Immediate Annuity Education

Scott Brooks, MBA, CFP®
3-5 min read

The Facts About Immediate Annuities

If you need a guaranteed stream of income, an immediate annuity might be for you. You exchange some of your savings now for an income stream. The income stream begins in the first twelve months.

An immediate annuity is like a pension. You can think of an immediate annuity as a pension you buy for yourself. Some call immediate annuities a personal pension.

You transfer the risk of outliving your money to the annuity company because they are contractually obligated to pay you as long as you live.

They are contracts purchased from insurance companies. Immediate annuities were the primary type of annuity sold in the United States until the 1950s.

You will hear immediate annuities referred to as SPIAs and income annuities. SPIAs, immediate annuities, and income annuities refer to the same thing.

SPIA stands for “Single Premium Immediate Annuity.”

Single premium means that you can only invest a single, lump-sum amount. You cannot add money to the contract.

You can own more than one immediate annuity. This is often advised.

You give the insurance company a lump sum, and they promise to pay you for the rest of your life or for a specified period of time.

You can also add another person to the contract. This is a joint life contract.

If the contract is designed to pay for the rest of your life, it’s called a “life-only” annuity. Payments continue for the rest of your life.

If the contract pays for a specific period, it’s a “period certain annuity.” Payments would stop at the end of the period.

You can elect to receive your income payments monthly, quarterly, or yearly.

Who Immediate Annuities Are For

Immediate annuities are for those who want a stable, guaranteed income, an income they cannot outlive.

Retirees who want to replace their paycheck with a steady stream of income love them.

Do your Social Security and pension cover your essential expenses? If not, you can use an SPIA to cover the gaps.

For example, let’s assume you have $1,500 in Social Security and a pension of $1,000 coming in every month. If your core living expenses are $4,000 per month. Your shortfall would be $1,500 per month.

You could look at an income annuity to fill the gap and create the $1,500 you need.

Immediate annuities provide peace of mind. Retirees like knowing that their core expenses are covered from a guaranteed source of income.

The income will last as long as you do. And you can design the contract where your beneficiaries are protected.

SPIAs allow you to sleep easier because you don’t have to depend on other investments to provide income.

You can invest for growth because you don’t have to worry about selling investments when they are down.

Immediate annuities are a way healthy Americans can “bet on themselves.” The longer you live, the higher your returns will be.

If your family has longevity on its side, consider an immediate annuity.

Income annuities are popular with “mass affluent” Americans, which means anyone with financial assets of $300,000 to $5,000,000.

If you have $5,000,000, you probably don’t need an SPIA because you aren’t likely to run out of money. You can "self-insurance" this risk instead of transferring it to an insurance company.

Who Buys Immediate Annuities?

How many of these reasons apply to you?

1. You are close to retirement or already retired.

2. You have investments that you would like to convert into income.

3. You are concerned about outliving your money.

4. You want a guaranteed source of income in retirement.

5. You want to provide income for your spouse or loved ones.

6. You want to replace the income from a job.

7. You want to build an “income floor” to supplement pensions and Social Security.

8. You want income to start immediately.

9. You like simplicity.

Immediate Annuity Benefits

1. Simplicity - You don’t need to manage an immediate annuity. There is nothing to do but to make sure the income keeps coming in. The products are easy to understand and don’t have any surprises.

2. No Fees Whatsoever - The income you receive is net of all fees. There are no fees to open the accounts.

3. Preferred Tax Treatment - Most of the money you receive is not taxed for non-qualified money. This is due to an exclusion ratio. Taxes are less initially and rise later. This is a great way to lower and defer taxes early in retirement.

4. Safety & Security - SPIAs provide a stable lifetime income that cannot be outlived.

5. Higher Returns - SPIAs provide the highest payouts when you need income to start right away, assuming you want it contractually guaranteed.

Immediate Annuity Rates

Here are a few factors that influence how much income you could receive in an immediate annuity.

1. Your Life Expectancy - The older you are, the less time you have to live, thus, the higher the monthly income will be. The younger you are, the lower it will be. Your age matters. If you are curious, visit our life expectancy calculator.

2. Your sex - Because women live longer than men, they receive less income. All things being equal, men receive a higher income amount.

3. Which Company You Choose - If you get a quote from us, we will show you 90% of the income annuity market. You will be able to see virtually all of the companies in the space. Some companies pay higher amounts than others.

4. Type of Policy - You can design the contract to be based on your life alone. This is called “single life.” Single life contracts pay the highest income. A joint life policy is based on your life and another person. These will pay less than a single life contract.

5. Inflation Protection - You can have your income increase with inflation from 1-5% per year. The higher the rate of inflation you choose, the lower the income amount. If your family has a long life expectancy, add inflation protection because you have time to make up the lower payments.

6. Credit Rating - Generally speaking, the companies with the highest ratings, pay less. Companies with lesser ratings pay slightly more.

7. Investment Amount - The more you invest, the higher the rate you will receive.

Mortality Credits

Your income payments consist of three types of returns:

1. Your principal

2. Your interest

3. Mortality credits

When you invest in an SPIA, you are investing alongside a pool of other investors. Some people will die before life expectancy. Some at life expectancy. And some will live longer than life expectancy.

