The concept of single premium immediate annuities (SPIA) actually sprang from a much simpler time when there weren’t any stock markets, interest rates or financial institutions peddling scores of different financial products. The original annuities were a simple arrangement between a government and its citizens to provide for annual income payments in exchange for a lump sum of money. These days governments issue bonds as a way to borrow money from their citizens for which they are paid interest. And, SPIA annuities are now issued by life insurance companies, but little else has changed in terms of their purpose.

Anyone who is concerned with the possibility of outliving their income sources is a strong candidate for an SPIA annuity. And that might include the vast majority of Baby Boomers, 80% of whom think that their retirement savings are insufficient to be able to generate 20 to 30 years of income. With an SPIA annuity, for all or a part of their retirement income they could be assured that they won’t outlive their income.

How SPIA Annuities Work

It is a simple exchange, one commitment for another. An individual commits a lump sum of money to a life insurance company that then commits to that individual a guaranteed stream of income payments. As determined by the individual, the income guarantee can cover a specific period of time, or it can cover the person’s lifetime. In either case, the life insurer guarantees that all of the principle plus all of the interest it is projected to earn, will be paid out in equal periodic installments, typically monthly, until it is completely distributed.

The most important aspect of that guarantee is that, even if the individual lives beyond his or her life expectancy, the life insurer is still committed to make the periodic payments until the individual dies. This is the longevity insurance that makes SPIA annuities so unique and compelling, especially in an era of uncertainty for people approaching retirement.

SPIA Annuity Steps

Determining the Amount of Deposit

Once a lump sum of money is deposited with a life insurer and the income payments begin, the money cannot be returned except through the periodic payments. So, it is vitally important to make a sound decision as to the amount of money to be deposited. Most planners will work from an income need standpoint. That is, calculating your overall need for income and how much can be generated from various income sources. If you have multiple income sources, the SPIA can be used as a part of a portfolio of income investments to create a safety net, or foundation of income to act as a stabilizer.

Given a certain amount of income that would be needed on a monthly basis, a life insurer could calculate the amount of money that would need to be deposited. Or, given a dollar amount to be deposited, the calculation would produce an amount of monthly income that could be generated.

Calculating the Payout Rate

In either case, the calculation involves several key factors, such as your age when the income is to begin, your life expectancy based on actuarial tables, and a project interest rate. Once the number of payment periods is determined (either specified number of periods, or the number of periods as determined by your life expectancy), the life insurer comes up with a payout rate, which is fixed percentage of the annuity balance that is to be paid each period. The payout rate includes an exclusion ratio that determines the amount of the payment that is comprised of principal, and is, therefore, excluded from taxes. Much like a mortgage in reverse, the SPIA annuity is calculated to distribute the entire principal along with interest earnings by the last scheduled payment period. If the schedule of payments is based on life expectancy, the number of payment periods becomes indefinite once the individual lifetime surpasses its life expectancy.

Structuring SPIA Payments

One of the more important steps in the SPIA process is to determine how the annuity payments are to be structured. In its simplest form, an SPIA is paid out on a single life which means that, if the individual dies prior to life expectancy or a specified period of time, the income payments simply stop and the life insurer keeps the remaining balance.

Individuals with spouses will usually structure the SPIA as a joint life annuity so that, the annuity payments will continue for the second spouse after the death of the first spouse. The payout rate for joint life annuities is reduced by an amount that covers the additional cost of insuring two lives.

Additionally, an SPIA can be structured to return all or a portion of the annuity balance to a named beneficiary at the death of the primary annuitants. Instead of continuing the annuity payments, the annuity proceeds are paid to the beneficiary in installments over a five to ten year period.


The fact that SPIA annuities have been providing income security for hundreds of years is somewhat of a double-edged sword when it comes to appreciating their importance. On one side, they are nearly as old as the hills, which might lead to a characterization of being stodgy or even out-dated. On the other side, they are still the only financial instrument that can offer the ultimate in financial security which, if you ask millions of retiring Baby Boomers, would never get old.

SPIA annuities are not difficult to understand. It’s their application in an individual’s retirement plan that requires careful analysis to determine their suitability and their value. While they may not be suitable for everyone, they can play a vital role in just about anyone’s retirement income portfolio where stability, predictability and general peace-of-mind are desired attributes.