Most Protect Their Immediate Annuities

While attending the Financial Planning Association’s annual convention in San Diego in mid-September, I happened to attend a presentation where an annuity expert described the advantages and disadvantages of single-premium immediate income annuities, or SPIAs. SPIAs are contracts where you pay an irrevocable lump sum to a life insurance company and the insurer pays you a guaranteed income—for as long as you live, or (optionally) as long as either you or your spouse is living.

The expert knew his subject, no question about it. But he also helped perpetuate a myth about income annuities—a myth that unfortunately makes many people unnecessarily afraid of buying them.

He said that when you buy an immediate annuity, if you happen to die within a few years of buying the contract, you forfeit whatever portion of your investment hasn’t been paid to you yet.

That’s true—but only if you purchase a pure life annuity. Most people, however, do not buy pure life annuities. Instead, they protect themselves from the forfeiture scenario by modifying their contracts.

Some buy so-called “life with period certain” SPIAs, which means that payments will continue to their beneficiaries if they die before receiving monthly payments for a specific period, such as 5, 10, 15 or 20 years. Others buy “life with cash refund” SPIAs, which means that their beneficiaries will receive a lump-sum refund of the difference between the original investment and the amount already paid out.

Many people continue to avoid SPIAs, which can serve as personal pensions and provide anchors of financial security in an insecure world, because they think they might get hit by a bus and lose most of their money. But that’s not necessarily so.

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