Annuity FYI Blog

According to a press release, Security Benefit Corporation has just released a new annuity exclusively through four independent marketing organizations.  The Total Value Annuity will be sold through Advisors Excel, Creative Marketing, Impact Partnership, and Gradient Financial.  This is the time for a fixed indexed annuity product like the Total Value Annuity and Security Benefit is excited to release this “unique and competitive” annuity.  Security Benefit provides retirement and income savings products throughout the United States and announced this annuity release through MarketWatch’s “Security Benefit Launches Innovative Total Value Annuity.”

Last year, they introduced the Security Income Annuity and it has become one of the top four products in its industry.  By extending on that success, the Total Value Annuity is aimed at people who are savers, but also are looking for asset accumulation.  It offers accumulation without much risk, guaranteed lifetime income, and the option to add death benefits for your heirs.  Security Benefit finds these to be the three biggest concerns for advisors and clients.

You have three interest crediting choices with the Total Value Annuity.  The first option is choosing a fixed annuity rate instead of one that will fluctuate.  Or you can link your indexed annuity to the S&P 500 or the 5 year fixed annuity through the Annuity Linked TVI Index.  If you purchase the Total Value Annuity, you can choose to allocate your money throughout all three of these choices or just one or two.  There are also riders to guarantee your income lasts throughout your lifetime and to pass on death benefits, if either of those is something you would like to add to your fixed indexed annuity product.  Security Benefit believes this product addresses many of the concerns retirees have.

Written by Rachel Summit

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The Department of Treasury recently made it much easier for people to buy long-dated deferred income annuities, which are also known as longevity insurance or advanced life deferred annuities (ALDAs).

The new regulations mean, for instance, that if you use tax-deferred assets to buy an ALDA at age 60 that will pay out an income if and when you reach age 85, you don’t have to count those assets when you calculate how much you must withdraw from your tax-deferred accounts as annual required minimum distributions (starting at age 70½).

Great news, right? Maybe. It remains to be seen whether the rule change will spark interest in this interesting product. So far, demand has been low. But, in my opinion, ALDAs are the perfect antidote to certain types of financial insomnia.

Here’s the ALDA story. Let’s say you’re 60 years old, you have $500,000 in savings, and you’ve inherited dynamite genes (with long telomeres). You could take $32,000 of that half-million and buy an ALDA that pays you $2,000 a month starting at age 85. If you died before then, you’d get nothing.

Why make that bet? Because you could spend your remaining $468,000 in savings without the anxiety about outlasting your money that plagues many retirees. Many people—including people with ample savings—clip coupons and skip vacations during retirement because they’re hoarding their money against the possibility that they might live to 100.

An ALDA takes that problem off the table, without requiring you to surrender control over a large percentage of your savings. It may even be cheaper in the long run than buying a variable annuity with a living benefit guarantee and paying a 1% fee each year for the rider.

Like the idea, but can’t tolerate the thought of forfeiting the $32,000 due to an early demise? Then buy an ALDA with a death benefit. In that case, however, the upfront cost would be almost double—$63,000 for $2,000 a month at age 85, according to one quote—and you would have to count those assets toward your RMD. Uncle Sam won’t let you have it both ways.

Written by Kerry Pechter

There are many reasons why it is crucial to make sure you update the beneficiary on your annuity accounts.  Even if your will says that one person should receive your annuities and other money once you die, the person you have listed as your annuity beneficiary with your insurance company will get your annuity funds.  In the Chicago Tribune’s Local Naperville section, John Seyman answers some annuity beneficiary questions in the article “Beneficiary in annuities and IRAs.” Some of the highlights are below.

If you have inherited an annuity, it is not difficult to get your money once you prove that you are the beneficiary.  You will need to fill out a specific request form with the annuity provider and send them a copy of the deceased’s death certificate.  Even if you have a will stating that you are an annuity’s beneficiary, you still have to fill out the request form and ensure that you are listed on the annuity paperwork as the beneficiary.  If you are not, the annuity money will go to the listed beneficiary.

