Single Premium Annuity

A Single Premium Annuity is purchased with a single deposit amount. Most companies require a minimum deposit amount to open the account. Keep in mind a single premium annuity and sinlge premium immediate annuity are the same thing. Payments will start sometime in the near future.

This type of annuity usually starts making regular monthly payments to you after you make the deposit with the insurance company. The typical starting time is 30 days from the date of deposit. However, many companies allow you to state a specific starting date as long as it is within one year from the date of deposit.

The mechanics of an immediate annuity are pretty straightforward. In return for a sum of money, the insurance company promises to make regular payments to the owner or annuitant (if different) for a specific period. This specific period can be 10 years, 20 years or for the remainder of the annuitant's life.

The sinlge premium annuity payments you will receive can be set up in a variety of different ways. Also, in most cases, whatever form you select at the time of purchase cannot be changed at a later date. In accepting this guaranteed schedule of payments you also give up the right to demand the return of your original deposit. Stated another way, once the payments of an immediate annuity begin, the contract generally cannot be revised or cashed in.

Funding a single premium annuity is not limited to any specific source. For example, the premium can come from a maturing Certificate of Deposit (CD) or monies accumulated in a Deferred Annuity account or a lump sum distribution from a tax-qualified defined benefit or profit-sharing plan, or an IRA account.

Before taking the money from a tax qualified plan, always check with your CPA or tax preparer. You want to be sure you won't incur a tax penalty.

There are many advantages an immediate annuity can provide to the buyer. Here are several:

1. Security- the annuity provides stable lifetime income which can never be outlived or which may be guaranteed for a specified period
2. Simplicity- the annuitant does not have to manage his investments, watch markets, report interest or dividends
3. High Returns- the interest rates used by insurance companies to calculate immediate annuity income are generally higher than CD or Treasury rates, and since part of the principal is returned with each payment, greater amounts are received than would be provided by interest alone
4. Preferred Tax Treatment- it lets you postpone paying taxes on some of the earnings you've accrued in a "tax-deferred" annuity when rolled into an immediate annuity (only the portion attributable to interest is taxable income, the bulk of the payments are nontaxable return of principal). The IRS uses an exclusion ratio to determine which part is principal and which part is interest
5. Safety of Principal- funds are guaranteed by assets of insurer and not subject to the fluctuations of financial markets

Everything You Need To Know About Annuities: