Guides
Single premium immediate annuities (SPIAs): how they work
A SPIA turns a lump sum into income that starts within a year. How payout options, pricing, inflation and taxes work, and who a SPIA suits and doesn't.
A single premium immediate annuity (SPIA) is a contract in which you pay an insurer one lump sum and begin receiving regular payments within about a year, for life or for a set number of years. It is the most direct way to buy guaranteed income, and it usually pays more per dollar than other conservative options because part of each payment is your own principal and part comes from pooled longevity. The price is that, once you buy, you generally cannot get the lump sum back.
How a SPIA works
You choose the amount, the starting date (usually one month to a year out) and the payout option. The insurer sets the payment using your age, sex where state law allows, the payout option and interest rates at purchase. It does not require a health exam in most cases; unlike life insurance, health usually does not change the price, except in specialized "impaired-life" products.
LIMRA reported that income annuities totaled $18.8 billion in 2025, of which $14 billion was SPIA, a small share of the $461.3 billion total market.
Payout options
The option you pick decides both the payment and what your family receives.
| Option | Pays | If you die early | Relative payment |
|---|---|---|---|
| Life only | For your life | Payments stop; nothing to heirs | Highest |
| Life with period certain (10 or 20 years) | For life, guaranteed at least the period | Beneficiary gets the remaining period payments | Lower |
| Life with cash refund or installment refund | For life | Beneficiary gets premium minus payments made | Lower |
| Joint and survivor | Until the second death | Payments continue to the survivor, often at 100% or a reduced share | Lower than single life |
| Period certain only | For a fixed number of years | Heirs get remaining payments | Depends on years |
The more you ask the contract to protect your heirs or a spouse, the smaller the payment. Use the annuity payout calculator to compare. A life-only payout is often the best value if you are single and have no heirs relying on the money, and the worst fit if you need to leave something. Choose joint-and-survivor if a spouse depends on the income.
Some contracts offer a cost-of-living increase, for example a fixed 2% or 3% a year or a CPI adjustment. Starting payments are lower in exchange. Because inflation erodes a level payment over decades, it deserves real thought; the price of inflation protection varies.
A hypothetical example
Say a 70-year-old with $150,000 wants income to cover a gap between Social Security and expenses. A quote might show a monthly life-only payment and a smaller payment for life with a 10-year period certain. The difference between those two numbers is the price of a guarantee that heirs get something if death comes early. The prospective buyer should compare real quotes from several insurers, since payments for the same age and amount can differ. These numbers are not quotes, and no figure is given here because rates change with interest rates (see how annuity rates are set and why they move).
Taxes
If bought with after-tax money (a nonqualified annuity), each payment is partly a tax-free return of your cost and partly taxable income, set by the exclusion ratio under IRS Publication 939. After you have recovered your cost, the entire payment is taxable. If bought with IRA money, payments are generally fully taxable. Rules differ by situation, so ask a tax professional. See how annuities are taxed.
Risks and limits
- Irrevocable. After the short free-look period (commonly at least 10 days, longer in some states), you usually cannot cash out. Keep emergency money elsewhere.
- Inflation. A level payment buys less each year.
- Interest-rate timing. Buying when rates are low locks in smaller payments. Some buyers ladder purchases over several years; see building an annuity ladder.
- Insurer risk. Payments are backed by the insurer, with state guaranty association protection up to limits. According to NOLHGA (as of June 1, 2025), most states cover $250,000 of annuity present value, so large purchases are sometimes split between insurers. Look up your state with the state guaranty association coverage lookup.
- Early death. With a life-only payout, early death means the insurer keeps the remainder. That is the pooling at work, not a flaw, but it matters to you and your family.
Who a SPIA suits, and who it doesn't
Often suits:
- Retirees whose guaranteed income (Social Security, pension) falls short of essential expenses.
- People with a long-lived family history who fear running out.
- Those who want less to manage, or whose cognitive decline is a concern.
Often does not suit:
- People who may need the lump sum, such as for health costs or an emergency.
- Those in poor health with short life expectancy, where payments may not repay the premium. The life expectancy calculator gives a rough sense but does not replace advice.
- Savers who prefer to leave maximum assets to heirs.
- Buyers who have not compared quotes and the insurer's financial strength.
Before you buy
- Decide the essential monthly expense you want covered and how much Social Security and pensions already cover.
- Get written quotes from several insurers for the same age, amount and payout option.
- Ask whether the payment is fixed or adjusts for inflation, and what each choice does to the starting amount.
- Confirm the insurer's financial strength ratings and your state's guaranty limit.
- Use the free-look period to review the contract.
Key takeaways
- A SPIA exchanges a lump sum for guaranteed payments that start within a year, for life or a set period.
- Payout choices trade payment size against what survivors receive; life-only pays most and leaves nothing.
- It is generally irreversible, so keep emergency money outside it.
- Taxes depend on whether the money was after-tax or from an IRA; nonqualified payments use an exclusion ratio.
- Compare multiple quotes, check the insurer's strength and the guaranty limit.