Immediate Annuities (SPIA): How They Actually Work

An immediate annuity is the annuity every other annuity is elaborating on: hand an insurance company a lump sum, and it hands you back an income stream, starting now. No accumulation phase, no caps, no benefit bases. This guide covers how payments work, what the payout options actually trade, and the one property — irreversibility — that should shape the whole decision.

What an immediate annuity is

A single premium immediate annuity, or SPIA, converts one lump-sum payment into a series of income payments that begin within one payment period of purchase — typically the first monthly payment arrives about a month after issue, and regulation generally requires payments start within a year.

That is the whole machine. There is no account balance afterward, no investment menu, no renewal rates. You have exchanged a sum of money for a contractual promise of income.

When payments begin, precisely

Within one payment period. A monthly-mode SPIA pays its first installment roughly one month from the premium date; quarterly mode within a quarter; annual mode within a year. If a contract's first payment sits further out than one period — say, income starting at 70 on a premium paid at 62 — it is a deferred income annuity, a related but distinct product with different pricing and different uses.

Why there is no accumulation period

Deferred annuities have two phases: accumulation, where the money grows, and payout. An immediate annuity is the payout phase sold by itself. The premium never sits in an accumulating account; it converts directly into the payment stream.

This is worth stating so plainly because it is the definitional line between the two halves of the annuity world, and because a striking amount of search traffic asks exactly this. If someone is describing an accumulation period on an immediate annuity, one of the two words is wrong.

The payout options, and what each one trades

Single life. Payments for as long as you live, stopping at death. Largest payment per premium dollar, because the carrier's obligation ends with you. The risk is dying early: payments stop, and nothing returns to your estate.

Joint and survivor. Payments continue while either of two people lives, usually at 100%, 75%, or 50% of the original amount after the first death. Smaller payments than single life, because the expected paying period is longer.

Period certain. Payments for a fixed term — ten years, twenty years — regardless of anyone's survival. Die during the term and the remaining payments go to your beneficiary. This is the one payout whose math is pure arithmetic, which is why our payout tables can print it exactly.

Life with period certain. The common compromise: payments for life, with a guaranteed minimum term paid to beneficiaries if you die early. Costs a somewhat smaller payment than pure single life in exchange for removing the die-in-year-two catastrophe.

Every option prices differently from the same premium, and the differences are not small. Choosing between them is the real decision in a SPIA purchase, and it deserves quotes on at least two options side by side.

What it pays — and why only a quote can say

Lifetime payment amounts come from three inputs: the carrier's current payout rates (which track interest rates), a mortality table applied to your exact age and gender, and your state. Change any input and the payment changes. Two well-rated carriers will quote the same person different amounts in the same week — routinely by several percent, occasionally by more.

That is why this site's calculator deliberately refuses to print lifetime numbers, and why any article that does print one is publishing a guess. Period-certain math is exact; lifetime pricing is a market. Shop the market — it is the highest-return hour in the entire purchase.

How payments are taxed

From a non-qualified annuity — after-tax money — each payment splits under the exclusion ratio: part is tax-free return of your own premium, part is taxable interest, in proportions fixed at issue, until your basis is fully recovered. After that, payments are fully taxable.

From a qualified account — IRA or employer-plan money — essentially every dollar is ordinary income, because none of it has been taxed yet. Full mechanics are in our annuity taxation guide.

The irreversibility trade, faced squarely

Once payments begin, there is generally no account value, no surrender option, no changing your mind. You cannot get the lump sum back, because you no longer own a lump sum — you own an income stream.

This is the feature, not the bug. The carrier can guarantee lifetime income precisely because annuitants cannot exit when it suits them; the pool's permanence is what funds the promise. But it dictates the sizing rule: annuitize the income gap, not the portfolio. Cover essential expenses that Social Security and any pension leave uncovered, and keep the rest of your assets liquid. A SPIA bought with money you might need back has been bought wrong regardless of the rate.

Who a SPIA genuinely fits

The strongest case: a retiree whose guaranteed income falls short of essential expenses, who fears outliving money more than underperforming markets, who has other liquid assets, and who values a contractual number over an expected one. The weakest case: anyone who may need the principal, anyone whose fixed costs are already covered, and anyone buying primarily to leave assets to heirs — an income stream that stops at death is the opposite of an estate plan.

For the middle cases, partial annuitization — a SPIA covering the gap, the rest left invested — is usually the honest answer, and it is the structure we find ourselves recommending more than any other.

About the Author

Connor Cedro

Connor is the founder of Palm Wealth Capital, an independent retirement and annuity research firm based in Tampa, Florida. He holds a Finance degree (SMU '21) and an MBA ('25), and writes about annuities and retirement income planning with a focus on independent, jargon-free analysis.