What should I be looking for when shopping for Income Annuities?

annuity think tankAnnuities provide a handful of really effective solutions to common problems amongst both retirees and pre-retirees.   For instance, many people looking for a healthy balance of safety and growth in the market end up utilizing annuities.  Both Fixed and Index Annuities provide these very features.  Some consumers use annuities with estate planning and wealth transfer.  Some like to prepare for Long Term Care, Nursing Home, and or Terminal Illness costs in the future.  A lot of consumers use annuities to supplement a pension.  It’s all about providing a predictable income stream for their entire lives, and today I want to talk about factors to look into when shopping for the right income annuity for you.

A misconception in the income annuity game is “where can I find the biggest bonus or the highest guaranteed growth possible?”   This does not guarantee the highest income stream for you.  I want to go over the 3 main factors to look for when preparing for retirement income.

Bonus

Bonuses are gravy.  You will receive extra growth just for signing up!  Be warned, there are 2 types of Bonuses:  “The Walk Away Bonus” and “The Income Bonus”.

The Walk Away Bonus is a real and true bonus.  This bonus will either be given day 1 of the contract or it will vest over the period of the contract.  In most cases, your client’s heirs will inherit 100% of the bonus at death.  Some cases, not so much.  Ask your advisor.  Also if the bonus is vested, it will be pro-rated if you decide to cancel the contract before the end of the surrender period.

The Income Bonus is typically not a real and true bonus.  In most cases it’s a fake number that builds your income account to generate a higher income quicker.   Some cases the income bonus can be accessed as a death benefit.  Ask your advisor about this.

The Income Roll Up

A huge misconception with annuities stems from many advertisements touting high guaranteed growth opportunities in annuities with rates in the 7% to 15% range.  The truth is that this “growth” typically in a fake money account.  Carriers provide a fictitious guaranteed # to grow each year so that the consumer can take a percentage of a higher number later on in life.  This make the consumer feel good because it guarantees today the worst case scenario later down the road when they decide to turn on their income stream.  Some of the annuities allow this fictitious number to become real at death meaning their heirs can pocket a larger amount of money!  Be sure that your advisor explains exactly what is yours and when you have access to it.

The Payout Percentage

The payout is a percentage of the income account that will distributed for the life of the annuitant.  It will range anywhere from 4% to 6% depending on the age of the client at time of taking the income stream.

The Bonus + Income Rollup + The Payout Percentage = Maximum Income for Life

The sum of these 3 factors will equal the best option for the client based on their specific scenario.  If you don’t factor on all three together, it could cost you some $$$ in the end.

A couple other topics I want to go over are your options with income.

First, when taking income through these annuities you are not annuitizing your income stream.  This means you are not losing control of your money.   You can turn it on and off.  You could change your mind and walk away with the accumulation value lump sum AFTER the surrender period is up.  There’s a lot more flexibility.

Secondly, I want to talk about the Single Premium Immediate Annuity (SPIA) and annuitization.  The pros and cons of these 2 is you typically get a much higher income stream, but you lose ALL control of your money.  Sometimes there is little or no death benefit as well, but you will get maximum income.  Ask your Advisor.

Annuities are terrific retirement planning tools for many pre-retirees and retirees.  However, it is extremely important to seek out help from experienced retirement income planners to ensure you get the most bang for your buck.

 

 

 

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4 comments

  • Hello, guest
  • In a SPIA, you TRADE in death benefit with all other annuitants to all get higher income for as long as you live. Isn't that what we are talking about income while you live with your money, rather than just protecting a base income and a legacy amount (that you"control".

    • Thanks for the comment Steve. Most people think that when you own a SPIA, the insurance company keeps the money when you die. That's a "Life Only" SPIA, but no what most people buy. The vast majority of SPIA's I recommend are "Life with Installment Refund" which means that the insurance company does not keep a penny….and someone (you or your beneficiaries) will get the full principal payments. SPIA's should be looked at as pure pension products that solve for longevity risk….or not outliving your money. Let me know if I need to clarify further, or if I misunderstood your questions. Stan The Annuity Man

    • Yes, you misunderstand SPIA's. ALL SPIA's trade death benefit for income.The insurance company doesn't keep the money – it pools it so that all can receive more mincome while they live. Life Only is the purest and fullest form. Those with death benefits merely compromise the purpose and effect of the product (and are bought because it FEELS like there would be less of a loss if one dies early (and while the latter is true, one could opt for a death benefit which is so thorough, as to wipe out all of the sharing benefits of the product to begin with – it would be an interest only annuity.

  • In a SPIA, you TRADE in death benefit with all other annuitants to all get higher income for as long as you live. Isn't that what we are talking about income while you live with your money, rather than just protecting a base income and a legacy amount (that you"control".