Annuities aren’t a one-size-fits-all product. People buy annuities for different reasons, and their choice of annuity type varies according to their goals and needs.
Insurers have an array of annuity types to offer their clients. In a blog, Truth About Annuities, investment expert Suze Orman explains that different types of people, or people in different life situations buy different types of annuities. Here are some descriptions of those annuity types—and some information about the people who purchase them.
Single premium deferred annuity
Individuals purchase a single premium deferred annuity (SPDA) by depositing a single premium into the policy. Taxes on that payment are deferred until the individual begins to withdraw money in the form of payouts. This type of annuity guarantees a specific interest rate for a specific period of time, which can vary from one to several years, like a bank CD.
As with all annuities, the overarching goal for SPDA buyers is to invest money that will generate income. Individuals most likely to buy an SPDA, according to Orman, are those who want to allow their money to grow risk-free while avoiding paying income taxes on that money.
Single premium immediate annuity
Similar to the SPDA, the single premium immediate annuity (SPIA) requires an individual to invest one lump sum to purchase this product. Immediate annuities guarantee that individuals receive a fixed income for the remainder of their lives, and the payouts begin immediately. The amount of the income varies and is based on the individual’s age, current interest rates and the maximum period the individual has opted for payouts. There are tax benefits as well.
There are several advantages to an SPIA. First, an SPIA is appropriate for those seeking a guaranteed monthly income that comes with tax benefits. An SPIA works for those who don’t have beneficiaries when they pass away, and for those who are looking to boost their income rather than making a typical interest-bearing investment. Orman explains that those who buy this type of annuity are also looking to leverage a high interest-rate environment. “The perfect time to have purchased an immediate annuity, for example, with respect to interest rates, would have been in the eighties, when interest rates were high, not in the late nineties, when interest rates are relatively low,” she points out.