Annuities

For millions of Americans, a life annuity can provide safety of principal and tax deferral. However, one disadvantage inherent in most life annuities is their inability to keep up with inflation over the long-term.

For example, assume that you invest $100,000 into a single premium immediate life annuity. as an example, a current contract from a major annuity company would then pay out $658.59 per month, for a total of $7,903.08 for the year.  The problem is if the rate of inflation is 3%, then the purchasing power of these payments will decline from one year to the next. Obviously, $7,903 will not buy in a future year what it can now. Imagine how you feel twenty years from now when the purchasing power of your life annuity is reduced by 47%!

One way that life annuity buyers can deal with this problem is to purchase a cost-of-living rider in the contract. This rider is designed to ensure that the income from the annuity stays abreast of the rate of inflation over time.
However, these will be a trade off in that less income may be received today.

For example, the same immediate life annuity contract with a 3% inflation protection rider will only pay $499.06 per month initially.  But this amount will increase by 3% each year for the duration of the payout, thus providing some protection from inflation. Of course, it is plain to see that there is a cost to this rider, as the initial monthly payment is $159.53 less than the contract without the COLA rider. However, if the annuitant should live long enough to receive payments for the next 20 years, then the payment by year 20 would be $901.36 per month or $242.77 per month more than the straight-life annuity contract payout. The longer you live, the more value the inflation rider becomes in your life annuity.

COLA riders can come in different forms, with some riders having a specific cost, while others (such as the one shown previously) merely affect the dollar amount of the monthly payout (i.e. less today and more later). Different rates of increase are also generally available, depending upon how much inflation protection the life annuity contract holder desires. For example, the contract as shown previously also has a 6% inflation protection rider option, which would result in the contract holder receiving a proportionately lower payment each month to begin with, and a higher payment at the end of the term.

Since there are several options, you may want to consider them. You can get in touch with a local financial advisor by ordering the FREE booklet below as this will be sent to you by a local professional.

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The word “annuity” brings to mind different meanings for many investors.  That’s because there are different types of annuities designed for different purposes.  One of these is the immediate fixed annuity, which can provide an immediate stream of cash payments over a lifetime or a defined period of time.

If the investor has chosen a lifetime payout retirement option, he or she typically pays a single premium to an annuity company. In return, the company agrees to pay the investor regular and ongoing cash payments for life, or for a lesser amount to continue over the life of both spouses. Although many investors choose to receive monthly payments, it is also possible to receive quarterly, semi-annual, or annual payments as well.
Assuming the payments are structured over a lifetime, the investor is provided with a lifetime income he or she cannot outlive. Such an investment is useful for investors requiring additional retirement income, for support of a community spouse in the event the other spouse is in need of nursing-home care and is seeking to qualify for Medicaid (immediate annuities can be treated as exempt asset in some states), for making lifetime payments to cover long term care needs, or for paying long term care insurance premiums.

A portion of each payment is considered a return of premium and therefore not taxable to the investor. The remainder is considered interest and will be subject to federal and state income taxes.  For example, for a male investor age 70, 68% of each payment is nontaxable to age 86 (then all amounts thereafter are taxable).

One drawback to these products is an early death. In such a case, the annuity company keeps the funds and the income ends. This early-death financial risk is sometimes perceived as a negative feature among some investors. However, there is a possible solution to this concern as some annuity companies will guarantee a return of the investment to heirs in the case of an early death.  The feature is referred to as a “refund” provision.  Other companies offer “commutation” which allows the investor to change his mind and recover his initial investment (usually with a surrender charge), for example, in the case of a terminal illness.  These features make the immediate annuity more flexible and remove the chance of having one’s investment disappear in the case of untimely death.

Please note, that annuities are long-term investments that are designed for retirement purposes. Annuities are also subject to administrative fees, mortality charges, and surrender charges that can apply to early withdrawals, and these fees tend to vary from company to company. Annuity premium payments and any other guarantees are subject to the claims-paying ability of the issuing company. For this reason, it is very important to consider the financial standing of the issuing company before you purchase an annuity.

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