially single premium immediate annuities (SPIA), can be a powerful earnings tool even if you are not yet ready for retirement. Investors can leverage these to boost their investment capability and secure their money in a predictable and market-protected source.
Here’s what you need to know about how a SPIA may be able to help you with your own investment goals.
What Is a Single Premium Immediate Annuity?
The first element of SPIA stands for “single premium” and means that the annuity is funded with a single lump sum. In other words, you cannot continually put money into the annuity over the course of months or years to help it grow. You put in a single amount, and then the contribution portion is complete.
The “immediate” part of SPIA means that the annuity begins paying out right away. Alternatively, deferred annuities allow you to choose a start date from a couple months up to more than 10 years from the time that you begin to contribute money to the annuity. However, immediate annuities usually pay out within 30 days of being funded. Some options that are particularly flexible may grant you up to 12 months, but this is rare.
Once a SPIA starts paying out, you will continue to receive payments (usually monthly) for the duration of the term to which you have agreed. This could be a period of five years, or you can set up an annuity to pay out for the duration of your life; the shorter the term, the higher the individual payments will be. Some SPIAs even allow for payments to continue for the lifetime of a surviving beneficiary as well, allowing you to provide for a loved one after you pass away.
How Investors Can Leverage SPIAs
Single premium immediate annuities may seem as though they are primarily useful for retirement planning, but investors often take advantage of them as well. SPIAs give owners a continued source of income, even during an unexpected downturn.
If you invest what you receive from your SPIA each month and then the market drops, everything that is left in the SPIA has been protected from that unexpected change and can provide you with some or all of the income and buying power you need to survive the bear years.
Be aware that SPIAs are a means of receiving income that you can then invest in other products, not of growing and accumulating money on their own. They pay out immediately, missing the accumulation phase that other types of annuities (such as deferred annuities) may offer.
SPIAs also allow investors to free up their assets. With the knowledge that consistent payments will be coming from the annuity, you make other investments in longer-term commitments without fear that you will need to draw upon that money for income.
Those looking to invest for the sole purpose of funding their retirement can also benefit from SPIAs. These serve as “paychecks” that continue to pay out for the entire term (up to life) and shield the retirement balance from potential loss in the market.
The Risks of SPIAs
Single premium immediate annuities are powerful tools when used properly but, as with any investment option, they do have some risks. These include:
- The reliability of the insurer: SPIAs and other types of annuities are not investment products in the sense that they are managed by a bank. Instead, they are offered by insurance agencies. If the agency goes out of business, it may not pay out the full value that you entrusted to the annuity. When you select an insurer for your SPIA, be sure to choose one with a robust and trustworthy reputation.
- Locked investment: Annuities are meant to be left alone. In fact, if you try to take more money than your monthly payments out of the annuity, you could be faced with steep penalties, if you are even allowed to withdraw at all. Annuities are not right for people who anticipate they may need to cash-in ahead of time to receive their entire lump sum back.
- Missed opportunity: While it is true that SPIAs can shield you against market downturns, they also miss out on market upswings. Your money will receive a predictable growth benefit, so annuities must be used wisely or else your investments may not grow enough to support you.
Choose the Right Annuity for Your Investment Goals
You understand the full nuance of your investment portfolio, but have you considered how a single premium immediate annuity may be able to help? At Pillar Life Insurance, we offer a self-service online portal through which you can take charge of your own annuity journey. Take a look online to see what we offer and get started with the annuity that is right for you.
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