Legal Definitions - SPDA

SPDA stands for Single-Premium Deferred Annuity.

A Single-Premium Deferred Annuity (SPDA) is a financial contract, typically offered by insurance companies, where an individual makes a single, lump-sum payment (the "single premium") to the insurer. In return, the insurer promises to make a series of payments back to the individual starting at a future date (the "deferred" period). During the deferral period, the initial payment grows, often on a tax-deferred basis, meaning taxes are not paid on the earnings until the payments begin. This type of annuity is often used for long-term savings, particularly for retirement planning, as it provides a guaranteed income stream later in life.

• Example 1: Investing a Bonus for Future Retirement

  Maria, a 40-year-old executive, receives a substantial year-end bonus of $50,000. She already contributes generously to her 401(k) and has an emergency fund. Wanting to secure an additional income stream for her retirement, which is still 25 years away, she decides to invest this bonus.

  How it illustrates SPDA: Maria uses the entire $50,000 bonus as the "single premium" to purchase an SPDA. She chooses to "defer" the income payments until she reaches age 65. This allows her lump sum to grow over two and a half decades without being taxed annually, providing a predictable, guaranteed income supplement when she eventually retires.

• Example 2: Allocating a Legal Settlement

  David, age 50, receives a $150,000 settlement from a personal injury lawsuit. While he has some immediate expenses, he wants to dedicate a significant portion of this unexpected windfall to ensure a stable income later in life, particularly since his current retirement savings are modest. He plans to retire in 15 years.

  How it illustrates SPDA: David takes $100,000 of the settlement and invests it into an SPDA. This is his "single premium." He sets the annuity to begin making payments when he turns 65, making it a "deferred" annuity. This strategy converts a one-time payment into a reliable, future income stream that will supplement his Social Security and other limited retirement funds.

• Example 3: Planning for a Child's Future Financial Security

  Sarah's grandparents want to give her a financial head start for her adult life, specifically for her retirement. When Sarah is 25, they gift her $25,000, advising her to invest it for the long term.

  How it illustrates SPDA: Sarah decides to use the $25,000 as a "single premium" to purchase an SPDA. She chooses to "defer" the income payments until she reaches a traditional retirement age, like 65. This allows the initial investment to grow significantly over 40 years on a tax-deferred basis, providing her with a substantial and guaranteed income stream to complement her own retirement savings when she is much older.