Income for Life
Surveys of those over 50 years-old indicate that one of their greatest retirement concerns is running out of money before they die. It’s time to look at putting together a ‘personal pension’ again by using the time tested and trusted financial vehicle known as an annuity.
Purely speaking, an annuity is a lump sum of money deposited with an insurance company which turns around and calculates a monthly, quarterly, semi-annual or annual payment of the money back to the depositor on a tax-favored basis as a guaranteed source of income. The annuity pays as long as the annuitant is alive. This annuity is also referred to as a ‘single premium immediate annuity’ or SPIA, and could be thought of as a personal pension plan. Carrier payout rates can vary widely, so be sure to shop around for the best ones available at the time of the clients deposit. Payout rates usually change every two weeks.
Variations on this theme include annuities with ‘period certain’. That is to say, if the annuitant dies before the full payout of the initial deposit is made, the remainder of the annuity is paid to a designated beneficiary for specified periods, such as 10, 15, or 20 years. Payouts for these types of annuities are typically lower for the annuitant during his/her lifetime because the insurance company must payout the entire amount deposited plus interest.
Another variation is the refund payout. The annuitant takes a tax-favored payout over a designated period of years, the least of which is usually 5 years. If the annuitant dies before the entire refund is paid out, a designated beneficiary receives the remainder.
Many annuities offer an inflation rider at extra cost to vary payments to accommodate increases in the consumer price index (CPI).
Often, consumers object to the idea of giving up principal for income. When you make the initial deposit, the money goes to purchase the income stream. It is not recoverable under most circumstances by the the depositing annuitant. A ‘period-certain’ design might be a better choice for such an objection, the annuitant being assured that all of the money plus interest will be paid out to their beneficiary. The downside to this design is that because the insurance company must pay back all of the money plus interest to someone, the payout to the annuitant is somewhat lower.
The advantages of an annuity (SPIA) is that a steady stream of income is guaranteed for life and that all the deposited money plus interest will be paid out on a tax favored basis. The income from an SPIA that is not needed for living expensense can be used for any other need. In fact, if the annuitant is medically insurable, part of the after-tax payout could be used to purchase an insurance policy to replace the deposit made into the SPIA for the next generation. The death benefit of such a policy would be income-tax free to the beneficiary. The agent of such a transaction results in both a commission for the SPIA and a first year commission on the life policy.
