Friday, October 26, 2012

Longevity Insurance through an Annuity

Lately, I been looking at income options that may be needed if we live longer than expected.    One option I've been evaluating is purchasing an annuity.  I've talked to insurance agents about several possibilities.  Here are the similarities I noticed when talking to different agents:

  • Product sounds great. The annuity insurance all sound almost too good to be true :-)  Guaranteed returns of 5% or market returns, which ever is higher, tax deferred earnings growth, guaranteed fixed income for life, withdrawal of accumulated earnings, and, often, a life insurance benefit equal to the premium paid. 

  • Little interest in my product request.   My main interest is purchase an immediate annuity sometime in the future at about 75.   The agents have been reluctant to discuss this product, mainly because they won't be the person selling it to me 20 years from now since they will be retired.   No commission, no interest, I think.
  • Since I'm always interested in learning, I decided to ask some questions about the single premium deferred annuity.   First, I asked, "Not to be challenging, but the annuity you described sound really good.  So what's the downside.  Why isn't everyone using this annuity as their ONLY retirement option?"   Really, I was just curious.  Here's what I learned:

  • Loss of flexibility.  Usually, the recommendation is to rollover IRA or 401K money into the annuity.  Once rolled over, it cannot be rolled over again into an IRA or other qualified pension plan.  So leaving the annuity plan is a taxable event of 100% of the withdrawal.

  • Perhaps high fees.  The annual cost of the annuity wasn't obvious to me.  However, it was clear the immediate upfront fees were 8% of assets invested based on the withdrawal chart that I was shown.

  • Inflation.  While $3000 a month may sound like a lot today, it may not be much 20, 30 or 40 years from now.   The annuities I was evaluation were fixed and not inflation adjusted annuities that would provide increasing payments bases on cost of living adjustments.

  • After getting a balanced information of the pros and cons,  I had a better understanding of the product.  For now,  I still believe an immediate annuity in the future around 75 is the best option.   Although it will cost more, I prefer to pay when I need it versus paying now for what I think I may need in the future.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial or insurance advice. Please consult a professional advisor.

    Copyright © 2012 Achievement Catalyst, LLC

    No comments: