What is a Single Premium Annuity?

A single premium annuity is a form of annuity, a contract which guarantees income for a set period of time, which is established by making a single lump sum payment. This is in contrast with other types of annuities, in which people make steady payments over an extended period of time which establish the funds used to create the annuity. Single premium annuities are issued by many insurance companies which offer annuities, as well as financial firms.

Annuities have a number of advantages which make them appealing for people who want to ensure a steady source of income during their retirement. When people invest in an annuity, they typically lock in a high rate of interest, and they are not taxed on the earnings of the annuity until they receive annuity payments. Often, the payments themselves are taxed at a reduced rate, as many governments like to reward citizens for planning ahead for retirement.

Single premium annuities can be purchased at almost any age. A single premium annuity can be a good investment option for someone who has just inherited money, reached the maturity date on a CD or retirement account, sold property, or settled a life insurance claim. The amount of the premium varies, with the amount of the annuity payments being determined on the basis of the life of the contract and the amount of the premium. The larger the premium paid to establish a single premium annuity, the larger the payments will be, as a general rule.

Some single premium annuities last for life, ending with the death of the policyholder. Others are set to last for a specific period of time, such as 20 years. It is also possible to have joint policyholders, in which case when one person dies, the annuity will be paid to the surviving policyholder. People can also designate survivors to receive the remainder of the annuity payments in the event of their deaths. The payments may be fixed, or varied; for example, someone who wants to work half time could start out with small annuity payments, which increase as the person gradually reduces his or her workload and moves into full retirement.

The big disadvantage to a single premium annuity, or any other kind of annuity, is that cashing out early can carry stiff penalties. The company which issues the single premium annuity may have a surrender charge, a penalty fee based on a percentage of the total funds in the annuity, and people will also be expected to pay taxes on the funds when they cash out an annuity. For this reason, people who think that they may need to access the funds they would use to establish an annuity may want to consider another investment instrument which will allow for more flexibility.