Annuity FYI Blog

If you have any questions or interest in a secondary market annuity, you can get a FREE guide from Annuity FYI.  We have been talking about secondary market annuities for awhile now because they can have fixed compounded effective yields up to 7.75%.  The Secondary Market Income Annuities Buyer’s Guide will answer your questions and give you a plethora of information on the products.  The guide is free to all visitors of Annuity FYI’s website, so sign up here for our SMA Buyer’s Guide if you’d like one.

Secondary market annuities come about when someone who has won money to be distributed through an annuity decides to sell their future annuity and receive a lump sum payment in the present.  You can purchase that annuity at a discounted price and receive the future payouts when the guarantee period is up, sometimes immediately.  These fixed annuity rates tend to be much higher than the rates of other fixed annuities, variable annuities, bonds, or CDs.  Find more information on secondary market annuities in the SMA Buyer’s Guide.

There are many things to consider when you are preparing for retirement, but most couples disagree during the decision making process.  According to the Minuteman News Center’s Joe Mont, a “Study finds couples (are) at odds over retirement.”  Fidelity Investments performed a study of 648 married couples between the ages of 46-75 regarding retirement issues and products like annuities.  Among couples, 33% did not agree on the type of lifestyle they would lead in retirement, so this is the first issue couples must overcome.  They cannot make a plan for retirement without knowing how they will spend their time, hence how much money they will need.

Well over half of the couples surveyed, 62%, did not agree on the age at which they would retire.  How long you plan you plan to work is a big determining factor in your lifestyle and finances in retirement, so couples need to get on the same page with that decision.  58% of couples said their advice to newlyweds would be to make all of their decisions together regarding finances.  This includes everything from variable annuity reviews to how much to spend on a mortgage.  Figuring out whether you’ll need or want to work in retirement is something that 47% of recipients didn’t agree upon.  Only 58% said that they are working with a financial professional to reach their retirement goals.  Ideally, everyone should look for help to make sure they will not outlive their savings.

Out of those surveyed, 63% have a detailed retirement plan to ensure that they will not be subject to that longevity risk.  While you should review your retirement portfolio yearly, 57% of the couples did not agree on how often these reviews should take place.  Inflation was a concern for 42% of respondents; maybe the others have already planned for that with inflation adjusted annuities.  19% worried that their social security payments would be reduced during retirement.  The best immediate annuities can help guarantee a lifetime of income should social security be reduced or not enough to cover your expenses.  Unexpected health care costs were only a concern for 31% of couples.  Out of pocket costs could exceed $230,000 without employer sponsored health insurance, so make sure that you have an insurance plan in place long before retirement.

The New York Times article “The Annuity Puzzle,” by Richard Thaler, ponders why more people with control over their retirement income do not choose annuities.  The guaranteed lifetime income offered by annuity products seems like a “no-brainer” over other investments where you might run out of money before your death.  But even so, many retirees do not opt for annuities when choosing their retirement vehicles.

A few reasons are suggested for why more people are not purchasing 401k annuities when they retire and transfer their 401k plan money into an investment from which to draw down.  One is that they’re worried an annuity hurts their heirs.  But investors can opt for a death benefit annuity or set aside a portion of their savings for heirs before purchasing their annuity products.  There is also the risk without an annuity that you could run out of money and your heirs would not only inherit nothing, but may have to pay for your care and expenses in your later life.  With an annuity, your money will last as long as you live and your heirs wouldn’t have to worry about that.

Another reason more people may not look to annuity products is that they appear to be complicated and it can be a frightening purchase.  While there are definitely complicated annuities out there, with the help of an expert you can find a product that works for your situation and will ease your financial worries about retirement.  It can also be hard psychologically for people to understand the importance of annuities.  They think it is a gamble and that you have to live to a certain age to make the purchase worthwhile.  Annuities should actually be seen as insurance protecting you should you live past the age where other investments run out.  With a fixed monthly income guaranteed over the rest of your lifetime and in some cases, your spouse’s lifetime, annuity products can also help you better determine when you have enough money to retire.  Providers of annuities may need to get more people to compare annuities and spread more information on the value they bring in financing your retirement.

