Date posted: October 30, 2014
In the Benefits Pro “Clueless about guaranteed lifetime income,” Marlene Y. Satter says that Americans know very little about guaranteeing lifetime income with annuity products. CANNEX and Greenwald & Associates recently performed a study to see what Americans know about lifetime income sources. The first thing they found was that Americans want and need sources of retirement income. Most people know about the lifetime income they will receive from Social Security. While that is an important source, it doesn’t cover everyone’s living expenses and most Americans need more income during retirement. If you are one of the lucky few that will receive a pension from your employer, then you are obviously aware of that form of lifetime income as well. But what if you don’t have a pension and Social Security payments will not be enough to cover your financial needs?
Researchers found that people aged 55-75 who have at least $100,000 in investable assets have a strong desire for guaranteed lifetime income to supplement their Social Security payments. They value this guaranteed income highly because they know that it helps them manage their overall finances and spending, but that it also offers them a peace of mind during retirement. A full 40% of retirees pay all of their expenses using sources of guaranteed income. They don’t spend down their investments at all. Most retirees try to keep their discretionary spending low and pay all of their expenses from Social Security and pensions, rather than using retirement savings. Those surveyed said that guaranteed lifetime income sources pay for 79% of their basic living expenses. This is great for those who have both Social Security and pension income coming in, but many Americans need another source of guaranteed lifetime income.
Annuities are that source. Unfortunately, most people are unaware of the income benefits that they can receive from annuity products. Most Americans place a high value on guaranteed lifetime income, but they don’t know where to find it outside of Social Security and pensions. The study used a new index to see what value consumers place on products like annuities that guarantee lifetime income. Only 16% of people scored highly on this index and said that they were likely to invest in these products. This is probably because they aren’t aware of the benefits offered by annuities. Researchers also found that consumers didn’t understand the differences between the multiple types of annuity products. Less than 1/3 of those studied said that they were very familiar with fixed annuity products. The consumer groups who placed the most value on guaranteed lifetime income were women, people with less than $1 million in assets, those who’ve had an advisor discuss annuities with them and people who rely on others to make their investment decisions.
Annuity products are one of the only ways to guarantee the lifetime income that is so valued by most consumers. Speak with a financial expert to see how an annuity might help you create guaranteed lifetime income for your future financial plans.
Date posted: October 28, 2014
Pacific Life has been looking to fill a void within their line of fixed annuity products. They recently launched a new deferred income annuity to fill that void. Insurance News Net’s Cyril Tuohy introduced the new product in the article “Pacific Life Launches Fixed, Deferred Income Annuity.” This new deferred income annuity offers a guaranteed stream of income during retirement. Fixed annuities have been selling well this year, particularly deferred income and indexed annuity products. Pacific Life says that their Pacific Secure Income deferred income annuity can be used to pay for basic living expenses in retirement. This is one of the first steps that their clients can take to help build an active retirement. You can spend more of your savings on hobbies and travel knowing that your basic living expenses are covered.
During the first half of this year, the industry sold $1.3 billion of deferred income annuities. That was a 43% increase from the first half of last year. Second quarter sales were up 33% from year to year. Although they still make up a small portion of overall annuity sales, deferred income annuities are likely to continue their upward trend and overtake other types of fixed annuity products in the next 5 years or so. Those who purchase deferred income annuities defer their payments until some point in the future. The products are similar to Social Security in that the longer you wait to start receiving your payments, the higher your payments will be.
The number of people retiring is increasing every year and those retirees are searching for ways to generate a stream of income, especially if they won’t receive a pension from their job. Pacific Life’s Pacific Secure Income annuities fill a niche within the company’s line of fixed annuity products. Clients have the option of purchasing the deferred income annuity with a lump sum or with multiple premium payments. Annuity products are often labeled as inflexible, but the Pacific Secure Income annuity offers choices and flexibility. Although you choose the start date to begin receiving payments when you purchase your annuity contract, that date can be changed. You can start receiving income sooner or defer your payments even longer if your needs change. There are also options that can be added to your annuity in case you die sooner than you expected. Your heirs can be reimbursed for the entire purchase or continue to receive income payments if you had already started getting them.
