What is a SPIA?
A Single Premium Immediate Annuity (SPIA) is an insurance contract that converts a lump sum into guaranteed income for life—or a specified period. You give an insurance company a one-time payment, and they promise to send you regular checks for as long as you live.
The Simple Version
Think of it as creating your own personal pension. You hand over $100,000 today, and the insurance company guarantees you'll receive $614 every month for the rest of your life—no matter how long you live or what happens in the market.
How SPIAs Work
Understanding the mechanics behind lifetime income payments.
- You pay a single lump sum premium to an insurance carrier (typically $10,000 minimum, no maximum). This is an irrevocable decision—you cannot get this money back as a lump sum.
- Income payments begin within one year (usually within 30-90 days). You choose monthly, quarterly, or annual payments based on your cash flow needs.
- Payments continue for your lifetime or the period you selected. The amount never changes unless you chose an inflation rider (which reduces starting payment).
- The insurance company pools longevity risk across thousands of annuitants. Those who die early subsidize payments to those who live longer—this is called "mortality credits."
- At death, payments stop (unless you chose a period certain or joint option). Any remaining principal stays with the insurance company—it's not passed to heirs.
Why SPIAs Pay More Than Bonds
A 7.37% annual payout from a SPIA at age 70 seems impossibly high when 10-year Treasuries yield just 4.5%. The difference is mortality credits. Insurance companies know roughly 50% of 70-year-old males won't make it to 85. Those who die early forfeit future payments, and that money gets redistributed to those who live longer. You're not just earning interest—you're benefiting from pooled longevity risk.
Payment Options Explained
Each option trades off higher income now vs. protection for beneficiaries or spouse.
Life Only (Single Life)
Pays the highest monthly amount but stops at your death—nothing goes to heirs. Best for: Singles with no legacy concerns, or married individuals whose spouse has sufficient other income.
Age 70 Male
$614/month
7.37% annual on $100KAge 70 Female
$565/month
6.78% annual on $100KWomen receive lower payments due to longer life expectancy (87.2 vs 84.5 at age 70).
Joint & Survivor
Continues paying until both you and your spouse die. The payment amount can stay the same (100% continuation) or reduce to 50-75% after the first death. Best for: Married couples who want income security for both lives.
100% Continuation
$528/month
6.34% annual50% Continuation
$571/month
6.85% annualLife with Period Certain
Guarantees payments for a minimum number of years (typically 10 or 20), even if you die early. If you die within the guaranteed period, payments continue to your beneficiary. Best for: Those wanting lifetime protection with a legacy component.
Life + 10 Year Certain
$587/month
7.04% annualLife + 20 Year Certain
$542/month
6.50% annualPayment Option Comparison
| Payment Type | Monthly Income | Protection | Best For |
|---|---|---|---|
| Life Only | $614 (highest) | None | Singles, no legacy needs |
| Life + 10 Year | $587 | 10 years guaranteed | Moderate legacy concern |
| Life + 20 Year | $542 | 20 years guaranteed | Strong legacy desire |
| Joint & Survivor 100% | $528 | Both lives fully covered | Married couples |
What Determines Your Payout Rate?
Four main factors influence how much monthly income you'll receive per dollar invested.
Your Age
Older buyers get higher payouts because they have shorter life expectancies. A 75-year-old receives ~14% more than a 65-year-old for the same premium.
Your Gender
Men receive 8-10% higher payouts than women of the same age because male life expectancy is shorter by ~2.5 years on average.
Interest Rate Environment
When Treasury yields rise, SPIA payouts increase proportionally. Today's 7%+ rates are much higher than the 5-6% rates from 2020-2021.
Mortality Tables
Insurance companies use actuarial tables to predict lifespans. Carriers with more conservative assumptions offer lower payouts to protect against paying longer than expected.
When SPIAs Make Sense (7 Good Scenarios)
SPIAs work best when longevity protection matters more than liquidity or legacy goals.
You have longevity in your family
Parents or grandparents lived into their 90s. You're healthy and expect to beat average life expectancy. SPIAs reward long life—the longer you live, the better your "return."
