One of the reasons Social Security is so valuable is that it provides a stream of income for life. Even the most successful retirement savers always have to worry about the possibility of running out of money over unforeseen events, but regardless, Social Security payments will keep coming and provide them with at least a basic level of retirement income.
However, Social Security isn’t the only way to get a reliable stream of income. Life insurance companies have offered annuity contracts to customers for a long time. Although many types of annuities are unnecessarily complicated and carry high fees, some of the simpler forms of annuities can play a vital role for those seeking secure income in their golden years. Moreover, with interest rates on the rise, a couple of key types of annuities have gotten a lot more popular recently. Below, you’ll learn more about these two types of annuities and whether they might make sense for you.
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The return of the single premium immediate annuity
The simplest type of annuity is the single premium immediate annuity (SPIA). With a SPIA, you pay a one-time premium to the insurance company. In exchange, the insurer pays you a set monthly payment according to the terms of the annuity.
Insurance companies offer different provisions for SPIAs. Some make payments until the death of the individual contract holder and then stop. Others are geared toward married couples, with payments continuing as long as one or both spouses are still living. Still others include provisions that guarantee that payments will last for at least a fixed number of years, helping to protect against the possibility that the annuity holder could die soon after purchase. In that event, remaining payments would go to heirs that the annuity holder designates.
Sales of SPIAs were up 25% in the second quarter of 2022 compared to the first quarter, according to figures from the Life Insurance Marketing and Research Association (LIMRA). Customers bought $2 billion in SPIAs during those three months and have spent $3.5 billion year to date.
The monthly payments that SPIAs offer can supplement Social Security well. They typically don’t adjust upward for inflation like Social Security does, however, so the purchasing power of the payments that SPIAs provide will likely deteriorate over time.
Deferred income annuities also on the rise
Also gaining in popularity are deferred income annuities (DIA). These insurance products are similar to SPIAs, except that the monthly payments don’t start until a specified date or age in the future.
As an example, a 65-year-old person could purchase a DIA that would call for monthly payments to start at age 75. The amount of those monthly payments would be far higher than the payments a SPIA starting immediately would offer. However, if the person passed away before reaching age 75, then the money could be lost unless the annuity holder chose contract options that called for some guaranteed minimum amount being paid to heirs.
Sales of DIAs were also far higher in the second quarter than in the first quarter of 2022, rising 42% to $520 million. That’s likely because higher interest rates are boosting the monthly payments that DIA purchases can expect to receive.
Giving your Social Security a boost
SPIAs and DIAs do have downsides, though. Once you purchase these annuities, you give up access to the often large initial premium amount that you paid. If you run into an unexpected financial problem, therefore, you can’t count on being able to tap that money to cover it.
Moreover, purchasing these annuities is essentially a bet on your living beyond the life expectancy that the insurance company has set. If you pass away earlier than expected, then your heirs will typically be worse off than if you had invested the money in more traditional investments.
Nevertheless, for those seeking to protect against running out of money after a long life, SPIAs and DIAs can be a useful tool. And with a more favorable rate environment, interest in these types of annuities could continue to rise.
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