Single, Fixed and Flexible Premium Annuities

Another area of flexibility in annuities is the way in which purchase payments are made. Most insurers offer both single and fixed premiums. Both kinds of annuities have their advantages and disadvantages.

Single Premium Annuities

Single premium annuities are purchased with a single deposit amount. No further payments are expected or permitted.

Often, single premium annuities are funded by money received from an employment arrangement. For example, someone could receive a lump sum of money as part of an employee severance package. Similarly, it is not uncommon for individuals to receive distributions from an employer's pension or profit sharing plan and use that money to fund an annuity. In other case, single premium annuity premiums come from a lump sum of money from a structured settlement for injury, divorce or an inheritance.

Single premium payments may be made for either immediate or deferred annuities. The income you receive can be for a specified amount at regularly scheduled intervals (making for a single premium immediate fixed annuity), or it may fluctuate based on the performance of the underlying investment sub-accounts you chose (making for a single premium immediate variable annuity).

Fixed Premium Annuities

In addition to the single premium method, annuities can be funded with fixed or level premium payments. Under this approach, you pay a regular premium at fixed intervals: monthly, quarterly, semi-annually or annually. Normally you must pay the fixed amount.

Fixed level premiums are akin to a forced savings approach. This method characterizes traditional retirement annuities where the goal is to have a structured savings plan that prompts you to set a certain amount of money aside that will pay reliable income at retirement. Since the advent of more flexible premium payment schedules, this method is no longer as popular as it once was.

Flexible Premium

The most popular method of funding an annuity is through flexible premiums. With flexible premium annuities, the insurance company sends you regular premium notices on the chosen frequency (monthly, quarterly, semi-annually or annually). You can pay the premium billed, an amount above or below the billed premium, or make no premium payment at all. Most insurance companies, however, will impose certain minimum and maximum premium amounts.

Many prefer a flexible premium schedule over fixed because it allows for discretion in premium payments.