As with any annuity product, you should know the ins and outs of deferred income annuities before making a purchase. If you have questions about Pacific Life’s Pacific Secure Income deferred income annuity or any other annuity products, an expert would be happy to help you.
Date posted: October 27, 2014
We all know that the marketing of certain products and investments may stretch the actual truth. When it comes to some of the advertisements for 770 accounts, this might be the case. According to Bonnie Lee’s Fox Business article, “The Tax Story Behind 770 Accounts,” these accounts are not actually a secret way to get rich fast as some ads claim. One particular ad claims that banks and wealthy people use 770 accounts in order to gain up to 40% more interest than you can receive in other bank accounts. It also says that the withdrawals or interest from the account are tax free. The author says that these claims are misleading and recommends speaking with a financial expert to learn the actual benefits and downsides of a 770 account.
IRS Code 7702 covers all life insurance contracts. This is where the term 770 accounts originates from. The IRS guidelines related to this section of their code can be found in the Fox Business article. Basically, a 770 account is actually a life insurance contract that you use as a savings account. Before receiving any tax free disbursements from the account, you have to have it fully funded. The reason that your withdrawals are not taxed is because you are taking the money out as a loan that you will repay to your account at a later date. Money received from loans is never taxed because it is not considered taxable income by the IRS. Interest, however, is considered taxable income. The exceptions to this last rule include interest that is earned within qualified retirement accounts like 401k’s or IRA’s. That interest (and the rest of the distribution) is taxed when you start receiving income from the plans.
One financial expert explained 770 accounts, also known as infinite banking, as borrowing money from yourself. You borrow money from your life insurance contract when you need it to buy a new car or fix up your home. Since you are borrowing the money from yourself, you earn the interest. You are paying yourself back rather than paying back the bank with added interest costs. This expert says that these types of life insurance contracts are often beneficial, but cautions you to know the details before getting into a contract. Make sure you know whether the loan’s interest rate is fixed or variable and how much you will make from the loan. If your loan rate is contractual then it will not change, but a current practice rate can be changed at any time.
770 accounts should be used just like any other financial vehicle. You have to know the pros and cons and speak with an expert before getting into a contract. There may be tax benefits to taking a loan from a 770 account rather than taking money out of another investment. The interest you’ll receive could be beneficial as well. But keep in mind that there really are no “get rich quick” or “secret tax-free investments” to be found. Each financial product you choose has to meet your personal needs and match up with your future goals.
Date posted: October 23, 2014
If you’ve been waiting to purchase a fixed annuity product, now is the time to pull the trigger. Insurance companies are probably going to lower fixed annuity rates in the next week or so after a large decline in the 10-year U.S. Treasury rate. Earlier this week, that rate went down 21% from last month and closed at 2.09%. Fixed annuities have been popular in recent years because of their guarantees and transfer of risk. An expert at Annuity FYI would be happy to help answer any questions you have regarding fixed annuity products before rates go down soon. Our latest product alert is for two fixed annuities that are worth consideration for their particular costs and benefits.
Delaware Life’s Pinnacle Multi-Year Guaranteed Annuity (MYGA) is a single premium deferred annuity. This annuity offers guaranteed interest rate periods of 3, 5, 7 or 10 years and has a maximum age of 85. The current yield for the 10 year option is 3.65%. That is 75% higher than the 10-year Treasury. This MYGA guarantees your interest rates, does not charge initial sales or management fees, gives you access to your money and lifetime income. The minimum premium amount for qualified money is $5,000 and $10,000 for non-qualified money. There is a premium limit of $1,000,000 without special company approval. You can withdraw up to 10% of your account value without penalty after the first year. You can take systematic withdrawals yearly, twice a year, quarterly or monthly as long as your minimum account value stays above $2,000. The Pinnacle MYGA offers death benefits equal to your full account value. Surrender charges and market value adjustments will be applied to any withdrawals greater than the free withdrawal amount. Each time your guaranteed interest rate period ends, you have 30 days to select a new time frame. There are also many different options to choose for annuitization, two of which are Life and Life with Period Certain.
