A single-premium immediate annuity (SPIA), its name descriptive of its function, provides that payments to the annuitant commence immediately after the insurer has received a single (typically large) premium payment. SPIAs are often used by those who have large sums of money and desire to have the fund liquidated for retirement income purposes. These funds may have been accumulated through personal investments, through savings, or from a lump-sum distribution under a pension or other employer-sponsored retirement plan. Life insurance death proceeds are often paid out in installments via an SPIA. Commonly, one envisions such installments as being paid under a life insurance policy settlement option provision that itself is an earmarked SPIA. The beneficiary’s financial interest, however, may be better served by receiving the death proceeds as a lump sum, then shopping carefully for an SPIA.
Structured Settlement Annuity a contemporary use of SPIAs has evolved from liability insurers efforts to minimize their loss payouts. A structured settlement annuity (SSA) is an SPIA contract issued by a life insurer whereby the plaintiff (the injured party) receives periodic payments from the defendant in a personal injury lawsuit. Typically, the defendant and the plaintiff, together with their attorneys and a structured settlement specialist, negotiate a settlement package intended to compensate the plaintiff for his or her losses, including future earnings. Although most personal injury settlements consist of a lump-sum payment, a structured settlement involves periodic payments to the plaintiff. The periodic payments are funded through an SSA purchased by the defendant or the liability insurer from a life insurer that guarantees to make the agreed-upon payments, usually for the life of the injured person (or a designated beneficiary). In pricing the SSA, the life insurer faces both an investment risk and a mortality risk, as with all annuities. Unlike the situation with most other annuities, underwriters must assist in SSA pricing. Most SSA annuitants can be expected to exhibit substandard mortality experience, as most will have suffered some injury. To be competitive, the insurer must offer the lowest possible price to the liability insurer to win the sale, The greater the assessed likelihood of an early death, the lower the insurer’s offered price can be or, stated differently, the higher the benefits can be.
Reverse Annuity Mortgage A reverse annuity mortgage involves a (typically) elderly person entering into an agreement with a financial institution, such as a bank, under which the individual who owns a debt-free home receives a lifetime, fixed monthly income in return for gradually giving up ownership of his or her home, At the owner’s death, the financial institution gains title to the property, which it can sell for a profit. Such an arrangement can be made between individuals as well. At one time, it was believed that the market for reverse annuities would be huge, but such has not proven to be the case to date. An interesting variation has recently emerged. The homeowner obtains a loan on the security of his or her home. A portion or all of the loan proceeds is used to purchase an immediate life annuity. When the elderly person’s home is sold because of death or otherwise, the loan is repaid from the sale proceeds and the individual would have enjoyed a lifetime income from the annuity in the interim.