The term “Income Annuity” is a catch all used for any annuity that produces future income on a guaranteed basis. The three types of annuities that can create guaranteed future income are a SPIA (Single Premium Immediate Annuity), a deferred income annuity and an annuity (fixed indexed or Variable) with an income rider. All three have different sweet spots which can help someone determine when to use each type. A review of each is provided below.
- SPIA- A single premium deferred annuity creates immediate income that will last for a pre defined amount of time. It can be used to provide income for one person for life, a couple for both lives or simply for a set amount of time such as 20 years. The biggest thing to be aware of is that the lump sum is no longer owned by the insured. The insurance company and/or bank takes control of the lump sum of money. They take the money in return for paying a guaranteed income stream that will not change. If someone puts $300,000 in a SPIA with a life with 20 years certain option, they are guaranteed to be paid for life. In the event they die prior to being paid for 20 years, the income will be paid to a beneficiary until is has been paid for a total of 20 years. The trade off is that the insured no longer has access to the lump sum of money.
- WHY WOULD SOMEONE USE THIS?- A SPIA will pay out the higher ratio of guaranteed income than the income rider or the deferred income annuity. This is most useful for someone that has other assets and can afford to dedicate a portion of assets to create a guaranteed income stream. The lump sum is no longer available so it is important to have other liquid assets if this option will be used.
- Deferred Income Annuity- The product is very similar to a SPIA. The difference is that income does not start immediately. It starts at a pre determined future date. The longer the deferral the higher the future income payment is. Payments can be calculated on a guaranteed bases in the future so the insured knows exactly how much they will be getting at the future date.
- WHY WOULD SOMEONE USE THIS?- If the insured has a future income need, this is a good way to create a income stream without the need to worry about market performance or worry about anything for that matter. They just dedicate the needed amount of money and then can be assured income will start when needed. The flaw is that the future income payout is not competitive with the future income payout created by some income riders.
- INCOME RIDER-When an income rider is attached to a fixed indexed annuity or a variable annuity it allows the insured to create a future income at any year they choose. They do not need to pre determine the year income will be taken and they can see exactly what the income would be in any given year. They also maintain control over the lump sum investment and can continue to accrue interest on the money. The income payout exceeds that paid by the Deferred Income Annuity. Picking the most competitive company is critical however as the guaranteed payout amounts vary tremendously depending on the company that is used. There is also an annual fee on most income riders.
- WHY WOULD SOMONE USE THIS? If someone is looking for the highest deferred guaranteed income payment, the right income rider is the best option. They would also maintain control of the lump sum investment using this approach.