Single Premium Annuities, Flexible Premium, Level Annuity Plan

Single premium annuity contracts are annuities in which only one premium is envisioned. Generally no further premiums are either expected or permitted. Often, single premium annuity contracts are funded by money received from an employer’s qualified plan—a pension or profit sharing plan—or as a result of a severance package received from a terminating employer. Sometimes, of course, single premium annuity premiums come from an inheritance or an individual’s certificate of deposit. Single premium annuities may be either single premium immediate annuities (SPIA) or single premium deferred annuities (SPDA).

Level Premium Annuities

Annuities are sometimes funded through fixed level premiums. Under this approach, the contract owner pays a regular premium at fixed intervals—monthly, quarterly, semi-annually or annually— much as he or she would pay a whole life insurance premium. Normally, the contract owner does not have the option of paying more or less than the billed premium. Fixed level premiums characterize traditional retirement annuity contracts, where the objective is to accumulate a certain future amount of funds which, upon retirement, will then be annuitized to generate a specified level of income. While fixed level premiums provide a certain compulsion to accumulate funds through a forced savings approach, this premium-paying method has largely given way to flexible premiums.

Flexible Premium Annuities

The most popular method of funding an annuity is through flexible premiums. In a flexible premium annuity, the insurer sends regular premium notices on the chosen frequency to the contract owner who may remit the billed premium, more or less than the billed premium, or no premium at all. (There are, typically, certain minimum and maximum premiums permitted by the insurer.) Under the flexible premium approach, the contract owner may pay a premium when his or her cash flow permits and pay no premium when it doesn’t. As noted, this popular premium-paying method has supplanted, for the most part, the less-flexible fixed level premium approach.

Whether the premiums are paid on a fixed, level basis or on a flexible basis, annuities on which ongoing premiums are paid may only be deferred annuities; single premium annuities, however, may be either deferred annuities or immediate annuities.