SPIA on steroids, Pt. 1Article added by Joe Bellersen on August 18, 2009
Joseph Bellersen

Joe Bellersen

Joined: August 21, 2010

On June 8, 2009, Rep. Earl Pomeroy (D-ND) along with Rep. Virginia Brown-Waite (R- FL) introduced H.R. 2748, The Retirement Security Needs Lifetime Pay Act of 2009. This bill is a new version of a previous bill called the Secure Annuity Income for Life Act (SAIL) introduced in 2005. The new bill proposes to exclude a portion of such lifetime annuity payments from current income tax. The Security Needs Lifetime Pay Act of 2009 contains significant changes to the income tax code and allows for substantial benefits in a lifetime based SPIA.

Tax-favored SPIA

The most substantial impact of the proposed legislation is upon the method of determining an additional exclusion from income on an individually owned SPIA. The proposed legislation allows for an exclusion from gross income for 50 percent of the taxable portion of lifetime income payments up to a maximum of $10,000. This change would provide a substantial incentive to encourage the use of lifetime annuity benefits. Individuals whose SPIA taxable portion was $20,000 would receive such an exclusion of $10,000.


Generally, the tax basis in a SPIA contract is recovered over a period not exceeding the lifetime of the annuitant, or in the instance of a joint life annuity, the lives of the annuitant and spouse. The IRS utilizes life expectancy as determined from IRS Table V to compute the taxable amount in individually owned SPIA contracts. For example, a male age 65 would receive an exclusion of approximately 64 percent of the total annuity payments as return of principal under current law and current interest rate pricing for a single life annuity. We evaluate a SPIA under current law along with the tax result using the proposed changes for a view of the possibilities. We then go a step further with our proprietary tools, The Bellersen TEq Yield Power IndexJ, to illustrate a comparable investment return that would be needed to achieve the same spendable income picture for the buyer using the SPIA:

Current Law
Proposed Law
Annuity Income$7,800$7,800
Excluded portion$4,992$4,992
Taxable portion$2,808$2,808
Tax amount @ 34%/(50%*34%)$952$476
Net after tax$1,856$2,332
Non taxable portion$4,992$6,396
Net spendable income$6,485$7,324
Annualized gross equivalent$10,371$11,096
Taxable Equivalent Yield10.37% 11.09%

Tax analysis

The amount of income from a SPIA which is subject to tax would be adjusted by the additional permitted exclusion. This substantially increases the value of the lifetime benefit feature of a SPIA contract. Under current law, as a SPIA continues, the amounts received after the recovery of the basis or the exclusion allowance portion would become fully taxable. The results under current law develop spendable income of $6,485 versus $7,324 under proposed law. This increase of $839 amounts to a 13 percent increase in spendable income.

Under the proposed legislation, the amounts that would otherwise become fully taxable after recovery of basis would now be subject to the 50 percent exclusion from tax. This continuation of favorable income tax treatment makes the argument for a SPIA even more compelling.

Taxable yield power

The value of money is its earning power. At the present time, interest rates underlying a SPIA are probably around 5.45 percent. When you break down the SPIA product into its components, it doesn't look like much. When you convert the proposition to a result utilizing The Bellersen TEq Yield Power IndexJ method, the results are quite enlightening.

Where else can retirees receive a taxable equivalent yield of 11.09 percent?

In spite of moderately low interest rate conditions, the SPIA TEq is currently 10.37 percent. Under new law, the TEq would grow to 11.09 percent. The earning power of a SPIA gets a boost from the proposed legislation. We want to highlight this again as we believe that the SPIA TEq power is most often misunderstood in the marketplace.

Suitability once again

As SPIAs begin to stake center stage, more disclosure is needed within the market. It has long been argued that clients "lose" their money when the annuitant dies. While this may be true for Life Only type annuity options, Life with Cash or Installment Refund forms provide a money back option for beneficiaries and Life with Period Certain guarantees provides a return of a certain dollar amount to beneficiaries. These options are not new and have been available for decades. The availability of these insurance guarantee components are often not disclosed to prospective buyers in an effort to retain assets under management from being annuitized. This conflict of interest is high. And while advisors may argue for those reasons, no one can predict the outcome or survival of a particular annuitant.


SPIA products are here to stay -- and they will grow in use. And through the years, more tinkering will occur. As this tinkering evolves, SPIA products will become more accepted by consumers. While advisors may wail against longevity insurance, consumers will demand it, and that presents opportunities to provide true lifetime retirement income solutions.

What have we learned?

The new legislation will serve to enhance the visibility and acceptability of the SPIA product, and it provides a tax incentive which could gain the attention of the marketplace and overwhelm advisor resistance.


Lifetime SPIAs are a much needed solution to retirement income security. Sometimes you have to motivate the consumer to consider the benefits of sound policy. This is no different than allowing a tax deduction for accumulating wealth through 401(k) or IRA accounts during our working years. Not everyone will hit the market lottery and perfectly time their retirement date to the market zenith. This legislation levels the playing field for those who may be willing to convert less robust retirement assets to achieve an enhanced secure retirement income during their retirement years.

Rate commentary:
Spread Analyzer results for The Bellersen TEq Yield Power IndexJ illustrate SPIA cash flows on a Ataxable equivalent yield@ basis. This is a clear picture of SPIA yield power. Rate commentary:
Spread Analyzer results for The Bellersen TEq Yield Power IndexJ illustrate SPIA cash flows on a taxable equivalent yield basis. This is a clear picture of SPIA yield power.

The Bellersen TEq Yield Power IndexJ
MaleJuneJulyChangeT BondTSpread
7012.03% 12.02%-.01%4.37%+7.65%

* QAS SPIA Rate Database B May-June, 2008
** Yahoo! Finance - Bonds B Apr, 2008

The Bellersen TEq Yield Power IndexJ Male June July Change T Bond T Spread 65 10.31% 10.28% -.03% 4.37% +5.91% 70 12.03% 12.02% -.01% 4.37% +7.65% 75 14.45% 14.45% -.00% 4.37% +10.07% 80 17.87% 17.88% -.01% 4.37% +13.51% * QAS SPIA Rate Database B June - July, 2009 ** Yahoo! Finance - Bonds B July, 2009

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