Learning Center

Annuities (P1)




Annuity basics
  • Single Premium Immediate Annuity
  • Deferred annuity
  • Annuity Advantages
  • Annuity Tax Facts
  • Annuity Concepts

  • What is an annuity?
    To put it simply, an annuity is a contract between an individual (called the annuity owner) and an insurance company for an interest-bearing policy with guaranteed income options. These income options are payments made from the principal and interest applied within the annuity and can be guaranteed for the lifetime of the individual or for a specified period of time. The annuity can be further categorized into two types — the Single Premium Immediate Annuity or SPIA, and the Deferred Annuity.

    What is a Single Premium Immediate Annuity, or SPIA?
    A SPIA, commonly referred to as an immediate annuity, makes it possible for an individual to turn a lump sum of cash into a guaranteed income stream. Unlike the deferred annuity, which is allowed to accumulate interest over time, an immediate annuity skips the accumulation phase and begins to issue income payments soon after it is purchased — usually after 30 days.

    How does an immediate annuity work?
    After an immediate annuity is purchased, the owner must select an income payment option, which is known as a settlement option. The settlement option determines how the insurance company will distribute the income payments. For example, if a “Life” option is selected, the insurance company will provide the owner with an income for as long as he or she lives — guaranteed. This payment option is based on the life expectancy of an individual known as the “annuitant,” which may or may not be the owner. (In some cases it is also possible to receive payments over the combined life expectancies of both the annuitant and his or her spouse.) The amount of each payment is determined by the frequency of the payment, the size of the original premium, the interest applied and the annuitant’s life expectancy. If a “Period Certain” option is selected, the insurance company will provide an income payment for a specified period of time, such as 10 years. Once a payment option amount has been established, it cannot be changed. (These examples are only two out of a variety of settlement options available)

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