The Sentinel Security Life Personal Choice Annuity offers you the ability to customize your annuity with your specific financial needs. You can choose between a 5, 7 or 10 year time frame with this single premium deferred annuity. Currently, the 10-year rate is 3.75% and the 5-year rate is 3.35%. The Personal Choice Annuity offers 6 optional riders that you can select a la carte so that you don’t have to pay for riders that you don’t need. This allows you to receive a higher interest rate because you aren’t automatically paying for 6 benefits if you don’t want them. Although most of your riders will be added during the guarantee period, you can choose to add your required minimum distribution any time during your contract. If you choose to add the required minimum distribution rider, surrender charges and market value adjustments will be waived from tax-qualified plans. There are 5 other riders available with the Personal Choice Annuity. With the preferred 10% free withdrawal rider, you can withdraw up to 10% of your account value yearly without penalty. The terminal illness/nursing home care feature waives your surrender charge if you need your annuity money to pay for terminal illness care or nursing home care lasting more than 90 days. Surrender charges and market value adjustments will also be waived if you add one of the last three riders: death benefits, a 72(t) free withdrawal or an accumulated interest withdrawal.
This is the week to research fixed annuity products and make a purchase if you have been contemplating using this type of financial tool. The guarantees and transfer of risk offered by fixed annuities are hard to find anywhere else. Speak with an expert before fixed annuity rates decrease soon.
Date posted: October 22, 2014
Fixed indexed annuities have a lot of pieces and parts. They are more complex than the fixed annuity products that came before them. In The Aiken Standard article, “On the Money: Equity-indexed annuities are popular but complex,” Greg Roberts defines the terms that are associated with fixed indexed annuities and offers basic annuity refreshers. Annuities are contracts between you and an insurance company. You purchase this product with a lump sum or a stream of payments and the insurance company makes payments to you for a period of time or your lifetime. An immediate annuity pays you right away, while your payments come in the future with a deferred annuity. Deferred annuities have an accumulation phase before you begin receiving payments and then a payout phase.
Annuity products can be fixed or variable. Fixed annuities guarantee an interest rate during your accumulation phase and then guarantee your payments. They also have tax advantages and sometimes offer credits if interest rates get higher while you are in your deferral phase. Your interest rate with variable annuities is dependent upon your annuity’s investment accounts. Variable annuities are considered securities and are regulated by the SEC. Fixed equity indexed annuities are a hybrid of these two types of annuities. You typically receive a guaranteed minimum interest rate or are at least guaranteed that you will not lose your principal. Your interest is also linked to a stock market index. You take on less market risk than you do with variable annuities, but have the potential to gain in the markets unlike with fixed annuities. While indexed annuity sales are regulated by state insurance departments, many people think that these products should also be regulated by the SEC like variable annuities are.
Indexed annuities have a lot of different features that can affect how much interest you receive. Make sure that you know all of the complex moving parts associated with your fixed indexed annuity so that there are no surprises. Participation rates are the percentage of any stock market gain that you will receive. Ideally, you would like a 100% participation rate so that you could take advantage of any gains in the markets. Many indexed annuities offer 90% participation rates. Some indexed annuities have an interest rate cap. This cap means that you cannot earn more than that much interest in any time period.
A spread, sometimes called a margin, is an amount that will decrease any percentage of market gains you receive. If your fixed indexed annuity has a spread of 5%, your gain would only be 1% if your index increased by 6%. Each insurance company uses a different indexing method with their fixed indexed annuities. Ask questions from your advisor so that you understand the indexing method associated with your product. Most fixed equity indexed annuities guarantee your principal and some even guarantee a minimum interest rate credit. Indexed annuities have surrender charge periods around 5 to 10 years, so it is important to make them a long term investment to avoid paying surrender charges. Fixed equity indexed annuities might be the right tool for your personal financial plan, so speak with an expert to help you understand all of their features and terms.