What is a SPIA (Single Premium Immediate Annuity)?
A SPIA converts a lump sum into guaranteed lifetime income, starting within 12 months. Here's how they work and when to use one.
A single premium immediate annuity (SPIA) is the simplest annuity there is: you hand an insurer one lump sum, and it sends you a guaranteed paycheck — often for the rest of your life — starting as soon as next month. No caps, no sub-accounts, no index, no ongoing decisions. The trade is just as simple, and it is permanent: you give up access to the principal to get the guarantee. Below you'll see exactly what $250,000 buys at 65, which payout option protects a spouse, how the checks are taxed, and who should skip a SPIA altogether.
How a SPIA works
You pay one premium, and income begins within about a year — usually the next month for a true immediate annuity. You choose the payout structure up front, and that choice is generally irreversible. That permanence is exactly what buys the guarantee: the insurer can promise income for life only because it cannot be forced to give the principal back.
The older you are when you start, the larger each payment. Your expected payout period is shorter, so the insurer spreads the money over fewer years. Prevailing interest rates matter too — SPIA payouts rise when bond yields rise, because the carrier backs your income mostly with high-quality bonds.
One naming caveat: a SPIA is "immediate" because income starts right away. If you want guaranteed income that begins years from now, you are looking at a deferred income annuity (DIA) or a QLAC, not a SPIA. Any guarantee here rests on the claims-paying ability of the issuing insurer; annuities are not FDIC-insured.
Illustrative single-life payout by starting age — representative levels for A.M. Best A− and above carriers, not a survey or quote. Payout levels as of October 2026. A female buyer's check runs about 4.2% lower at 65 and 7.1% lower at 80, reflecting longer life expectancy. Actual quotes vary by carrier, state, sex and payout option.
The payout options (choose carefully — it's permanent)
The payout structure is the single most consequential choice. It sets both your monthly check and what happens to anyone who survives you, so match it deliberately to your spouse and heirs.
| Option | What it does | Trade-off |
|---|---|---|
| Life only | Highest payment, stops at death | Nothing to heirs if you die early |
| Life with period certain | Pays for life, min. 10/20 yrs guaranteed | Slightly lower payment |
| Joint life | Continues to a surviving spouse | Lower payment than single life |
| Cash/installment refund | Heirs get unpaid premium back | Modestly lower payment — usually a smaller cut than joint life |
A worked example: what $250,000 buys at 65
Suppose you are a 65-year-old man and place $250,000 into a SPIA. The quoted monthly income changes with the payout option. Using illustrative figures from our October 2026 payout levels (a woman the same age gets about $1,670 life-only; real quotes depend on current rates and the carrier):
| Payout option | Income on $250k at 65 | What happens at death |
|---|---|---|
| Life only | $1,745/mo | Income stops |
| Life with 10-yr certain | $1,640/mo | Beneficiary gets remaining 10-yr payments |
| Life with 20-yr certain | $1,536/mo | Beneficiary gets remaining 20-yr payments |
| Cash refund | $1,605/mo | Lump-sum refund of any unused premium |
| Joint life 100% | $1,361/mo | Continues unchanged for surviving spouse |
Walk the arithmetic on the life-only line. $1,745 a month is $20,940 a year — about 8.4% of your $250,000 premium. That looks far better than any Treasury bond, but the catch is that each payment includes both interest and a return of your own principal. Just getting your $250,000 back at $20,940 a year takes about 12 years, so you break even around age 77. Live past that, and every later dollar is the insurer's money, not yours — that is the longevity insurance you bought. Die before it, and a life-only contract was a poor deal, which is exactly why refund and period-certain options exist.
The mortality-credit advantage
A SPIA's headline payout rate looks too good to be true precisely because most of each check is return of principal, not yield. The honest way to judge it is the internal rate of return for someone who lives to roughly actuarial life expectancy: mortality pooling supports the lifetime payments, and your effective return depends on the purchase terms and how long you live. A payout rate is not an interest rate: most of each early check is your own principal coming back to you, so the percentage is not comparable to a bond or CD yield.
The mortality credit is the structural difference between a SPIA and a bond ladder: a ladder pays interest, but no one else's premiums subsidize your payments. The insurer pools many buyers; those who die earlier subsidize those who live longer, and the survivors collect the difference. The longer you live, the higher your effective return; the shorter you live, the worse the deal — which is exactly the risk transfer you are paying for.
This is also why a SPIA is hard to replicate yourself. A do-it-yourself bond ladder gives you the interest but no mortality credit, so guaranteeing the same income for life on your own means funding to age 100 or beyond — money you may never spend. The trade-off runs the other way too: the ladder stays liquid and passes to heirs, while a life-only SPIA does neither. The annuity lets you safely spend more from the same dollars because the pool, not your own savings, absorbs the risk of a very long life.
Who a SPIA fits — and who should skip it
A SPIA is a decision, not a default, so weigh both sides plainly.
- Strength: the purest longevity insurance — income you cannot outlive, immune to market crashes and sequence-of-returns risk.
- Strength: radically simple, with no fund choices, rebalancing, or rider math to manage once it is set.
- Limit: illiquid — the lump sum is gone, so it cannot fund an emergency or a one-time purchase.
- Limit: a level nominal payment loses purchasing power to inflation unless you buy a COLA option, which lowers the starting check.
- Limit: with a life-only option, dying early forfeits the remaining principal to the insurer.
A SPIA fits when you have non-negotiable expenses you want immune from volatility, when you fear outliving your money, when you are bridging income while you delay Social Security, or when you would otherwise sit in cash earning negative real returns. A SPIA does not fit for accumulation, for legacy maximization, or when a pension plus Social Security already covers all your baseline needs.
A common middle path is to annuitize only the gap. Add up your essential monthly costs — housing, food, insurance, utilities — subtract what Social Security and any pension already cover, and buy a SPIA sized to fill the remaining shortfall. That way your baseline is guaranteed while the rest of your portfolio stays invested for growth, flexibility, and heirs.
How SPIA income is taxed
Taxes depend on the source of the money. For non-qualified dollars (already taxed), each payment is split into a tax-free return of principal and a taxable gain using the exclusion ratio — your premium divided by the total payments you're expected to receive over your life expectancy. Once your basis is fully recovered, later payments are fully taxable.
For qualified money — a SPIA bought inside a traditional IRA or 401(k) — the entire payment is ordinary income when received, just like any other pre-tax withdrawal. The SEC's Investor.gov site has a neutral overview of annuities, including immediate annuities, and the IRS explains the exclusion-ratio mechanics for annuity income in IRS Publication 575. For any sizeable purchase, confirm the specifics with a tax professional.
Mistakes to avoid and how to buy one
Most SPIA regret traces to a handful of avoidable errors. Steer around them:
- Annuitizing too much. Cover essential expenses, not your whole portfolio. Keep liquid savings for emergencies and goals.
- Defaulting to life-only. The biggest check is not the best deal if a spouse or heir depends on the income. Price joint and refund options before deciding.
- Ignoring inflation. A level payment that feels generous at 65 can feel thin at 85. Consider a COLA rider or buy in tranches over time.
- Shopping one carrier. Identical contracts can differ by hundreds of dollars a month. Always compare multiple quotes the same week.
- Overlooking carrier strength. The guarantee is only as good as the insurer. Check financial-strength ratings and your state guaranty-association coverage limit.
To buy, request same-week quotes from several insurers, choose the payout option that matches your spouse and heirs, verify each carrier's A.M. Best financial-strength rating and your state's guaranty limit, and read the contract's guaranteed monthly figure — that number, not any illustration, is what you are buying.
