Annuity FYI Blog

As an alternative to long term care insurance, LTC annuities are becoming increasingly popular.  This information comes from the AdvisorOne article “An Annuity Alternative to LTC Insurance,” by Robert Bloink and William H. Byrnes.  LTC insurance helps to pay for long term care should you need it, but it can be difficult for some people to qualify for and is a tough sell since there is a good chance that you’ll never use it.  LTC annuities, however, function like a typical deferred annuity which can last a certain number of years or over your entire lifetime.  They also offer a payout usually 200-300% higher than the annuity’s face value.  If you compare annuities with LTC insurance, they seem to be a better alternative for many people now.

Due to medical condition or age, there are many denials for those applying for LTC insurance.  Requirements for LTC annuities are not as strict, allowing more people to use them as a form of protection against the high costs of long term care.  With LTC insurance, you may never need a payment from the policy and you will not be able to pass the money onto your heirs.  But LTC annuities pass death benefits onto your beneficiaries in an amount based upon whether or not you used any money for LTC care.  While the payout for an LTC annuity can be much less than that for a traditional annuity, LTC annuities have significant tax advantages.  There is a newer option for a joint LTC annuity that is a good idea for couples to look into as well.

Written by Rachel Summit

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Retirement income planning isn’t easy. It’s more difficult to figure out how to sell your investments and spend the proceeds in retirement than it is to save and invest in the first place.

Investing is a bit like putting an astronaut on the moon. Not especially hard. Retirement spending, however, is a bit like trying to bring the astronaut back to earth safely and in the vicinity of recovery ships. A much more complicated challenge.

I won’t suggest that it’s harder to spend your savings than to earn money in the first place. But the challenge of stretching limited savings over an indefinite length of time can pose some unfamiliar riddles and even a few painful trade-offs.

Annuity purchases themselves are complex. You have to decide how much to spend, how to customize the contract, and how much to reserve for emergencies. But the complexity is temporary. Once you put guarantees in place, the pressure lifts. Used wisely, annuities can make financial life in retirement much simpler.

Written by Kerry Pechter

A recent LIMRA study showed that 35% of retirees generate retirement income from annuities, but the investments only account for 4% of household income in retirement.  Most people still use social security and pensions to cover their living expenses in retirement.  But with social security’s future in question and traditional pensions making way for 401ks, LIMRA expects both the number of people purchasing annuities and the amount they contribute to household income to increase.  This information comes from the Financial Planning article “LIMRA Study: Retiree Reliance on Annuities is Small, but Growing” by Dave Lindorff.

Those interviewed had minimum incomes of $35,000, were aged 55 to 79, have been retired a year or more, and do not work at all to bring in income.  The guaranteed income is by far the most popular benefit and reason for buying annuities.  Guaranteed income benefits were prevalent in 40% of the annuities owned by interview respondents.  Around 20% of those who have annuities chose immediate annuities, according to the survey.  The best immediate annuities for this 20% varied, while the rest of the respondents carried deferred annuities.

Income was not much of a determining factor as to who purchased annuities.  Around one-third of households seemed to own an annuity product in the group with incomes under $75,000.  Those with incomes over $75,000 only had about 5% more annuities owned.  The main difference in who owns annuities was related to the amount of household assets.  Households with assets below $100,000 only owned annuities 22% of the time.  For households with assets between $250,000 and $499,000, 45% had annuity income.  And 40% of those with assets greater than $500,000 use an annuity to help finance their retirement.  LIMRA only expects those numbers to grow.

Written by Rachel Summit

According to Investment News’ Darla Mercado, financial advisors are more loyal to Jackson National Life Insurance Co.’s variable annuity products than to any other company.  In the article, “Advisers most loyal to this VA provider,” we learn that Jackson National had the best variable annuity reviews followed by Prudential Financial Inc.  Jackson moved up from second place last year to throw Prudential out of the top spot this year.

Cogent Research performed the study of over 1,500 financial advisors.  They were asked what percentage of their business was dedicated to variable annuities and they rated their happiness with certain variable annuity factors.

Jackson’s internal wholesaler support had such a high ranking that it helped them grab the top spot.  Prudential had the highest variable annuity reviews for different product features, even though they didn’t get the top spot overall.  Advisors liked their guarantees, especially the Highest Daily feature.  Jackson does have nearly 100 subaccount choices as well, which still helped them reach number one.

The ChoicePlus variable annuity from Lincoln National kept them in third place this year.  Ameriprise Financial maintained their fourth place spot year to year.  Nationwide took the fifth spot from Ohio National, who came in seventh.  MetLife was in sixth place this year as well as last.  Sun Life, Allianz Life, and Transamerica finish the top ten for variable annuities.

Written by Rachel Summit

The so-called “rollup” might be the single best reason to buy a variable annuity contract with a guaranteed lifetime withdrawal benefit. Also known as a “deferral bonus,” the rollup automatically raises the “income base” (aka “benefit base;” the number used to calculate your guaranteed annual income) by a certain percentage for each year that you don’t withdraw money from the contract.

For instance, if Ms. Smith puts $100,000 into a variable annuity contract, the initial benefit base is $100,000. For every year that she doesn’t take a withdrawal, the benefit base might grow by, for example, 5% or 6% (compounded annually) or even 10% (simple growth). In some policies, the benefit base is guaranteed to be at least double the original premium if the owner withdraws nothing from the contract for 10 years after purchase.

But, in practice, two strange things occur after such contracts are purchased. First, many people seem to believe that the rollup in the benefit base is the same as the appreciation of the account value. It is not. The account value is the actual market value of the mutual funds where the owner put her original $100,000.  In other words, the cash value of the contract. It might be larger, or smaller, or the same as the benefit base. But the rollup has no effect on the account value.

Second, a recent study by Milliman, a global actuarial consulting firm, showed no sign that retired purchasers of variable annuities with GLWBs and rollups use the rollup feature at all. Many of them buy the variable annuity and simply withdraw an annual income of 5% or 6% of the benefit base within a year or two. Milliman’s experts aren’t sure what this means. They suspect that the financial advisors like the rollups, and recommend annuities with rollups to their clients. But the actuaries see little or no indication that the clients use the rollups to full advantage.

The moral: If you buy a variable annuity with a rollup, get acquainted with it and consider using it by delaying your withdrawals.  That might be inconvenient if you buy the annuity at age 65, so consider buying it when you’re 55 years old and taking income when you’re 65. That will require foresight. But time, after all, is money. If you don’t care about the rollup, don’t buy that option. You might end up paying an annual fee for something that you never use.

Written by Kerry Pechter