Legal Definitions - single-premium deferred annuity

A single-premium deferred annuity is a type of contract purchased from an insurance company where an individual makes one large, lump-sum payment. In exchange for this single payment, the insurance company agrees to provide a series of regular income payments to the individual starting at a specified future date, rather than immediately. The funds within the annuity grow on a tax-deferred basis until these payments begin.

This financial product is often used by individuals who have a significant sum of money available and wish to convert it into a guaranteed income stream for their retirement or another future period, while also benefiting from tax-deferred growth during the accumulation phase.

Here are some examples illustrating how a single-premium deferred annuity might be used:

• Example 1: Retirement Planning with a Windfall

  Maria, a 55-year-old professional, receives a substantial inheritance of $300,000. She already has a robust 401(k) and other investments, but she wants to ensure a guaranteed income stream for her retirement starting at age 65. Maria decides to use $200,000 of her inheritance to purchase a single-premium deferred annuity. She makes one payment of $200,000 to an insurance company. The annuity contract specifies that she will begin receiving monthly payments ten years later, when she turns 65, for the rest of her life. During those ten years, her $200,000 grows tax-deferred within the annuity.

  This illustrates a single-premium deferred annuity because Maria makes a single, upfront payment, and the income payments are deferred until a future date (her retirement at age 65).

• Example 2: Business Sale Proceeds for Future Income

  David, a 60-year-old entrepreneur, sells his successful small business for a significant profit. After paying taxes and reinvesting some funds, he has $500,000 remaining that he wants to dedicate to his future financial security. He plans to fully retire in five years at age 65. To guarantee a steady income stream during his retirement, David purchases a single-premium deferred annuity with the $500,000. The annuity is structured so that he will start receiving monthly payments when he turns 65, providing a predictable income to supplement his other retirement savings.

  This demonstrates a single-premium deferred annuity as David uses a single lump sum from his business sale, and the annuity payments are deferred until his planned retirement date five years in the future.

• Example 3: Long-Term Savings for a Specific Goal

  Sarah, 45, receives a large bonus from her company. She wants to save this money specifically for her living expenses during a planned sabbatical when she turns 55. To ensure the money grows without immediate taxation and provides a predictable income during her time off, she invests $150,000 into a single-premium deferred annuity. The annuity is set up to begin making monthly payments to her starting at age 55, for a period of two years, to cover her expenses during her sabbatical.

  This example highlights a single-premium deferred annuity because Sarah makes a single payment, and the income distribution is deferred for ten years until her sabbatical begins.