You want to eliminate market risk
Can't handle seeing your portfolio drop 30% in a downturn. SPIAs provide guaranteed income regardless of market crashes, recessions, or inflation.
You have other assets for emergencies
Maintaining $50K-100K in liquid savings/CDs for medical costs or home repairs. Using the SPIA for fixed expenses only.
You want to simplify retirement income
Tired of managing investments or doing annual withdrawal calculations. A SPIA provides set-it-and-forget-it income with zero ongoing decisions.
Social Security won't cover your expenses
Monthly costs exceed Social Security by $1,000+. Using a SPIA to create an additional "pension" that bridges the gap permanently.
You want to maximize spending early in retirement
Planning major travel or projects in your 60s and 70s. SPIAs let you spend more now than a 4% withdrawal rule would allow, without running out of money later.
You're concerned about cognitive decline
Worried about making investment decisions at 85+. A SPIA provides income on autopilot—no management required even if cognitive abilities decline.
When to Avoid SPIAs (6 Bad Scenarios)
SPIAs are the wrong choice when you need flexibility, have legacy goals, or poor health.
You have significant health issues
Life expectancy below average due to chronic conditions. SPIAs favor those who live long—dying at 75 after buying at 70 means a terrible "return" on your premium.
You need emergency access to funds
Limited liquid savings and concerned about major unexpected expenses. SPIAs provide zero access to principal—once purchased, you cannot get a lump sum back.
Leaving an inheritance is a top priority
Want to maximize wealth transfer to children or grandchildren. Life Only SPIAs leave nothing to heirs—the insurance company keeps any remaining balance at death.
You're under age 65
SPIA payouts are much lower for younger buyers—around 4-5% at age 60. Better to wait or use other annuity types that offer more flexibility and growth potential.
You want income that keeps pace with inflation
Concerned that $614/month today will feel like much less in 20 years. Standard SPIAs have fixed payments—your purchasing power erodes over time.
This represents most/all of your savings
Putting more than 50% of liquid net worth into a SPIA. Too risky—you need reserves for medical costs, home repairs, helping family, or other unpredictable expenses.
The 30% Rule of Thumb
Financial planners often suggest limiting SPIAs to 25-30% of your liquid portfolio. This provides meaningful guaranteed income while preserving flexibility and legacy options with the remaining 70%. Never annuitize your emergency fund.
SPIAs as Longevity Insurance
A different way to think about immediate annuities—as insurance against living "too long."
Most insurance protects against dying too early (life insurance) or catastrophic costs (health insurance). SPIAs are unique: they protect against living longer than your money lasts.
The Longevity Protection Value
Consider two 70-year-old retirees with $500K each:
Retiree A: 100% Portfolio
- Withdraws $20K/year (4% rule)
- Nervous about market downturns
- Reduces spending in bad years
- Portfolio might last to age 90
Retiree B: 40% SPIA + 60% Portfolio
- SPIA provides $14,808/year forever
- Can withdraw more from remaining $300K
- Less stress about sequence risk
- Protected if living past 100
Tax Treatment of SPIA Payments
Part of each payment is a tax-free return of your principal, part is taxable interest.
The Exclusion Ratio
The IRS uses an "exclusion ratio" to determine what portion of each payment is taxable. This ratio stays fixed for the life of the contract.
Example: $100,000 Premium, $614/month, Age 70 Male
| Component | Monthly Amount | Annual Amount | Tax Treatment |
|---|---|---|---|
| Return of Principal | $384 | $4,608 | Tax-free |
| Interest Income | $230 | $2,760 | Taxable as ordinary income |
| Total Payment | $614 | $7,368 | 37.5% taxable |
At a 24% marginal tax rate, you'd pay ~$662/year in federal taxes on a $7,368 annual income stream. This makes the after-tax payout ~$6,706/year or $559/month.
Special Rules
- Qualified Money (IRA, 401k): 100% of each payment is taxable—no exclusion ratio benefit.
- Non-Qualified Money: Uses the exclusion ratio shown above until your cost basis is recovered.
