An immediate annuity (SPIA — Single Premium Immediate Annuity) converts a lump sum into guaranteed income payments that start immediately (within 30 days of purchase). You give the insurance company a lump sum; they guarantee you a monthly payment for life (or a set period). The payment amount depends on your age, gender, the lump sum amount, and current interest rates. Immediate annuities solve the longevity risk problem: you cannot outlive your income. The tradeoff: once you purchase, you generally cannot access the lump sum.
Key Points
- Converts a lump sum into guaranteed income payments starting immediately
- Payments can be for life, a set period, or life with a minimum period guarantee
- Payment amount depends on age, gender, lump sum, and current interest rates
- Solves longevity risk: you cannot outlive your income
- Tradeoff: once purchased, you generally cannot access the lump sum
- Joint and survivor options available to protect a spouse's income