Annuities

ANNUITIES
  by SallyJane Lim, CFP®, CLU, LUTCF

Annuities may be complex and difficult to comprehend, but if you set aside your pre-conceived misconceptions, keep an open mind, and make an effort to understand how annuities work, it becomes the obvious sensible solution to your retirement income management quandary.

Where else can you find an investment that can provide you a guaranteed pay check for life (without having to work for it)? Only an annuity can give you that guaranteed lifetime income stream that never stops no matter what.

Life insurance is protection against dying too soon.  Annuity is protection against living too long.

Annuities are CD alternatives because of its equal safety features.  But the Annuity yields a much greater rate of return or a higher APY because an annuity gives a higher interest rate and unlike CD  interest income which is taxable yearly, an Annuity is tax-deferred similar to an IRA and 401(k).

Both CD and Annuity are subject to penalties for CD and surrender charges for annuities, if your money is withdrawn prior to maturity. However, people who are opposed to placing their savings or inheritance into an annuity are not aware of the exit strategies and liquidity features available in an annuity.

Many seniors park their money in a CD account earning 1.25% or less to self-insure for long-term care, in case it is needed. But they do not realize that an Annuity is a better alternative because it earns double or triple the rate of return and unlike CD penalties which are always enforced by the bank, the annuity surrender charges are waived in a premature withdrawal  due to the annuitant's terminal illness or  need for nursing home confinement. Some annuities bundled with long term care may even double or triple your original principal amount to make the funds more adequate for the purpose.

The other usual objection of protagonists against purchasing an annuity, ironically, is “annuitization”. But this is because they do not realize that every company gives the annuitant many different options of how the money will be received, based on the life expectancy of just the annuitant (Single Life, which gives the highest payout), or on the life expectancies of annuitant plus the spouse (Joint Life), and the time frame, either forever, or guaranteed for a fixed number of years, or Life with Installment Refund. The main objection is that the choice of annuitization option is final and irreversible.

This is why I always stress the importance of working with an experienced and knowledgeable Financial Advisor who will recommend to you the right annuity based on your personal needs and time horizon and will always still be around and available to help you choose the right option when the time comes for accessing your money.  

The good news in the insurance industry are the latest innovations in the annuity line of products, industrywide, which now offer optional riders that are aimed at overcoming the above critics' objection to the often misunderstood “annuitization” process. These riders are called:

Guaranteed Lifetime Income Benefit (GLIB)
Guaranteed Lifetime Withdrawal Benefit (GLWB) and its terminology variations by carriers
                                                                                               
Some companies offer a substantial amount of  add-on money to this income bucket if you choose to buy this income rider at a nominal fee as a substitute for annuitization.  These guaranteed lifetime  income riders are only available in newly issued annuities and can be attached only at issue date of the new policy.  You cannot buy these riders to add them to your old annuities because they were not available then.  So if you have an antiquated ten (or more) years old annuity that has not yet been annuitized, you can now exchange it to this modern breed of annuity with new features and riders, many of which will give you a higher income stream guaranteed for your lifetime.
 
If you own some old whole life insurance policies that have accumulated  substantial cash values over the years as compared to its death benefit, and you think you do not need this life insurance policy any more or you can not afford to pay the premiums, but instead, what you need more now is to supplement your retirement income, you can trade in your life insurance policy for a lifetime income annuity without any penalty or tax consequences, with any annuity carrier that offers these innovative riders.

The basis of your new annuity will be the basis (total premiums paid) of your old life insurance policy, which will therefore provide a substantial portion of your annuity income tax free, as a return of basis.  

You might even find extra new income to fund a real long term care insurance policy, which is now tax deductible on your  IRS Tax Form 1040, which will potentially reduce your income tax payable.

By doing this exchange or conversion of insurance products, you will alleviate your children's concern over a protracted nursing home or home care expenses.

For a limited time, I am offering a free review of your old life insurance and/or annuities to see if we can trade up to the latest innovations – annuities with income riders, better features, higher returns, and higher lifetime income stream without the need for “annuitization”.

                         



TYPES OF ANNUITIES:                                   


 I.  SINGLE PREMIUM IMMEDIATE ANNUITY (SPIA)

Payout begins in 30 days and the amount of income to be received annually, semi-annually, quarterly or monthly is a percentage (5%-7%) of the amount of SPIA purchased,  depending on the age of annuitant, the age of a surviving spouse (if joint life), and on the length or duration of the pay period (guaranteed lifetime, guaranteed number of years, with or without a survivor benefit, or with a refund.

II.  DEFERRED  INCOME  ANNUITY (DIA)

      FIXED ANNUITY (FA)

CD alternative with a higher guaranteed interest rate for a fixed period, 4, 5, 7,10 years.
Just like a CD, the longer the term or number of years, the higher the interest rate, currently 2-4%.
This is the simplest type of annuity that is based on a given interest that is either guaranteed for the term or an interest rate that changes every year during the term, depending on the company offer.

     EQUITY INDEXED ANNUITY (EIA) – Single Premium or Flexible Premiums

This is the latest complex version of a Fixed Annuity. It is complicated because the returns are variable based on the performance of the major stock indices in the US and Global stock markets: the Dow Jones, the S&P, Nasdaq, Gold and Real Estate, to name a few, and  your choices are subject to company offerings and crediting methods, which you can re-allocate annually during your anniversary month.

The advantages of an Equity Index Annuity over a Variable Annuity are:

•    EIA enjoys the upside of the market with no downside risk (No Loss of Principal).
•    EIA locks in the gain every year, so you never lose what you have already earned.
•    No roller-coaster ride in the portfolio,  a non-dizzy ferris wheel ride only to the top.

Some companies offer the Guaranteed Lifetime Income Rider and the Guaranteed Lifetime Withdrawal Rider for a  nominal fee.

Some companies offer upfront bonus to offset your market losses or surrender charge incurred if transferring an old annuity to a new annuity policy with the new company before its  maturity.

Some companies offer a loyalty bonus at the end of the period which is usually 10 years to compensate an annuitant's staying with the program, to term. Sometimes this bonus is not worth the wait.

The EIA returns average between 4% to 6% to 8% (or more) a year depending on the term period, annuity carrier, selection of index/indices, crediting strategies, and  the performance of the market.

You have to understand and accept the fact that because the insurance company assumes ALL THE RISKS in an Equity Index Annuity, this is the reason why they set a cap or maximum return on your account, because the “spread” they keep (the difference between the actual return and the return they credit you) is to offset the losses that only the annuity company would  suffer in a down market.