Single Premium Immediate Annuities (SPIA): The Complete Guide
A SPIA turns a lump sum into guaranteed income you can't outlive. Here's exactly how one works, what it costs you to add beneficiary protection, and how to know if it belongs in your plan.
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Decades ago, workers could rely on employer-sponsored pensions to provide guaranteed lifetime income in retirement. These pensions offered stability and peace of mind, ensuring retirees wouldn't outlive their savings. Today, with the rise of 401(k)s and other defined contribution plans, the responsibility for creating a secure retirement income has shifted to individuals.
A Single Premium Immediate Annuity (SPIA) is one tool that can replicate the benefits pensions once provided. It's the simplest annuity contract available: you exchange a lump sum of money for a contractually guaranteed income stream that won't change regardless of what happens in the economy. The payment amount is set using actuarial mortality assumptions and a stated interest rate — not a market forecast. Whether you want lifetime payments or income for a set period, a SPIA is designed to take the guesswork out of income planning.
However, SPIAs aren't without their drawbacks. From irrevocable contracts to inflation risk, understanding the pros and cons is essential before deciding if this product aligns with your financial goals. This guide covers how SPIAs work, their benefits and limitations, and how they compare to other retirement income strategies.
How SPIAs Work
The foundation of a SPIA is the lump sum premium. This payment goes to an insurance company in exchange for a guaranteed income stream, and it can come from a qualified retirement account (like an IRA) or after-tax savings — the source changes how the income is taxed, covered later on this page and in more detail in our
IRA vs. after-tax funding guide.
Once you pay the premium, the insurer assumes responsibility for your payments. This removes market risk and investment management from your plate — but the lump sum is generally irrevocable. Once the annuity starts paying, you can't access that principal again.
Example
You contribute $250,000 to a SPIA at age 65. Depending on the payout option you select, you might receive monthly payments of roughly $2,000 for the rest of your life — but you won't be able to access any of that $250,000 as a lump sum again.
Guaranteed Income Options
Every SPIA lets you choose how long payments last and whether a beneficiary receives anything if you pass away early:
- Life Income Only — pays for as long as you live; stops at death. Highest payout because there's no beneficiary provision.
- Life with Period Certain — lifetime income, plus a guarantee that if you die during the "certain period" (e.g., 10 years), payments continue to a beneficiary for the rest of that window.
- Installment Refund — payments continue to a beneficiary until the total premium has been returned.
- Cash Refund — if you die before receiving payments equal to your premium, the remaining balance goes to your beneficiary as a lump sum.
Example
Without a refund option, a $200,000 SPIA might provide roughly $1,700 a month for life. Adding a cash refund option might reduce that to around $1,450 a month, since part of the premium now funds the beneficiary guarantee. That lower payment continues at the same level for life, even after you've received your full $200,000 back.
How Payouts Are Calculated
Your monthly payment is driven by several factors: your age and sex, the interest rate environment, any features you add (a refund option or a COLA rider), and — critically — the specific mortality and expense assumptions the issuing carrier uses. That last point matters more than most people realize: it's not simply "the prevailing interest rate," and two carriers can quote meaningfully different payments for the same premium. We break down exactly what goes into that number in
What Actually Determines a SPIA's Payout Rate.
Medical Underwriting and the Two-Carrier Strategy
Some insurers will medically underwrite a SPIA — offering a higher payout to someone with a health condition that's expected to shorten life expectancy, because the insurer expects to pay for fewer years. See
Medically Underwritten SPIAs for how that underwriting works.
That creates an interesting opportunity: a health condition that increases your SPIA income from one carrier can simultaneously make life insurance more expensive — or unavailable — from that same carrier. Shopping the annuity and the life insurance separately, across different companies, can let you capture the best of both: maximum income from the insurer most comfortable with your health, and a death benefit from the insurer that prices it most favorably.
Example (illustration only, not a quote)
A 70-year-old with $500,000 to deploy purchases a medically underwritten SPIA providing roughly $50,000 a year for life from one carrier, then buys a $500,000 life insurance policy from a different carrier for about $10,000 a year. Net result: about $40,000 a year in usable income, plus a tax-free death benefit protecting the full $500,000 for heirs.
The Exclusion Ratio: How Your SPIA Income Is Taxed
Part of every SPIA payment is a tax-free return of your own premium; the rest is taxable as ordinary income. The
exclusion ratio is the percentage that's tax-free, and it's set once, at the start of your contract, using a federal formula — not a guess by your insurance company about how long you'll live.
For most nonqualified SPIAs purchased with after-tax money, the IRS General Rule sets the ratio as your
Investment in the Contract (your net premium) divided by your
Expected Return (your annual payment × a life-expectancy multiple from
IRS Table V — a standardized, unisex table keyed to your age at the annuity starting date, published in
IRS Publication 939). This is a separate calculation from how your carrier priced your payment in the first place — your insurer used its own mortality and expense assumptions to set your monthly check; the IRS uses its own standardized table to set your taxes. The two numbers come from different places and don't need to match.
Example
Jane buys a straight-life SPIA at age 65 for a $216,000 premium, paying $2,000 a month ($24,000 a year). Table V's multiple for age 65 is 20.0. Her expected return is $24,000 × 20 = $480,000. Her exclusion ratio is $216,000 ÷ $480,000 = 45%.
Each year, $10,800 of her $24,000 in payments (45%) is a tax-free return of principal, and $13,200 (55%) is taxable income. That 45% rate applies to every payment for as long as her SPIA pays out — it doesn't change if she lives 10 more years or 40.
Once Jane's cumulative tax-free payments reach her full $216,000 in premium, every payment after that becomes 100% taxable — the exclusion stops, not because the contract changed, but because there's no more principal left to return.
If Jane dies before recovering her full premium and there's no surviving annuitant, IRC §72(b)(3) allows a deduction for the unrecovered amount on her own final individual income tax return — the return for her last taxable year, typically prepared by her executor. Worth knowing: this deduction isn't subject to the usual 2% AGI floor that limits most miscellaneous itemized deductions, and it wasn't affected by the 2018–2025 suspension of those deductions — it's specifically carved out under IRC §67(b)(10).
Not tax advice
This is a simplified educational walkthrough, not a substitute for your own tax return preparation. Qualified-money SPIAs, joint-and-survivor contracts, and pre-1987 contracts follow different rules. See How a SPIA Is Taxed for the full walkthrough, and SPIA Funded by an IRA vs. After-Tax Savings if your premium came from a retirement account.
Single Premium Immediate Annuity guide