Single vs. Flexible Premium Annuities

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

We all want to ensure we have enough money to live on after we retire. Annuities provide us with regular income. In this lesson, you will learn about single and flexible premium annuities.

What Is an Annuity?

Let's meet Martha, a 50-year old who is hoping to retire in fifteen years. She is worried that she will not have enough money to retire. Her financial advisor recently spoke with her about purchasing an annuity. She doesn't know much about annuities and isn't sure if this product is right for her. Let's see if we can help Martha with this problem.

An annuity is a formal written contract between you and an insurance company. Martha would provide the company with money and they would provide her with a regular income for a specified period of time. Her contributions would grow over time and when she's ready to retire, she would receive a regular payment from the insurance company. Her contributions would grow tax-free until she started receiving her income payments in retirement.

There are a number ways that to fund an annuity. Let's help Martha learn more about single and flexible premium annuities.

Single Premium Annuity

A single premium annuity is one that Martha could purchase with a lump sum. In other words, she would pay the premium or the cost of the annuity all at once. For example, let's assume that Martha received $100,000 as an inheritance when her aunt died. She could choose to purchase a single premium annuity with this money.

If she chooses this option, she would deposit the $100,000 with the insurance company for a number of years until her annuity started making payments. Her lump sum payment would accumulate interest until she began to withdraw the annuity upon her retirement.

A single premium annuity would be helpful for Martha if she is concerned that she won't have enough money in retirement. An annuity would provide a guaranteed amount that would assist Martha with her monthly expenses and it would supplement the money she received from government benefits.

There are some drawbacks to a single premium annuity. For example, If Martha were to need some of this money before her annuity begins, it is somewhat difficult to withdraw. It is also difficult for most of us to save a large lump sum amount to fund an annuity.

Flexible Premium Annuity

A flexible premium annuity allows the 'annuitant', or the owner of the annuity, to make premium payments over a number of years. You would have to pay a small amount to start the annuity, but you make contributions over a number of months or years. Installments to the annuity are flexible and you can change the frequency or the amount you contribute at any time.

A flexible premium annuity is ideal if your income fluctuates from month to month. For example, if Martha is a real estate agent, the commission she earns would change from month to month depending on how many houses she sells. She could contribute more to her annuity in the months that she earns a larger commission and less in the months when she earns a lower commission. She can contribute whatever amount she wants as long as it exceeds the minimum amount specified in her annuity contract.

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