If you have a lump sum from the sale of a business, an inheritance, a pension payout, or a retirement account, you may hear about single-premium annuities. The name sounds technical, but the idea is simple: you pay one premium and the insurance company agrees, under the contract terms, to pay you income or credit growth. Whether that is a good deal depends on your goals and the specific contract.
The two main types
Single-premium annuities generally come in two forms:
- Single-premium immediate annuity (SPIA). You pay a lump sum and income payments begin soon after, often within a year. Payments can last for life, for a set period, or for the lives of two people.
- Single-premium deferred annuity. You pay a lump sum and it grows tax-deferred for a period before you take income or withdrawals. These can be fixed, indexed, or variable (variable annuities are securities and require additional licensing, so we focus here on fixed and indexed types).
How a SPIA works
You hand the insurer a lump sum, choose a payout structure, and the insurer calculates your payments based on your age, the amount, interest rates, and the option you choose. Common options include:
- Life only: the highest payment, but payments stop at death.
- Life with period certain: payments continue to a beneficiary for a set number of years if you die early.
- Joint and survivor: payments continue for a spouse after the first death.
- Period certain only: payments for a fixed number of years.
Once income begins, a SPIA is typically irreversible. That is the trade-off for the guarantee.
Who a single-premium annuity may suit
- Someone who wants guaranteed income to cover essential expenses that Social Security and a pension do not meet.
- A retiree who worries about outliving savings and wants a floor of income.
- Someone with a lump sum who wants predictability and is comfortable giving up some flexibility.
- A person who wants to reduce the stress of market swings on a portion of their savings.
Who it may not suit
- People who may need the full lump sum for emergencies.
- Those who want to leave the full amount to heirs and do not want a payout structure that ends at death.
- Anyone who has not yet built an emergency fund or paid off high-interest debt.
- Buyers who have not compared several carriers and structures.
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Request my Retirement Income ReviewCosts and risks to understand
- Liquidity. Immediate annuities are generally not reversible. Deferred annuities often have surrender charges for early withdrawals.
- Inflation. Fixed payments lose purchasing power over time unless you choose an increasing option, which starts lower.
- Insurer strength. Guarantees rely on the company paying. Compare financial strength ratings and understand your state's guaranty association limits.
- Taxes. Rules depend on whether the money is from a qualified account such as an IRA or from after-tax savings. See how annuities are taxed.
- Opportunity cost. Money in an annuity is not available for other uses.
Questions to ask before buying
- What exactly is guaranteed, and for how long?
- What happens if I die early?
- What are the surrender charges and free-withdrawal terms?
- How does this compare to other options such as CDs, bonds, or leaving money invested?
- How is the person recommending it compensated?
Comparing with a fixed indexed annuity
A fixed indexed annuity is a deferred annuity with growth tied to an index, subject to caps or other limits. It generally aims for protection from market losses with limited upside, whereas a SPIA focuses on income. Both have trade-offs and the right choice depends on your goals.
A way to think about the decision
Many retirees mentally divide their money into jobs: money for essential bills, money for fun and flexibility, and money left for heirs or emergencies. A single-premium annuity is usually considered for the first job only. If you can cover essential expenses with Social Security, a pension, and a portion of your savings turned into guaranteed income, the rest of your money may be able to stay flexible. The goal is not to put everything into one product, but to match each product to a job.
How we help
We are an independent agency and we can explain the structures from multiple carriers. We do not provide tax or investment advice, and nothing here is a recommendation for your situation. Request a review if you want to talk through whether an annuity belongs in your plan at all.
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general education, not tax, legal, investment or insurance advice. An annuity is an insurance contract, not a direct market investment. Guarantees depend on the issuing insurer’s claims-paying ability, and surrender charges, fees and tax rules may apply. Whether any product is suitable depends on your age, goals, other assets and time horizon. Talk with a licensed agent and a qualified tax professional before acting.