1. What is the Internal Rate of Return (IRR) on a SPIA and how is it determined?

The IRR is the approximate rate of return an owner can expect on the premium. With life contingent SPIAs, the actual rate of return cannot be determined until the death of the annuitant or annuitants. With term certain only SPIAs, the IRR is the approximate equivalent of an interest rate. The assumptions used when calculating an IRR, such as life expectancy, can vary from one company to the next. Therefore, compare the benefit amounts, not the IRR, when comparing SPIAs.

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2. How is the Exclusion Ratio Calculated?

The IRS provides the formula for the Exclusion Ratio. The basic formula is the investment in the contract (typically the premium) divided by the expected return. For a life contingent SPIA with a certain period, the investment in the contract is adjusted (reduced) by a refund factor. The expected return is determined by the length of the certain period for certain only SPIAs and by the annuitant’s life expectancy for life contingent SPIAs.

3. Is the Exclusion Ratio the same for all benefit payments?

No. With life contingent SPIAs, the Exclusion Ratio remains level up to the life expectancy of the annuitant(s). Part of each payment is taxed as ordinary income; part is treated as a non-taxable return of premium. If the annuitant lives past life expectancy, the benefits become 100% taxable as ordinary income. With certain only SPIAs, the Exclusion Ratio remains level for the entire certain period.

4. Does the 10% IRS penalty tax apply to SPIA benefits paid prior to age 59 ½?

Not always. The 10% IRS penalty tax for premature distributions applies to certain only SPIAs purchased with qualified money (Traditional IRAs, 401(k) plans, etc.).1 It also applies to certain only SPIAs purchased with non-qualified money, where the source of the premium is an existing non-qualified deferred annuity contract. There are several exceptions to the rule, one of which is a life contingent SPIA. Another exception is for SPIAs purchased directly with non-qualified money (i.e. money from a checking account or CD). This exception applies to both life contingent and certain only SPIAs, as long as the annuity starting date is within one year of the purchase date.

5. Can a Joint Annuitant be added to a Qualified SPIA Contract?

Yes. A spouse may be added as a joint annuitant at the time of application. A nonspouse may also be added, as long as the applicable benefit reduction percentage prescribed by the appropriate IRS table is used. Recent IRS regulations provide additional guidance. Consult your tax advisor.

6. Can a non-spousal beneficiary of an IRA transfer funds from an existing IRA into a GE Capital Assurance or First Colony Life Insurance Company SPIA on the death of the owner?

Yes, if distributions to the beneficiary(s) have not yet begun. The designated beneficiary may take distributions over his or her life expectancy or for a period not exceeding his or her life expectancy. The funds must be directly transferred from the relinquishing institution to GE Capital Assurance or First Colony Life; a rollover will not qualify. There are other requirements; please call us at the number below, or email us, for further information.

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7. Can you accept a partial 1035 exchange of proceeds into a SPIA?

Yes, if the agent receives prior confirmation from the relinquishing institution that they will process the exchange, and provided the owner submits a completed form number GEFA TAX-N, "Important Notice Regarding Cost Basis" form, available on GE Financial Pro.

8. Can I combine two or more deferred annuity contracts or life insurance policies into one SPIA using a 1035 Exchange?

Yes. With respect to deferred annuity contracts being exchanged, the SPIA must have the same owner as the deferred annuity contracts. With respect to life insurance policies being exchanged, the SPIA contract owner and annuitant must be the same as the owner and insured on the life insurance policies.

9. Can the Owner or Annuitant be a non-natural person, such as a corporation or a trust?

Yes and no. The Owner may be a non-natural person, but the Annuitant must be a living person.

10. Can the Owner or Annuitant be a non-resident alien?

Yes, but we have rules governing our acceptance of business when a non-resident alien is involved. A non-resident alien may be the owner and/or annuitant on a certain only SPIA, not a life contingent SPIA. We will make payments only to a U.S. bank, within the U.S. There also could be mandatory withholdings of up to 30% of the taxable portion of each benefit payment, depending on the alien’s country of residence. Please call for further details.

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Comments (2)

  1. Michael S.
    2023-11-14 10:58:55

    If the funds for a SPIA are coming from a Qualified account (401K), am I eligible for a Joint Life 20-year period certain?

    Or is the not allowed by the IRS

  2. Kyle
    2023-11-14 12:05:36

    Hi Michael,

    Thank you for reaching out!

    Most insurance companies will still allow you to use qualified funds to purchase a Joint Life and 20-year period certain SPIA. However, if both you and your spouse pass away and there are more than ten years still remaining to be paid out, the insurance company may force your beneficiaries to exercise a commutation option. This would mean converting the remaining monthly payments into a lump sum in order to stay within the IRS's mandatory ten year draw-down (for non-spousal beneficiaries).

    If you have any additional questions, please give us a call on our toll-free number, (800) 872-6684. We'll be very happy to help.

    Best regards,