What is a Single Premium Immediate Annuity?
- A Single Premium Immediate Annuity (“SPIA”) is a contract between a person or entity and an insurance company. By paying in a lump sum of money the person or entity is guaranteed to receive a series of payments over a period of time. The amount of the payment is determined by both the current interest rate at the time the contract is issued and by choices made from a wide variety of payment options. Once the contract is issued, the annuity payments are fully guaranteed for the period of time the person or entity has chosen.
- The person or entity that initially provided payment owns the traditional SPIA. The purchaser at the point of sale may name an alternate owner of the SPIA other than purchaser. In the event the Annuity Issuer cannot make payment the State Life & Health Insurance Guaranty Association steps in and assume the responsibility of the Annuity Issuer.
Why use a single premium immediate annuity for a structured settlement?
- No other investment provides the security of guaranteed payments for the life of the annuitant and beneficiary (if period certain). Because structured settlements are governed by the Internal Revenue Code (IRC). These payments when funded through the purchase of a single premium immediate annuity product, can qualify for preferential treatment under 104(a)2 and 130 section of the tax code.
- IRC Section 104(a)(2) provides that compensation received on account of personal injury or physical sickness is not includable in gross income, whether received in a lump sum or as periodic payments. Revenue Ruling 79-220, 1972-2 C.B. 74, provides that when claimants have no control over the assets that fund a periodic payment stream, the interest earnings on the investment will be excludable from income under IRC Section 104.
The security and guarantee of the Structured Settlement Annuity product is through first, the Life Insurance Company issuing the Periodic Payments. Second to the Settlement Obligor, which is the insurance company ultimately obligated to ensure the claimant receives their Periodic Payments. And last, in the event a Life Insurance Company becomes insolvent, the State Guaranty Fund kicks into play. The State Life and Health Guaranty Association provide the State Guaranty Fund.
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