SPIA Structure: Life Only is One Option

SPIA Life Only Lasts a Lifetime-Roman Soldiers & Their Families Enjoyed the Security of a Similar Structure
SPIA Life Only Lasts a Lifetime-Roman Soldiers & Their Families Enjoyed the Security of a Similar Structure. Hulton Archives/Getty Images

Single Premium Immediate Annuities are commonly referred to using the acronym SPIA.  These annuities have been offered in the United States for over 200 years being the only type of annuity available until 1952.  Now there are over 15 different types of annuities (including SPIAs) available, and all have their own benefits and limitations within the product strategy. 

The history of SPIAs can be traced back to the Roman Times when Roman soldiers and their families were provided lifetime pension payments for their loyal service to the all-powerful empire.

  The first SPIAs used in this country were provided to retiring Presbyterian ministers in the great state of Pennsylvania.

Single Premium Immediate Annuities can be structured in numerous ways, and can be fully customized from a contractual standpoint to meet your specific goals.  If you do not want the evil annuity company to keep a penny of your money, you can contractually guarantee that within the policy.

There’s only one annuity type…right? NO!

When you start a conversation about annuities, most people disdainfully describe how only one strategy exists.  The common misconception is that you give the money to the annuity company, and they pay you for the rest of your life.  This would be correct with an SPIA which is structured for lifetime income.  The mistake made by the majority of the public is believing that when you die, the evil annuity company keeps the money from every single policy.

  Of course, that is not the case across the board with SPIAs, but it does describe 1 of more than 15 ways to structure an SPIA payout.  This structure is called a “Life Only” structure.

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Why a “Life Only” SPIA Might Make Sense in a Portfolio

Single Premium Immediate Annuities (SPIAs) should be primarily used for lifetime income.  Financial journalists like calling this planning for “longevity risk”, which is a fancy way of saying it is a plan to eliminate the risk of outliving your money. 

An SPIA payment is a combination of the return of principal and interest.  In fact, any payment from any type of annuity is a combination of the return of principal and interest, regardless of what any agent or advisor tells you.  SPIAs are a transfer of risk products that contractually guarantee an income stream regardless of how long you live.  There is no way to calculate ROI (Return on Investment) until you die.  Up until that point, it is a pure transfer of risk. What risk? The risk of outliving your money.

When you purchase an SPIA, the payments are based on your life expectancy at the time you start the income stream.  In other words, you are placing a bet with the issuing annuity carrier that you think you will live longer than they think you will live.  If you do live longer than the annuity actuaries predict, the carrier is on the hook to pay you.  That’s the very simple benefit proposition of an SPIA.

“Life Only” Offers the Highest Payment! Why?

The reason that “Life Only” is the highest paying choice within the SPIA structure is because there are no additional guarantees built into the policy.  In the insurance world, they call this life expectancy bet “mortality credits.”  Life Only provides the highest mortality credits, which in turn provides the highest guaranteed payout.

You have to be aware that if you die in a car crash on day 2 of the “Life Only” contract, there is no money for your beneficiaries, and the annuity company keeps the unused amount.  That is why the payment guarantee is the highest.

People who typically choose a “Life Only” SPIA structure either already have legacy strategies in place, or do not have people that they want to leave money to.  Another reason to choose a “Life Only” structure, is to achieve the highest contractual payout possible as part of an overall retirement plan.

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If you are shopping for SPIAs, I would advise looking at “Life Only” quotes along with quotes that have built-in legacy guarantees.  This way you can compare the payout difference, and make an informed buying decision.

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