There may be some tax issues that arise if you receive a lump sum payment as an annuity beneficiary.  You have to pay federal “ordinary” income tax on any annuity gains that are above the paid premiums.  Depending on your tax bracket, this income tax could be higher than the capital gains tax that would have been paid had the deceased still been alive.  There are a few different ways to defer these taxes depending on the type of annuity.  If you are the deceased’s spouse, you can transfer your death benefit annuity to another IRA annuity without tax penalties.  You could also transfer the annuity to a non-qualified “stretch annuity” so that your taxes will be paid yearly as you receive your annuity money.  Another option is annuitizing your death benefits, so that you will get great tax benefits but will lose access to the lump sum.

Non-qualified annuities are those products sold by insurance companies which don’t have ties to other federal or tax programs.  Qualified annuities have an affiliation with other federal or tax programs like an IRA.  These qualified annuities offer you both the advantages and disadvantages of their associated programs.  The difference in taxes is significant.  You will pay taxes on any earnings above the premium basis for a non-qualified annuity that you have inherited.  With a qualified annuity, you’ll pay ordinary income taxes on all of your proceeds as a beneficiary.

Written by Rachel Summit

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So-called “longevity” annuities—contracts that you might buy at age 65 but wouldn’t receive payments from until and unless you reach, say, age 85—are perhaps the cheapest way for people to insure themselves against the risk of living to age 90 or 95 and running out of money along the way.

That hasn’t made them popular, however. One reason for low sales is that the tax rules have discouraged them. The rules say that at age 70½, owners of qualified accounts—tax-deferred 401(k)s and IRAs, for instance—must move a certain amount of the qualified money out of the accounts each year and pay ordinary income tax on the withdrawal. These are called “required minimum distributions.” In the past, if people put qualified money into a longevity annuity, they wouldn’t be able to comply because the money is locked up until they reach, for instance, age 85.

In February, the U.S. Treasury Department issued proposed regulations to remove that obstacle. Under the new rules, as long as a person puts no more than 25% of their qualified money (up to $100,000) in a longevity annuity, then the money won’t count toward the base on which requirement minimum distributions are calculated. The income payments must also start no later than age 85.

The annuity would have to be a pure “longevity” annuity, the government stipulated. In other words, the contract could not feature a cash-out option or death benefit that would give the buyer (or his beneficiaries) part of the money back if the buyer died before age 85.

The new regulations will allow employers to begin offering longevity annuities as an investment option in retirement plans, thus allowing them to contribute gradually to a longevity annuity during their working years instead of paying a lump sum at retirement.

At current rates, a 60-year-old man might pay about $32,000 for a longevity annuity that pays an income of $24,000 a year starting if and when he reaches age 85.

If your health is poor or you truly don’t think you’ll live well past age 85, a longevity annuity might be a terrible bet. But if you think there’s a strong chance that you will live 90 or 100, a longevity annuity can be a sensible alternative to hoarding money against the possibility that you might live that long.

Written by Kerry Pechter

A recent article on Cincinnati. com by insurance agent J. Brendan Ryan gives some added insight into the importance of using annuities with longevity insurance.  In “Longevity insurance may be for you,” we are reminded of all of the risks associated with retirement, not the least of which is longevity risk.  While many people don’t worry about living too long, there is a real danger of living longer than your money will last.  Annuities are a great way to grow money tax-deferred and a lot of people use them for that purpose.  But they are also an important way to receive retirement income that you cannot outlive.

Whether you purchase an immediate annuity to receive income right away or defer your annuity until some point in the future, you have the option of receiving income over the rest of your lifetime.  Your payout is based on a number of factors like age and life expectancy.  For those who live longer than their life expectancy, they have gotten a “mortality gain.”  If you die sooner than expected, it is a “mortality loss.”  There is a lot of focus given to the worry that one will die suddenly and “lose” the money put into their annuity.  Thinking of annuities as longevity insurance is a good way to remember why they are so important.  You use insurance to protect you in case you total your car or your house burns down.  If those things don’t happen, you aren”t upset that you protected yourself just in case.  Think of annuities the same way; if you don’t live longer than your life expectancy, you at least were protected just in case you had.

Longevity insurance is a new product and not many annuity suppliers know much about it.  It is, in essence, an annuity.  You make a lump sum payment and your money is held for a specified period of time.  If you are alive at that point in the future, you will receive annuity payments for the rest of your life.  In the riskiest form, you would not receive any refund if you died before the specified date.  But by taking smaller payments in the future, you could add death benefits or make your annuity joint with a spouse.  It’s up to you to decide what type of annuity you want with your longevity insurance.

Written by Rachel Summit

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