Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Economy & Markets > Fixed Income

The SPIA Comes Into Its Own

Your article was successfully shared with the contacts you provided.

By Frank J. Howell

Over the past several years, single premium immediate annuities (SPIAs) have quietly become the unsung heroes of the financial services industry. With todays retirees enjoying longer life spans and healthier retirements, the ever-dependable SPIA has suddenly become the one product in many retirees financial portfolio thats letting them get a little sleep at night–and these days, whos going to argue with a good nights sleep?

Recently published reports project that half the population will live past the age of 90. Combine this with the fact that fewer companies are offering defined benefit pension plans and the past three years market performance, its not surprising that an increasing number of retirees have become concerned about outliving their assets. Some of these retirees are turning to the SPIA for help.

For those of us with retired or soon-to-be-retired clients, its a concern–and a trend–to which we should be paying serious attention.

According to LIMRA International, sales of fixed immediate annuities increased 13% between 2000 and 2001, and by September of last year, sales had already matched 2001 levels. Why the sudden interest in what has traditionally been among the least glamorous products financial planners offer? The answer may be found in three simple words: “guaranteed lifetime income.”

SPIAs offer clients a variety of payout options (life only, period certain, joint & survivor, etc.) to help meet their particular income needs. What other type of investment product offers your clients a guaranteed stream of income for as long as they live–regardless of how long that may be? In an age where market conditions and longer life spans have evaporated even sizable nest eggs, SPIAs can offer your clients both flexibility and security.

But theres more to an SPIA than guaranteed income and dependability. Todays SPIAs are being used as integral components of many retirees estate preservation and retirement planning strategies. When purchased in tandem with traditional single premium deferred annuities (SPDAs), the results have been extremely satisfying–both in terms of income and asset preservation. Consider the following hypothetical example:

Bob and Betty Morgan retired a number of years ago. Figuring they would need about $60,000 a year to maintain their lifestyle, they decided to draw from three different sources: Bobs company pension plan, Social Security and the interest they were earning on certificates of deposit–money they had managed to set aside during their working years.

Then came the Tax Reform Act of 1993, which increased the taxation of Social Security benefits for married taxpayers whose provisional income exceeded $44,000. Following passage of the Act, retirees who were situated like the Morgans saw their income taxes go up and their spendable income come down. Unlike the Morgans, however, retirees who had their money in annuities were unaffected.

Why? Because while interest earned in savings vehicles such as CDs and municipal bonds is factored into the calculation of an individuals or couples provisional income, interest earned in annuities is not. Thus, annuity interest does not affect the taxation of Social Security benefits. In the Morgans case, the interest they were earning in their CDs bumped them into a higher provisional income tax bracket, resulting in additional income taxes and less spendable income. The solution for the Morgans was to move their money out of CDs and into a combination of fixed annuities.

Heres how it worked: The Morgans rolled a portion of their CD assets into an SPIA and the balance into an SPDA. This allowed them to accomplish three important objectives:

1. Since a portion of each income payment from the SPIA was actually a nontaxable return of premium and because the SPIA allowed them to select a “period certain” income option, the Morgans were able to customize an income stream that, when combined with their two other income sources, met their need.

2. The balance of their CD assets was now in an SPDA, which means that the interest they were earning was no longer factored into the calculation of their provisional income. Thus, they were able to reduce the amount of income taxes they owed on their Social Security benefit, resulting in a larger stream of income from that source.

3. Now taking advantage of the SPDAs tax-deferred growth, the balance of the Morgans assets had the potential to grow faster than it would have had they kept it in the CD.

Todays SPIAs come in many shapes and sizes. Nearly all offer clients a guaranteed lifetime income option, as well as a variety of “period certain” or “annuity certain” income options, where income is either guaranteed payable for a specified number of years or up to a specified dollar amount. Clients can customize a benefit stream that reflects their specific income needs, often in tandem with other income strategies, as outlined above.

But what really seems to be making fixed SPIAs so attractive to millions of retirees lately is the simple peace of mind they provide–the assurance that at least one of their income sources will be unaffected by market volatility.

SPIAs can also be ideal for clients with dependents who require lifetime care. Examples might include an elderly parent or relative, or a child with a permanent disability. By shifting assets into an SPIA and selecting the lifetime income option, clients can rest assured knowing the money will be there to provide care for a loved one or family member who would otherwise be unable to care for him or herself.

Simple, unglamorous and largely unsung, todays SPIAs are becoming an integral part of many retirees estate and retirement planning strategies. With their dependability, tax advantages, convenience, and durability–not to mention the peace of mind they offer– an SPIA might be just the financial tool youve been looking for to reach the lucrative, and swiftly growing, senior marketplace.

Frank J. Howell, CLU, ChFC, is vice president, Broker-Dealer sales for Penn Mutual Life Insurance Company, Horsham, Pa. He can be reached at [email protected].

Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.