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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What does it mean?

Put simply, to annuitize is to start taking payments from an insurance annuity that may have been accumulating for some time.  Specifically, you “trade” the accumulated annuity balance for a stream of payments over a specific term of years or life (a life annuity).

An annuity, a policy that is paid into either by lump some or regular payments by the policyholder, and gains value via investment of those funds by the insurance company that holds the policy, in a manner agreed between the two parties, has many terms attached when it is created, and there may be an option to annuitize at a certain point or date set at the start of the insurance annuity agreement.

What happens when I annuitize?

When, and how, the policy becomes annuitized is determined by the rules and terms that are agreed by the policyholder with the insurance company, and these can be varied and dependent on many different factors.

If the policy has a number of different options at which annuitization can take place, then it is up to the policyholder to decide what is best for him or her.  In many cases, if the insurance company does not hear from you, annuitization starts automatically at age 85.

When the choice is made, and one has opted to annuitize, there are a number of ways in which payments can be structured. There are options that involve continued payments within the lifetime of the policyholder, or those that pay up to a certain date (e.g. 10 years) beyond which the policyholder may live, but with no further payments. There are also options that allow a lump some payment of an agreed amount that can only be taken after a certain amount of time has elapsed on the policy, at which point the annuity is said to have matured.

Some annuities allow for the payments to be made to a partner or designated recipient (joint life annuitization), too, and there are other considerations that should be taken into account.

Should you Annuitize?

This is a question that only the policyholder can answer, but if the time has come to draw money from the annuity, some factors should be considered.

If the policyholder is collecting for himself, the lifetime payment option makes a great deal of sense, giving a guaranteed income for the rest of one’s life. The decision to annuitize, whichever option is taken, is not reversible – once done it cannot be rescinded, and the policy is deemed to have matured. (there are a few companies that now allow “commutation” which is the ability to cash in the annuity once it’s been annuitized.  You, the annuitant or owner will pay a stiff price to commute an annuity).

The most obvious reason for annuitizing is to claim the guaranteed payments that come with the policy, and this should be a consideration when deciding whether to annuitize. It may be that the policyholder needs the money in order to live, but in a large number of cases the money is used to set up a further annuity, continuing the process and effectively putting into action a chain reaction of annuities and annuitizing that creates greater income.

An annuity can be a worthwhile for those who like the option to annuitize and thereby shift the responsibility for income to the insurance company.

Learn more.  Get your copy to avoid “Annuity Owner Mistakes“

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