Annuity FYI Blog

A single premium immediate annuity is a good investment that’s simple to understand and works for many investors.  According to Forbes article “For Some Retirees, This Annuity Makes Sense,” Mel Lindauer says that the SPIA works as a bridge between social security and your necessary living expenses.  Immediate annuities also help to guarantee that you won’t outlive your money.  After your lump sum payment to an insurance company, you’ll receive periodic payments until you or your spouse, if that benefit option is chosen, is no longer living.  You can also choose to receive your payments over a specific time period.

With immediate fixed annuities, your payment options are inflation-adjusted, nominal, or graded.  You can also choose an immediate variable annuity, where your payout is based on your chosen investments’ returns.  Neither option accounts for inflation in most instances, so that is something you’ll have to consider in the future.  Most likely the amount you receive monthly will not increase over time.  There are a few products out there that adjust for inflation though.  Not only do immediate annuity products help make up for the difference between your needed monthly income and your proposed social security payments, they are also useful to help you delay social security payments until later in life.  You and your spouse can both receive more from social security by delaying payments for a few years or even a decade.

A single premium immediate annuity is one of the best annuities for you if your health is good and your family history dictates living a long life.  It makes sense if you are worried about outliving your money, don’t want to manage your own investments or don’t know how to, or are concerned that your spouse has no knowledge of investing to protect their future.  Since you cannot leave annuity money to heirs, an annuity is good for those who have no heirs, or have no desire to leave the money used to purchase their annuity to their heirs.  If these situations sound like they apply to you, a single premium immediate annuity might be a good investment.

While the Wise Indexed CD and other products guaranteed by FDIC insurance have been popular and are still good investments, there are four investment products that can earn you more interest than CDs at a low risk.  In the Herald Net’s article “Four low-risk ways to earn more interest,” a McClatchy Newspapers article is highlighted.  While these four investments are not without any risk, they have a relatively low risk for their available reward.  Some type of risk has to be taken in order to rise above inflation.

The first recommendation is the purchase of annuities.  They are sold by an insurance company and guarantee payments to the investor.  By purchasing from a high-quality company and fully understanding the terms of your annuity agreement, investors have the ability to earn more interest at a lower risk.  Three other investments that may do this for you as well are stocks paying dividends, bonds or bond funds, and preferred stocks.  The latter are more like bonds than common stocks as their price changes with the levels of interest rates.  Speak to an expert about annuities or another investment if you are looking to get more interest from a low-risk product.

According to California’s Daily Breeze article “MONEYWISE: Looking into the renewed interest in investing in annuities,” Stephanie Enright says that the government’s interest in promoting annuities has sparked an increased interest from investors.  Annuities are most often issued by insurance companies and grow over time with the expectation that you can receive lifetime income payments in retirement.  Two reasons annuities are popular are that some have a long-term-care insurance rider, which is increasingly popular today.  They also grow tax-deferred until you receive your money, then they are taxed like ordinary income.

Fixed annuities and variable annuities are your two options.  The fixed variety gives you a certain return based on interest rates at the time of purchase or a link to a financial index.  Variable annuities can have greater risk, but greater reward as your return is variable.

The author believes that the two most important things to consider when looking into annuities are the financial strength of the insurance company issuing the product and the structure of your contract.  Comdex ranks insurers based on the financial strength ratings from companies like Moodys, Standard & Poor’s, and A.M. Best Co.  Their stability and financial strength is the only thing guaranteeing your lifetime income payments.  You also want to know how your annuity agent is paid through commissions and fees.  Other contract details include riders like death benefits for spouses or other relatives.  Make sure you know all of the annuity details before purchasing the product.

It looks like the battle is over for fixed indexed annuities and other indexed annuity products.  The U.S. Securities and Exchange Commission said they would have to reevaluate their information after the U.S. Court of Appeals vacated the SEC’s Rule 151A.  The SEC had hoped to get indexed annuities classified as securities so they would be put under the SEC’s jurisdiction.  According to National Underwriter’s “Rater: Indexed Annuity Ruling Will Stick,” Standard & Poor’s Ratings Services believes that the SEC will not pursue their indexed annuity fight, at least for the next year and a half.

After the Court of Appeals announcement, President Obama signed H.R. 4173 forbidding the SEC from claiming jurisdiction over fixed indexed annuities and other annuity products in the general account of insurance companies.  The rule is known as the Dodd-Frank Wall Street Reform and Consumer Protection Act bill and states that you cannot compare annuities to the other stock market products that the SEC is in charge of.  Without H.R. 4173, the SEC’s Rule 151A would have taken effect next January.  Standard & Poor’s announced with their outlook improvement for American Equity Investment Life Holding Company that it is unlikely the SEC will revisit this issue in the next couple years, if at all.

According to Cincinnati.com article “Whether and when to buy fixed annuities,” J. Brendan Ryan says that there are good reasons to buy a fixed annuity.  They offer safety to investors, much like Social Security but with a higher monthly payout off which you could actually live.  While they are subject to the financial stability of the insurance company that will be making your payments, doing research and choosing a stable insurer should offer you a secure future.  The older you are when you start receiving your annuity payments, you will receive a higher amount of money each month in your income checks.

Ryan believes that it’s important to buy your annuity early and have it deferred until a later time in your life.  While immediate annuities work for people who haven’t purchased their annuity at an early age, buying early and deferring your payments until retirement will defer the taxes on your interest until you start receiving payments.  Another reason to buy an annuity early is that you’ll receive a higher monthly income based on the mortality tables.  Most annuities guarantee your income with the mortality tables in effect when you purchase the investment.  As life expectancies increase, your payment would be less had you purchased your annuity 20 or 30 years later in life.  Sometimes the new benefits offered by insurers do make it wise to transfer your money to a new fixed annuity product though.