According to a recent survey, investors are quite uncertain with the retirement issues surrounding them and could use more help from advisors.  Danielle Andrus of Advisor One says that many people are not happy with the support offered from their employer’s retirement plan in her article “Unsatisfied and Uncertain–Investors Need Advisors’ Help: Retirement Report Roundup.”  Cogent Research’s study of investors found that more than half were unhappy with their current situation and need advisors’ help transferring 401k annuities and other retirement savings plans.  Those who are happy with their current employer plans are three times more likely to roll their money over with the same company holding their 401k or 403b plans.  Investors were most satisfied with Fidelity, Wells Fargo, Vanguard, Merrill Lynch, and Charles Schwab.

LIMRA research has found that half of pre-retirees have not even considered the possibility of outliving their income.  Fewer than one third of those set to retire in the next three years actually have a written retirement plan in place.  Advisors will be able to help pre-retirees and retirees make decisions to carry their savings throughout their lifetime.  Annuities with guaranteed living benefits have been increasing steadily and were up 8% in 2010.  With $81 billion in sales of annuities with guaranteed living benefits in 2010, the total assets of variable annuities carrying that rider went to $521 billion during the fourth quarter of last year.  New annuities with these riders were introduced in 2010 by Hartford, Principle, and Protective.  Our experts can help you with 401k annuities and guaranteed living benefit riders that will make your money last over your lifetime.

Our series of real world scenarios continues.

A bank executive talked my 90-year-old mother-in-law into purchasing an annuity to increase her yield from a CD. Is this a mistake (considering her advanced age), or was it a good move to avoid probate in the case of her death?

Whether the annuity purchase was a wise move depends on the terms of the annuity she purchased. Call the insurance company and ask them the following questions:

1) What is her current interest rate, and what is the guaranteed minimum rate in future years? The minimum rate should be at least a guaranteed 3% return, and the company should have a strong renewal rate history if the contract is not guaranteed at a specified rate for the entire term of the contract. Ask for a copy of their renewal rate history to see how they’ve treated other policyholders in past years.

2) Is there a Market Value Adjustment (MVA), and if so, is it waived at death? Some annuity contracts contain MVAs or excess interest adjustments. These adjustments can be positive if rates are lower historically than when you purchased your contract, or the adjustments can be negative in the event that interest rates are higher than when you purchased your annuity. These MVAs can be very advantageous if the contract was properly purchased. However, at death you want to make sure if it is negative the company will waive the negative MVA. Note: most companies will pass along a positive MVA to the heirs in the event the owner passes away.

3) Are the surrender charges waived at death? Make sure her interest rate is pro-rata so that her heirs will receive 100% of the earned interest penalty free. Also, make sure that there is a nursing home bailout and a medical bailout, so that if she becomes ill and needs to be admitted to a hospital or confined to a nursing home there are no penalties.

4) Is she both the owner and the annuitant? Make sure she is. If they named an heir as an annuitant, some life insurance companies will not allow owners and annuitants over a certain age, so agents and planners and brokers will recommend that you name a younger owner or annuitant (i.e. a child) in order to qualify for the annuity. Understand that this may mean that the annuity will not be available without penalty upon the death of your mother. In other words, if your mother is not the owner and annuitant it is likely that the insurance company will not waive any surrender fees or negative MVA upon her passing.

5) What is the annual free withdrawal amount? As a rule of thumb, most insurance companies allow for a 10% free withdrawal. However, in recent years some more restrictive plans allow for low or no free withdrawals during the surrender period. At age 90, your mother-in-law may want income from her annuity to maintain her quality of life. If this is the case with you mother-in-law, you’d want an annuity with free withdrawals.

As with any investment whereby you can name beneficiaries, annuities allow you to avoid probate, which is a major benefit. Provided that there are no-surrenders at death, a negative MVA is not applicable, and her required income doesn’t exceed the free withdrawal amount, then she’s going to be just fine and this could be one of the best annuities for her.

If you want to discuss in person with an Annuity FYI Expert, please do not hesitate to contact an Annuity FYI expert for more information.