Deferred Annuities: Single Premium vs. Flexible Premium

Deferred annuities may be purchased with either a single lump sum or a series of payments over time. Single premium deferred annuities (SPDAs) require only one payment at the time the contract is established, whereas flexible premium deferred annuities allow the purchaser to pay in multiple installments.

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    Jennifer Schell

    Jennifer Schell

    Financial Writer

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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    Lamia Chowdhury
    Lamia Chowdhury

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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    Rubina K. Hossain, CFP®
    Rubina K. Hossain

    Rubina K. Hossain, CFP®

    Client Advisor for MEIRA

    Certified Financial Planner Rubina K. Hossain is chair of the CFP Board's Council of Examinations and past president of the Financial Planning Association. She specializes in preparing and presenting sound holistic financial plans to ensure her clients achieve their goals.

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  • Updated: August 25, 2023
  • 5 min read time
  • This page features 4 Cited Research Articles
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Key Takeaways

  • With deferred annuities, you can choose between a single premium or a flexible premium. 
  • A single premium deferred annuity is funded with one lump-sum payment when the contract is issued.
  • Purchasers of flexible premium deferred annuities can pay their annuity’s premium over time with multiple payments.
  • Each has unique benefits and drawbacks, so you may want to consult with a financial advisor to determine which premium option makes the most sense for you and your goals.

How Annuity Premiums Work

A deferred annuity’s premium is the payment a customer makes in exchange for receiving income at a later date. When you purchase an annuity, you can pay the premium in a single payment or multiple installments.

According to the Insurance Information Institute, people often fund their single premium deferred annuities with money from a different qualified account, such as a 401(k) plan or IRA, or from the sale of an appreciated asset.

Flexible premium deferred annuities are funded with a series of smaller payments, which can be set up as automatic transfers or paid directly by the annuity owner at his or her own discretion. This is a helpful option for people who may not have a large sum of money to contribute right away but can afford smaller payments spread out over a longer period of time.

The flexible premium option is available only for annuities with deferred income start dates. Deferred annuities have an accumulation period before the contract annuitizes and the owner begins receiving payments. 

“During the accumulation period, the annuity earns interest or increases in value and, in cases of flexible premium annuities, the annuity owner adds money in the form of additional premium payments,” Brian Kaplan, a Certified Financial PlannerTM professional and Senior Vice President of Lenox Advisors, told

Immediate annuities, which are also known as income annuities and include single premium immediate annuities (SPIAs) as well as deferred income annuities, don’t have an accumulation phase. However, when you buy a deferred income annuity (DIA), you select the income start date at the time the contract is issued and can make additional premium payments as allowed by your annuity contract.

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Pros and Cons of Single Premium Deferred Annuities

SPDAs are ideal for some, but they may pose challenges for others. Do you have a large sum of money that you can contribute now, or might you need access to that money in the short term?

According to Mark Cavalieri, associate director of multi-year guaranteed annuity sales for Senior Market Sales, SPDAs are significantly more popular than their flexible premium counterparts among today’s soon-to-be retirees. Many people approaching retirement have savings to use as a lump-sum premium payment or money from a qualified retirement plan like a 401(k) that they wish to roll over into an annuity.

Pros of Single Premium Deferred Annuities

Principal protection
Your original contribution can be protected from losses, unlike investments made directly in the stock market.
Optimizing compound interest
More funds in the annuity equate to higher potential compounding gains.

Cons of Single Premium Deferred Annuities

Potential surrender charges
The larger the premium payment, the more money you’ll have tied up in the contract. If you encounter a pressing financial obligation that requires you to withdraw funds during the surrender period, you will have to pay surrender charges.
Lack of capital for other investments
This is referred to as “opportunity cost.” Your funds are held in the annuity, so they do not have the opportunity to potentially grow with other products or accounts.

Many SPDAs have a minimum premium, and they provide higher payments with a longer accumulation phase — or a longer period during which the lump sum premium can earn interest.

Pros and Cons of Flexible Premium Deferred Annuities

Flexible premium deferred annuities may suit you if you prefer to divide up your premium payments into smaller amounts. Cavalieri told that most providers require an initial premium of at least $2,000 for a flexible premium annuity, so there is often an established financial responsibility prior to the scheduled payments.

Pros of Flexible Premium Deferred Annuities

Less capital tied up
Smaller payments made over time mean more money at your disposal for immediate needs.
More time to pay
If you do not have the full premium amount, you can make payments over time for the product best suited to you.
Control over premium payment structure
You set the schedule based on your income and comfort level.

Cons of Flexible Premium Deferred Annuities

Less interest accrued and loss of compounding benefits
With less money in the annuity, you miss the compounding interest that accompanies a larger sum premium.
Maximum premium amounts
Like single premium annuities, flexible premium annuities may impose a maximum premium amount.

Cavalieri, who is a life underwriter training council fellow, explained, “Today, the number of single premium annuity products far outnumber the ones with flexible premiums.”

Which Should You Choose: Flexible Premium or Single Premium?

Your time horizon and risk tolerance should influence your decision regarding premium options.

As Cavalieri explained, if someone has a lump sum and a diversified portfolio, single premium annuity products tend to be better options with broader features.

Conversely, flexible premiums can be suitable for conservative savers who may not have a lump sum saved but want a low-risk product with a guarantee of lifetime income.

An annuity owner’s circumstances can change, but it is important to make an informed decision about your annuity product’s terms before signing the contract.

Tax penalties and surrender charges for early withdrawals are considerations common to both single and flexible premiums. It can be costly to change annuity products or contract terms, but you may be permitted to exchange your current contract for a more suitable option under the 1035 annuity exchange rule, as long as you meet certain criteria.

The right premium choice depends on your goals and current financial limitations. Reputable annuity providers and your financial advisor can guide you toward the right solution for you.

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Frequently Asked Questions

What is the difference between a single premium and a flexible premium in a deferred annuity?

A single premium deferred annuity is purchased with one lump-sum payment, while a flexible premium deferred annuity can be purchased in multiple installments over time.

What is a disadvantage of a flexible premium annuity?

Flexible premium annuities have some disadvantages, including the loss of compounding interest and potentially a maximum premium limit.

What is an advantage of a single premium annuity?

Some advantages of a single premium annuity is that you can protect all of your principal at the same time and maximize your compounding interest.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 25, 2023