The definition of a single premium annuity can actually have two variations. There are fixed annuities that allow for only a set premium amount, which also means that the annuitant (investor) cannot increase their contribution simply by adding funds to their payment.
The other definition for a single premium annuity is the more frequently used and is generally indicative of an “immediate annuity”. Immediate annuities take a one-time, single premium payment which then creates a steady income for the buyer. Such annuities are traditionally purchased by those about to retire or all ready retired and require a significant amount of money. They can be fixed or variable annuities as the funds will still need to be put to work by the insurance company who manages them, but they usually lock an annuitant into one of two options – a full life payment option or one that refunds the balance at the time of death.
The full life payment annuity will take the single premium payment and place it into either a variable or fixed arrangement where the interest rate and payment are guaranteed (fixed) or the interest rate and payment can be different from month to month (variable). Either way the annuitant is going to receive a higher payment from this full life arrangement because the insurance company will be granted the remaining funds at the time of the investor’s death. While many people might immediately frown at such a decision, the reality demonstrates that they can be a wise option for an investor who devotes some thought to the choice. For example, an investor who places a large sum into a single premium annuity will probably “break even” on the investment within twenty to twenty-five years. That means that a sixty year old person who lives into their nineties will have re-earned their investment anywhere from six to ten years earlier.
Of course if an investor is not assured about their personal health or does not predict their lifespan to exceed a certain period they may want to investigate an immediate single premium annuity that offers a refund at the time of death. While such a plan would yield a lower interest rate and lesser monthly payment it would also provide an inheritance to the annuitant’s estate or heirs. This could be a good way to secure tax-deferred earnings on savings that are completely protected and guaranteed until the time of death.