Annuities have gotten a bad rap with some investors.

You may have heard that they carry high expenses, surrender charges, and are hard to understand because of complex contracts. It can be difficult to tell if an annuity is a good investment or not. The good news is we’re here to clear up some of that confusion.

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Here’s the bottom line. Some annuities can be very useful for retirement planning, especially one annuity in particular: the single-premium immediate annuity (SPIA).

Some annuities, especially single-premium immediate annuities (SPIA) can be very useful for retirement planning.

How Do Single-Premium Annuities Work?

An SPIA is a contract with an insurance company where an individual pays a premium, or a lump sum of money, up front, and in return the insurer agrees to pay back a certain amount of money periodically, which can be monthly, quarterly, or annually, for the rest of the insured’s life.

Immediate annuities can be funded in a number of ways, including: a lump sum distribution from a tax-qualified defined benefit or 401(k), or an IRA account, cash from a maturing certificate of deposit (CD), exchanging monies accumulated in a multi-year deferred annuity account, or proceeds from the sales of stocks, bonds, or a business.

Since this money goes in as a lump sum, it can be invested at a fixed rate. Payments can also be fixed and start immediately. If your client chooses these fixed payments, then they would have a single premium immediate fixed annuity. These are helpful because they make retirement planning easier, and they allow for a higher withdrawal rate than one can safely take from a portfolio of stocks, bonds, and mutual funds over the course of a potentially lengthy retirement.

An SPIA allows for a higher withdrawal rate than what can safely be taken from other investment options over the course of a potentially lengthy retirement.

Why You Should Recommend SPIAs To Your Clients

SPIAs allow for one of the most crucial components of retirement planning—security for your client’s money. An annuity starts paying out right away and provides stable lifetime income that can never be outlived. This advantage can put clients who may have feared outliving their savings at ease. The interest rates used by insurance companies to calculate immediate annuity income are generally higher than a CD or treasury rates. But since part of the principal is returned with each payment, greater amounts are received than would be provided by interest alone.

An immediate annuity may also be a good strategy to defer taxes until later in your clients’ retirement when they may be taxed at a lower rate. The principal is also safe from fluctuations of financial markets since they’re guaranteed by assets of the insurer. Best of all, these accounts don’t have annual management or maintenance charges—100 percent of the premium goes towards a senior’s monthly income.

Immediate annuities also allow your client to defer taxes until later in retirement when they may be taxed at a lower rate.

Retirement planning is very personal and depends on what each individual needs or wants for their future. If your client is looking for security and peace of mind, then an SPIA should have a place in your retirement-planning portfolio.