- After Life Expectancy: Once you outlive the IRS life expectancy table, all payments become 100% taxable (you've recovered your full basis).
SPIA vs DIY Withdrawal Strategy
Should you annuitize or manage withdrawals yourself from a portfolio?
$100,000 Investment Comparison
| Factor | SPIA (7.37% payout) | 4% Portfolio Withdrawal |
|---|---|---|
| Year 1 Income | $7,368 | $4,000 |
| Longevity Risk | Zero (guaranteed for life) | High (could run out) |
| Liquidity | None | Full access anytime |
| Inflation Protection | None (fixed payments) | Can increase withdrawals |
| Legacy Value | $0 at death (Life Only) | Remaining balance to heirs |
| Market Risk | Zero | High (sequence of returns) |
| Complexity | None (automated) | High (requires management) |
| Best If You Live To | Age 90+ | Die before 85 |
The Hybrid Approach Often Wins
Instead of all-or-nothing, consider splitting: Use 30-40% for a SPIA to cover essential expenses (housing, food, utilities). Keep 60-70% invested for discretionary spending, inflation protection, and legacy goals. This balances guaranteed income with flexibility.
SPIA vs DIA (Deferred Income Annuity)
Understanding the difference between immediate and deferred income annuities.
Key Differences
| Feature | SPIA (Immediate) | DIA (Deferred) |
|---|---|---|
| Income Starts | Within 12 months | 2+ years in future |
| Typical Purchase Age | 65-75 | 50-65 |
| Payout Rate (Same Age) | Lower | Higher (longer deferral) |
| Purpose | Replace lost income now | Longevity insurance for late life |
| Death Before Payments | N/A (payments already started) | Return of premium or nothing |
Example: Buy a DIA at age 65 that starts paying at age 85. If you make it to 85, you receive very high payouts (12-15%+ annual rates). If you die before 85, you may get nothing—but that's fine because you still had your other savings. Think of DIAs as "longevity insurance" specifically for late-life (age 85+).
How to Shop for SPIAs
Getting the best payout requires comparing multiple carriers and understanding the process.
- Compare at least 5-7 carriers — Payout rates vary significantly. The difference between the best and worst quote can be $50+/month on a $100K premium.
- Verify financial strength ratings — Stick with A- or better from AM Best. Your carrier needs to be solvent for 20-30+ years.
- Get quotes on the same day — Rates change frequently. A quote from last week may no longer be available.
- Understand exactly what you're buying — Confirm the payment option, frequency, and any riders. Ask if there are any scenarios where payments could change.
- Consider laddering purchases — Instead of $300K at once, buy $100K now, $100K in 6 months, $100K in 12 months. This averages out rate fluctuations.
- Work with an independent advisor — Captive agents only show their company's products. Independent advisors can quote 20+ carriers.
Common Questions
What happens if the insurance company fails?
State guarantee associations protect you up to $250,000 per carrier (varies by state). This is why financial strength ratings matter—buy from A-rated or better carriers.
Can I cancel my SPIA if I change my mind?
Most states have a "free look period" of 10-30 days after purchase. During this time, you can cancel and get a full refund. After that, SPIAs cannot be canceled—they're permanent.
Are SPIA payments adjusted for inflation?
Not by default. Standard SPIAs pay a fixed dollar amount. You can add a COLA (cost-of-living adjustment) rider, but it reduces your starting payment by 25-30%.
What if I need a lump sum for medical expenses?
You cannot access the principal in a SPIA. This is why experts recommend keeping 12-24 months of expenses in liquid savings before annuitizing.
Should I use IRA or non-IRA money to buy a SPIA?
Using non-qualified (after-tax) money provides better tax treatment via the exclusion ratio. With IRA money, 100% of each payment is taxable. However, if you need to take RMDs anyway, a SPIA can satisfy that requirement.
How do I know if I'm getting a competitive rate?
Compare your quote against multiple carriers. For a 70-year-old male with $100K, Life Only rates should be 7.0-7.5%+ in today's interest rate environment. Anything below 6.5% is likely uncompetitive.
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