Date posted: September 30, 2014
Believe it or not, there are many ways to create a stream of income from your annuity. In Marketwatch’s “The 6 best ways to collect on your annuity,” Stan Haithcock tells us what he thinks are the best ways to annuitize. The first annuities, dating back hundreds of years, were immediate annuities that created an income stream after you made a lump sum payment. Most deferred annuities can also be annuitized now to create income that lasts for a certain time frame or for the rest of your life. Your income payments come from your principal and interest, so there are tax advantages when the money is outside of an IRA account. Lifetime income payments are based on your life expectancy and interest rates when you annuitize. You transfer your risk to the insurance company in hopes that you will live a long life and they will continue to pay you long after your principal has been depleted.
The first option for annuitization that Stan lists is life with installment refund. You will receive lifetime income payments until you die and any money leftover if you don’t live until your life expectancy will go to your beneficiary. This option gives you the highest lifetime income stream possible when you want the guarantee that you or your heirs will receive every penny of your money. The life with cash refund option is similar to the first option listed, but any remaining money goes to your heirs in the form of a lump sum rather than a continuation of your annuity payments. Choosing the installment refund makes your payments a little bit higher than choosing the cash refund because the insurance company keeps your money longer and doesn’t pay it out in a lump sum.
Life with period certain is another option when you want to create lifetime income. You will receive income for as long as you live just like with the first two options. You can add a period certain time frame so that your heirs will continue to receive payments if you die before that period is up. The most common time frames are 5 years, 10 years or 20 years. The longer the time frame guaranteed to pay your heirs, the lower your income payments will be. If your main goal with your annuity product is not to create lifetime income, you can opt for a period certain guarantee. You will continue to receive payments for as long as you choose in the contract, typically around 20 years. Five years is the shortest time frame for period certain guarantees and is often chosen by people who ladder their annuity purchases.
The life only guarantee is what most people think of when they hear the word annuitize, but it is far from being the only option available. Your payments are guaranteed for as long as you live, but no money will be paid to beneficiaries if you die before your life expectancy. This option is a good choice for those with no heirs or who have taken care of their beneficiaries with other investments. You receive the highest monthly income payments when you choose the life only guarantee. The final option listed in the article for annuitization is life with death benefits. You will receive lifetime income payments and your heirs will receive a pre-chosen percentage of your principal amount returned when you die. If you have a life with 50% death benefit rider on a $100,000 annuity, your heirs will receive $50,000 when you die. They will get this money even if you live far past your life expectancy, but this option costs the most.
Annuity products offer consistency like Social Security and pensions. Annuities are the only products you can buy that will guarantee you payments for as long as you live. Each annuity product comes with a cost, so you have to consider the value you will receive in exchange for that cost. If you want to create lifetime income from an annuity product, an expert at Annuity FYI can lead you in the right direction.
Date posted: September 29, 2014
Earlier this month, Jackson National Life Insurance Company introduced new pricing for their variable annuities. Investment News’ Darla Mercado wrote about the new options in the article “Jackson National unveils tiered pricing for variable annuities.” The company’s living benefit riders are very popular and they are hoping that this new tiered pricing will be beneficial for consumers looking for more options. There are five tiers of pricing available with the Lifeguard Freedom Flex and the Lifeguard Freedom 6 Net when they are single life products. The joint life variable annuities have a new three tiered pricing program.
As the variable annuity sales leader, Jackson National wants to help advisors and clients create a product with their personal needs and goals in mind. They can look at the different pricing tier levels and base their variable annuity purchase on the benefit that brings them the most value. Some investors prefer lower pricing while others like the higher withdrawals. The FreedomFlex and Freedom 6 Net will no longer offer their optional income upgrade. You could previously pay 25 basis points to opt for 5% income at age 65. This brought their rider fee to 1.5%. Now that the income upgrade is a part of Tier 5, it will no longer be an option for the other tiers. It’s important to note that this feature will not be available until next January.
When Jackson National filed their tier systems with the Securities and Exchange Commission, they said that the system is based on income versus cost. Level 1 offers the lowest amount of guaranteed income for the lowest cost. One chart in the Investment News article shows the amount of your guaranteed annual withdrawal percentage based on the age at which you start receiving income. The percentage of income you will receive increases gradually approximately a percentage point from Level 1 to Level 5. The article also includes charts with the costs for both variable annuity products based on the five tiers. The costs increase gradually between tiers, just like the income levels do.
Over the past couple of years, Jackson has made changes trying to decrease 1035 exchanges into their variable annuity products. With this new tiered pricing, they can better control what money is coming into their products without banning any transfers. This helps to keep those selling Jackson’s variable annuities happy as well. Some advisors are disappointed that Level 5 will not be offered for the remainder of this year, but they say that Level 4 is still a very competitive option as well. Raymond James is not offering their clients Level 1 or Level 2 tiers because they aren’t convinced that the products offer enough value. But those consumers focusing more on low cost might find value in the lower tiers offered by Jackson National. If you are interested in a variable annuity from Jackson, make sure that you balance the costs with the income levels to determine which pricing tier will help you reach your goals.
Date posted: September 25, 2014
Fixed indexed annuities offer principal protection and the potential to grow your money if stock market indexes increase. They are a helpful tool to use when financing your retirement. But they can be complex and you need to make sure that you understand all of their pieces and parts. In the CBS Moneywatch article, “6 questions before buying a fixed indexed annuity,” Allan Roth helps to explain the details of indexed annuities and lets you know what to look out for. Fixed indexed annuities are also referred to as equity indexed annuities and have been increasing in popularity over the past few years. Sales increased 39% from the first quarter of 2013 to the first quarter of 2014.