As people in the pool pass, their money left in the pool is shared among the other members. This other money is the mortality credit.

When you buy an SPIA, you are betting on yourself and the fact that you will live longer than other people your age. And the longer you live, the higher your returns will be.

A life-only SPIA will always produce the most guaranteed income of any investment.

“Period certain” annuities do not offer mortality credits.

Funding an Immediate Annuity

Immediate annuities are single premium (single premium immediate annuity). You can own multiple contracts but can only add money once.

SPIAs work with both qualified and non-qualified money.

Protecting Your Beneficiaries

Most of the annuities purchased provide some type of death benefit.

If you are single and want to maximize your benefit, choose a life-only annuity. Once you pass, there won’t be anything left.

If you have loved ones, then add a cash refund or period certain rider. The income would continue for a period of time, or until your initial investment is returned.

Whatever is left would go to your beneficiaries.

The cash refund option is the most popular type of death benefit.


How payments are taxed depends if pre-tax or post-tax money was invested in the contract.

Pre-tax money is “qualified” money that is held inside of qualified retirement plans, such as a 401(k), IRA, etc.

Because the money inside of most qualified plans has not been taxed, you are taxed when the money comes out.

Pre-tax money not taxed yet is 100% taxable when you receive income.

Non-qualified monies have already been taxed. For example, the money you have in a savings account has already been taxed when earned.

Non-qualified SPIA income is subject to an exclusion ratio. Some of what you receive is principal and some interest.

Any principal you receive is not taxable. Interest is fully taxable. This ratio should show up on your annuity quote.

Shopping for the Best Rates

We use Cannex to shop immediate annuity rates. Cannex is the market leader for immediate annuity quotes.

They house the actuarial tables from the insurance companies on their servers. The quotes are guaranteed to be accurate from the insurance companies.

Around 90% of the immediate annuity market is run through the Cannex platform. And, most of the largest financial firms in the USA use Cannex.

Annuities are state-regulated. The quote is customized to find the products available in your state.

Request a quote from us, and we will customize the quote for your needs.

Downsides of Immediate Annuities

1. Liquidity - The biggest negative of immediate annuities is liquidity. Some contracts have options to help you. For example, some products allow you to accelerate your monthly benefits. Others allow for a one-time limited withdrawal. But there are hoops to jump through, and these vary based on the contract. Don’t invest a lump sum you might need access to in an SPIA. This is the best policy, in our opinion.

2. Lack of Market Growth - Most immediate annuities offer income streams that don’t change. You can add a COLA, as discussed earlier, but this lowers your income amount, so there is a trade-off. Invest in SPIAs for guaranteed income, not growth. Most people address growth with other financial products, which is what we recommend.


Immediate annuities (SPIAs) don’t have fees. 100% of your premium goes toward your monthly income. When someone says “annuities have too many fees,” they are usually referring to variable annuities.

The fees are built into the product. The insurance company factors their expenses into the guaranteed income amount. Therefore, the amount you receive is net of commissions and fees.

Banks don’t charge fees on many checking and savings accounts today. That does not mean they are not profitable. Banks make huge sums because they pay virtually nothing on deposits and charge up to 18% interest on credit cards.

Fees are non-existent with SPIAs. It’s hard to find negative press on SPIAs.

Immediate Annuity Tips

1. SPIAs typically have higher payouts than income riders attached to deferred annuities. If you own an existing deferred annuity and want income now, here is what you should do. Get an income quote from the rider attached to your existing deferred annuity. Then compare it to SPIA quotes you receive from us. Basically, shop what your existing annuity company is offering you vs. what the SPIA marketplace provides. You can 1035 exchange your existing deferred annuity into the best SPIA.

2. SPIAs pay lower commissions than index and variable annuities. Some insurance agents don’t sell immediate annuities at all. Agents might try to convince you to buy an index or variable annuity. If you speak to one of our annuity specialists, they will be happy to discuss SPIAs with you.

3. If you have beneficiaries, make sure they are protected. Add “Life With Cash Refund” or Life With Installment Refund” to the contract. This will protect the money from disappearing.

4. Consider the longevity in your family. If people in your family live far beyond life expectancy, a SPIA would be a great fit. If your health is not excellent,  make sure to use tip #3 and protect your beneficiaries.

5. If you don’t need income to start right away, look into longevity annuities (DIAs). They are similar to SPIAs, but the income begins after one year.

6. Ask your insurance agent which filters they have placed when running a quote for you. They might exclude certain companies from showing up on the list. Some agents only show you the products they are licensed to sell.

7. Because the income comes in over decades, carefully consider your insurance company. Look for top-rated insurance companies that will stand the test of time.

8. Adding a cost of living adjustment to an SPIA reduces the guaranteed income amount. If you expect to live beyond life expectancy, the rider makes sense.

9. The older you are, the higher the payments will be. The younger you are, the lower the payments will be.

10. If you need income now, the SPIA usually beats all contractually guaranteed options.

Immediate Annuity Commissions

The commissions agents receive on SPIAs range from 1-3%. SPIAs and fixed annuities pay the lowest commissions.

Index annuities and variable annuities pay the highest commissions, normally double- or triple-fixed annuities and SPIAs.