ANNUITY LIVING BENEFITS
"Is the Value Worth the Cost?
February 1, 2021 | View PDF
As a financial planner of 39 years, my goal has been to squeeze the most out of annuity companies for my clientele.
Most of us know the basic annuity often resembles a bank CD, as it is a deposit subject to time, whereby interest is periodically credited.
Where fixed annuities such as this normally pay more than similar time deposits offered by the banks, additional values such as tax deferral, multiple beneficiary allowances, and, in some states such as Florida, they also offer a modicum of protection from creditor seizure. In other words, a great place for people to protect and grow their nest-egg, while protecting from litigious vultures who have stored the phone numbers of ravenous attorneys from commercials which saturate the airwaves.
There are essentially 3 types of annuities which focus on future income streams for their depositors.
1. Single Premium Immediate Annuity (SPIA):
As its name implies, you make your deposit and within 12 months (usually 60 days) you see a periodic payment hit your bank account on usually a monthly basis, while continuing to enjoy those monthly payments for a certain period of time – even for life.
2. Fixed Index Annuity (FIA):
It credits little if any base interest, yet liberally shares returns based on (normally) an equity index such as the S&P 500, by crediting "excess interest" to your account.
Lacking the downside risk to your principal (stock and bond volatility), as measured (usually) from anniversary to anniversary, its upside is also limited, as one might expect.
Many Fixed Index Annuities offer "income for life" or other periodic payments to the annuitant/owner of the policy at certain dates/ages in the future. However, such income riders can cost 1% of your principal annually for such future privilege.
3. Variable Annuity (VA):
It often looks like a mutual fund of stocks and/or bonds, and evidences a more volatile change from period to period, as reflecting the changes in value to underlying equities and bonds within the subaccount(s) of the VA.
Where your downside to principal is not limited, so too your upside potential has no preset cap (ceiling) as one might find within the FIA.
Income guarantees are most popular within the VAs over their Fixed Annu-ity and FIA cousins, and yes, the annual cost will hit your policy account value by 1% or so.
Many people look forward to an income stream they can never out-live; but, does this mean that you will actually receive a net benefit from all the annual fees you have paid for such assurance?
Well... that depends on your age and mortality risk.
Annuity applications, unlike life insurance, don't ask health questions for submission to the company's actuaries (green shaded bean counters skilled in the black art of figuring out the exact day you will drop in your tracks) for their respective calculations as to the risk you pose to the company of them paying out more benefits than their company has received. The company has your initial deposit, subsequent deposits, interest additions, and subaccount positive performance which adds to the pool of money the insurance company can work with, prior to subjecting the company to financial loss.
So... Here's the "skinny" on how to beat the insurance company.
Most companies band their benefits, such that the longer you delay - the greater percentage of the pot of money you can get annually - as guaranteed for life. Indicated examples below may sound familiar to those purchasers who bothered to investigate:
• At ages below 65: 4% distribution rate annually, normally paid monthly.
• At ages 65 – 70: 5% distribution, annually paid monthly.
• At ages 70 – 80: 6% distribution, annually paid monthly.
• At ages over – 80: 7% distribution, annually paid monthly.
Where the above table is for representative purposes only, you get the basic idea. Sort of like delaying your social security benefit for a year to enjoy an 8% increase to your annual payment benefit.
Can this work for you?
In the case of social security, for every year you delay your benefit it could take 12 years to reach the break-even point.
Therefore, if you delay from say age 66 until age 67, the loss of the 12 monthly payments you could have enjoyed during your 66th year, will require 12+ years of the 8% increase to get you to the break even point.
Bottom line, for the thrifty guy in the above calculation: He has got to fog a glass through age 79 to be able to brag to his drinking buddies how wise he was to wait that extra year.
Though you do not own your social security benefit, you do own your annuity benefits.
What are the rules of thumb one should know concerning income benefits associated with annuities?
Zero is your hero!
The Insurance Company is giving you back your own money first until your account reaches Zero. Then, and only then, do they need to dip into their corporate treasury for the balance of your "payments for life."
Knowing this to be the case, the sooner you can drain the pond – the sooner you will be in their back pocket.
This is how you beat the company.
As soon as your payout age band goes up, say at age 65 (which seems to be the magic number), you need to start taking your income benefit right away – regardless of whether you need the cash flow or not!
If they provide a 5% payout at that age, it could take 20 years to get your account down to zero. Wow, that means you have got to live beyond 85 to be a winner-winner-chicken-dinner!
If you, like I, come from a family whose life expectancy is chronologically challenged, this "income benefit" is useless... Or, if you have longevity in your gene pool, but wait too long to commence your withdrawals – Guess what? Again, the benefit is useless!
So, what is the best approach?
If you have expectancy for a long and healthy life, take your income benefit at age 65... live for 20 years, then laugh every month when that ACH credit hits your checking account from the coffers of the insurance company.
What if you have waited too long? Call a professional to analyze your policies. Many, such as our office, will do it pro bono, hoping to gain other business.
Who knows, you may be able to stop the 1% annual bleed for a benefit you will never fully enjoy.
Cheers to your good health.