Allianz Life is the top seller of fixed indexed annuities. They simply describe the products as an agreement with an insurance company that can help you to meet your financial goals. After paying your premium, you can start receiving income immediately or defer it until after an accumulation phase. They list the benefits as tax deferral, guaranteed income, death benefits, accumulation and the potential to earn indexed interest. With the Allianz Core Income 7 Annuity, your account increases if the index to which it is linked increases. The value is capped by the insurance company though. As long as you don’t take money out during the seven year surrender charge period, your principal is protected from any losses than might occur in the index as well. Fixed indexed annuities offer excellent benefits, but it is important to ask these questions before purchasing a product like this that has a lot of moving parts.
The first question to ask is what your increases will be capped at. The Allianz Core Income 7 is capped at 4.5% right now. If markets are down or flat, you will not receive an increase. If markets rise, you will receive an increase up to 4.5%. Any higher increases in the markets will still result in a 4.5% increase to you. That is your trade-off for the protection you receive in the case that markets decline. In the fine print of your annuity contract, the insurance company might be able to lower the cap in the future. Allianz reserves the right to lower the cap to as low as .25%, but insists that it would have to be a global financial catastrophe before they would make such a move. Ask your insurance company if you will receive the total index return or only the price appreciation. Your return will be very different if the dividend portion is stripped out.
Whether or not you pay less in taxes is dependent upon how and when you take your money out. The taxes on interest you are credited is deferred. If you cash out at any time, all of your interest will be taxed the same year though. This is why fixed indexed annuities are best used as long term products to generate income in the way originally intended. The article recommends asking your insurance company if some of your income comes from a return of your principal. The answer is that yes, your principal is returned first and followed by interest. The point of most annuities is that they guarantee lifetime income, so if you live a very long life you will not run out of money.
As with any annuity product, it is crucial to know your surrender charges. The Allianz Core Income 7 charges 8.5% in the first year and goes to a 3% surrender charge by the seventh year. This is one of the lowest charges for fixed indexed annuities. They also offer a free 10% surrender in case you need money for an unforeseen circumstance. Sometimes annuity commissions can be high, so it’s also fair to ask your insurance company about those fees and commissions. Fixed indexed annuities are useful tools when used correctly, but it’s important to know all of the details before making a purchase. Annuity FYI offers our own annuity warning questions to ask before purchasing a fixed indexed annuity. The questions are similar and can help you decide if these annuities are right for your financial plan.
Written by Rachel Summit
Follow Rachel, aka Finance Mama, on Twitter and Google+
Date posted: September 23, 2014
Deferred income annuities have become an important and popular retirement tool over the past couple of years. In Sandy Block’s Kiplinger article, “When a Deferred-Income Annuity Makes Sense,” she helps people determine if this type of annuity product is right for their personal financial plan. It’s important to consider your family history when you are looking at deferred income annuities. If you have a lot of relatives who have lived into their 80s, 90s and even 100s, there is a good chance that you will live a long life as well. This is especially true if you have good health and have taken care of yourself throughout your lifetime by avoiding smoking, eating healthy and exercising.
Purchasing a deferred income annuity guarantees you a lifetime source of income that will start at some point in the future. Many deferred income annuity products, also referred to as longevity annuities, start payments late in life around age 80. But there are newer DIAs that allow you to start payments younger. The longer you delay receiving your payments, the higher your income payments will be in the future. The article offers the example of a 65 year old man purchasing New York Life’s Guaranteed Future Income Annuity with $100,000. If the man defers payments for 15 years until he is 80, he will receive $28,695 in income annually for the rest of his life.
One of the downsides to deferring your income for so long is that there is the possibility that you will die before you start receiving your income payments. Deferred income annuities offer higher payouts than other annuities because the insurance company knows that some people will die before receiving their income payments. Most of these annuities offer “return of premium” death benefits that will pay your heirs if you die before collecting your income. Opting for this cash refund feature will lower the man in the above example’s annual income down to $21,601. Since it is not recommended to put all of your money into one investment, it might be to your benefit to “risk” losing your money if you die early so that you will have higher annual income if you live a long life.
There a few other additional options that can be chosen with deferred income annuities. Some insurance companies will let you withdraw money in the case of an emergency even if you have not started receiving income yet. Many insurers allow you to put money into your annuity account periodically rather than having to invest in a lump sum. New York Life’s DIA allows you to start with a $5,000 investment and add $100 at a time up until you are two years away from receiving income. The amount of income you will be paid out is adjusted each time you make a deposit. There are other deferred income annuities that adjust for inflation. If the man in the above example added a 3% annual increase to his Guaranteed Future Income Annuity, his annual payout would change to $24,300. If he combined that with the cash refund option as well, his payout would go down to $18,140 a year. Keep in mind that retirees’ expenses usually decrease each year during retirement, so you may not need that inflation rider after all.
The Treasury Department has made it easier to purchase a deferred income annuity with your 401k and IRA savings. You can use either 25% of your savings or $125,000, whichever is smaller, to buy a deferred income annuity and avoid taking required minimum distributions on that money when you are 70 1/2. This ruling is likely going to bring a lot more insurance companies into the deferred income annuity market and increase competition. More competition will bring better products and innovation to consumers, so it is a win-win. Deferred income annuities are a good way to generate more income in your later years of retirement. Speak with an expert about your personal situation to see if they are right for your retirement planning.