Annuities are often used to generate lifetime income streams for retirees. SPIA’s and Income Riders are the two main ways to accomplish a lifetime income stream for a single person or for a couple. Here I will explain how both work and the positives and negatives of each.
SPIA- (Single Premium Immediate Annuity) A SPIA is one of the oldest types of annuities and are used exclusively as a tool to generate a lifetime income stream. The concept is simple: The annuitant gives an amount of money to the insurance company and in return, the insurance company provides the annuitant with a lifetime income stream that they can not outlive.
The positives of a SPIA are that you can star to receive income payments immediately. The payouts will never stop during the life of the annuitant. Traditionally SPIA’s have offered some of the highest monthly and annual payouts on an immediate basis.
The negative of a SPIA is that you are turning over control of the lump sum of money. The risk is that if a person dies early, they the insurance company will stop paying the life income and will keep the lump sum. More payout options are now available (Life certain and return of premium options)which can mitigate such risks but they also lower the monthly payout.
Income Riders- Income riders are usually attached to Indexed and Variable annuities. The rider will also pay out a guaranteed lifetime income stream on a single or joint life. While the income payout usually is not as high as the SPIA income payout, there are advantages to this strategy.
The first advantage is that the annuity holder maintains access to the lump sum of money. Also in the event of premature death, the remaining portion of the investment is paid to a beneficiary. The biggest advantage of an income rider is that payments can be deferred for a number of years (up to 25 with some products) which will allow the future income payment to grow larger every year. The future payment can be projected with complete accuracy which can be a valuable planning tool.
The highest paying income riders currently (In order from highest payout to lowest) Security Benefit SIA annuity, American Equity Retirement Gold with income rider, Forethought Destination series and Great American Safe Return products.