Being a Roman soldier was probably not an easy gig. Traveling all the time with your life constantly in danger, and going long stretches away from your family. Sounds familiar…except for life in danger part. Regardless, the Roman empire decided to reward those dutiful soldiers and their families by providing a lifetime income stream. The Latin word for payment is “annua.” Guess where the word “annuity” comes from?
Not much has changed with the SPIA (Single Premium Immediate Annuity) product since the Roman times. It’s still a transfer of risk lifetime income guarantee. Plain and simple.
Personal Pension in a “pension-less” world
Unless you work for the government or one of the few companies that still offer a traditional pension upon retirement, SPIAs are the best choice for setting up your own “personal pension.” SPIAs provide the highest contractual payout of any type of annuity if you want income to start immediately.
Because there are no moving parts and no market attachments with a SPIA, there are also no annual fees. Commissions paid to the agent come from the carrier’s reserves and is a net transaction to you. If you put in $100,000….you will see $100,000 go to work in your SPIA.
Life expectancy drives the pricing train
In a world where everyone seems obsessed with interest rates, SPIA pricing is primarily based on your life expectancy (life expectancies if joint payout) at the time you start the payments. Interest rates play a secondary role. So the older you are when the payments start, the higher the contractual dollar amount because your life expectancy is less…which means fewer payments. The reverse is true if you start the payments at a younger age.
Evil annuity company doesn’t always keep the money
One if the biggest misconceptions with SPIAs is that when you die, the evil annuity company keeps whatever money is left in the account. That is called a “Life Only” SPIA structure, but just one of over 30 different ways to contractually structure the payment.
“Life Only” is the highest payout because you are shouldering some of the risk, but you can also contractually structure the policy so that 100% of any unused money goes to the listed beneficiaries. In other words, even though the annuity company is on the hook to pay regardless of how long you live….whatever money is left in the policy when you die goes in full to your beneficiaries. That’s as close as you will get to “having your cake and eating it to” in the world of annuities.
There’s no ROI till you die
People always ask me what the return on investment (aka: ROI) is with a SPIA. I have no clue until you die. Up until that point it’s a pure transfer of risk. I continually offer my clients that I will sing at their funeral and work in the ROI # within the lyrics of the song, but I have yet to have any takers. Go figure.
SPIAs are like a gallon of milk
Every 7 to 10 days, a gallon of milk starts to sour and go bad. Same thing applies so SPIA quotes. Every 7 to 10 days, those quote guarantees expire unless you have locked them in and are moving forward with the application process. So there is not much time to analyze the quote before a buying decision has to be made. That doesn’t mean there is urgency, just that quotes expire. Annuity milk food for thought.
“Timing” jello to a wall
Everyone is trying to time a purchase or find the “sweet spot” or arbitrage moment to perfectly time their SPIA purchase. Good luck with that Sparky. If you are trying to time interest rates (even though life expectancy is the primary pricing mechanism), it’s like nailing jello to a wall.
If you wait to buy a SPIA, then you have to factor in the payments missed while you were waiting…and the break-even point because of your “timing issues.” Annuity companies have the big buildings for a reason. If you like the contractual guarantee, then lock it in an buy the SPIA.
Quotes are customizable
Not only are SPIAs commodity products and should be shopped with as many carriers as possible, you can also customize those quotes to contractually solve for your specific situation. Life Only, Life with Period Certain, Life with Installment Refund, Life with Cash Refund, Period Certain Only, COLA riders, CPI-U riders, Single Life, and Joint Life are the variables to choose from.
Always buy the highest contractual guarantee with a company you feel comfortable with from a claims paying ability standpoint.
Unique benefit proposition
You would think that the annuity industry would promote the one benefit that sets them apart from everyone else….an income stream that you can never outlive. No other financial product on the planet does that. Annuities stand alone. Instead, they continue to promote non-guaranteed return proposals attached to variable and indexed annuities. Go figure.
Shop all carriers for the highest guarantee
Don’t let your agent or advisor show you one or two SPIA quotes. Have them quote 7 to 10 carriers to see who offers the best contractual guarantee for your specific situation.