Single Premium and Flexible Premium Annuities
There are two different ways that a premium payment can be made for an annuity. The payment can be a single lump sum, or it can be in multiple installments. The terms used to describe the available payment schemes are single premium and flexible premium.
Single premium annuities are purchased with a single deposit amount. The contract can be a deferred or immediate. A flexible premium annuity is, however, purchased with multiple amounts of money over a period of time. This type of account is always a deferred policy – i.e. payments to the purchaser could be a long time in the future.
Investors in flexible premium annuities are looking to create a savings over a long period of time. They would rather have the flexibility associated with this product and do not need the income from the policy immediately (typically for retirement).
Immediate annuities are annuities that start their payments within a year of the policy’s purchase. These annuities must, therefore, be purchased with a single premium payment. The contract is often referred to as SPIA (Single Premium Investment Annuity). SPIAs are ideal for providing instant income to retirees. SPIAs offer the investor simplicity. Once the initial contract is set up, the buyer does not need to monitor the markets or actively manage investments. The income stream from SPIAs is guaranteed and predictable.
Flexible premium annuities have no fixed amount that must be paid into the account each year. However, minimums and maximums exist. The exact levels vary by the insurance company that issues the policy. Minimum payments can be in the range of $50-$200 per year. In comparison, a single premium contract usually requires a minimum investment of $5,000 or $10,000.
The tax considerations are very similar for the two types of premium payment options. Both types of payment schemes allow for tax-deferred savings until payments are made to the annuitant. Both single and flexible premiums also carry a withdrawal penalty. If funds are withdrawn from the account prior to the age of 59.5, a tax penalty of 10% may be applied to the amount received. Finally, if the premium, single or flexible, is made with funds from another tax-deferred product, such as an IRA or a 401(k), the account can receive tax-deferred treatment until payments are made to the policy holder.
Single premium annuity policies appeal to investors who have already have a large sum of money at their disposal. Sources of funding for single premium policies can include the following:
o Lump sum from retirement plan payout
o Sale of a house or estate
o CD funds that are maturing
o Life insurance settlement
Flexible premium annuities, on the other hand, appeal to investors who want to gradually accumulate the value of the annuity account. This investor wants to save but may not have access to the lump sum amount like the single premium annuity investor would. Instead they can increase their investment in the account slowly over time, using it as a tax-deferred saving plan.