Fixed Immediate Annuities vs. Variable Immediate Annuities

Before you place your money into an immediate annuity fixed, variable or a hybrid style immediate annuity, you should consider whether you would like to have a higher potential income hedge against inflation without a **guarantee where the income could actually decrease (case for a variable immediate annuity) – or – if you would prefer a payout that may not have the same potential for growth as the variable annuity^#; however, it will never decrease and it can also be graded for inflation, meaning that the income will start lower than a straight level immediate income payout and increase by a set percentage each year over time.(continued below video)
  

If you are a not a conservative investor and you embrace risk, an immediate variable annuity^# may give you the inflation hedge you are looking for. Unfortunately, the last 10 to 12 years have not gone well for these annuities. In many cases, income payouts somewhat decreased.

On the other hand, if you are conservative and not much of a risk-oriented investor, an immediate fixed annuity may give you the safety and income you are looking for. Compared to immediate variable annuities^#, the last 10 to 12 years have gone very well and they have proven to be safe, secure and financially viable.

Immediate annuities have been challenged recently by the introduction of the new living benefit riders available on many deferred annuities. They allow a lifetime income payout **guarantee, and, if the insured dies prematurely, the unspent account balance is paid out to the heirs instead of being paid to the insurance company. This innovative approach to that cannot be outlived has been well received and is being incorporated into main stream retirement planning on a large scale. It is actually in all practicality, a self-directed personal pension. Many deferred annuities now offer both options of an income rider or annuitization.

With a lifetime immediate annuity, the insurance institution risks that you may outlive your statistical life expectancy – forcing them to payout more than they received originally, including their investment earnings on the money they collected for the immediate annuity. The purchaser of the immediate annuity risks dying early and losing the hoped for benefit of a long term income stream. Since insurance companies primarily manage risk, they know that statistically they are likely to come out ahead financially by spreading their risk over large numbers. As the insured you also have an advantage since immediate annuities can be purchased without answering underwriting questions concerning your personal health and family longevity. You may know that the odds are in your favor to live much longer than the insurance company would have ever expected. Touche, you win! If you want some type of a **guarantee in case you croak early – known as period or term certain – it will lower your payout. It is also possible to have a lower initial income with an inflation-adjusted increasing payout **guaranteeing more income on the future payments.

Immediate Fixed Annuity Attributes

• A portion of a non-qualified immediate fixed annuity is tax-excluded; this is considered the immediate annuity exclusion ratio
• All income from a qualified immediate fixed annuity is taxable (IRA, 403 B)
• Contributions lump-sum only
• Invested in mostly high quality A-AAA bonds
• No risk to client. Insurance Company assumes all risk.
• Guaranteed income
• Predictable retirement income
• The longer the term, the lower the income payout
• Younger people get lower payouts
• Payout normally begins within 30 days to one year of purchase
• Minimal growth
• 1% to 3% internal rate of return
• 5- 10- 15- 20- 25- 30-year and lifetime terms
• Predictable, simple
• No annual fees
• Creditor-protected in most states

The two categories of annuities, fixed and variable – with their variations of immediate or deferred – each serve a particular purpose. It is important to look at your age, size of assets, future income needs and inflation and then do a cash flow analysis over your life expectancy during retirement. This will help you choose which annuity is right for you. Financial planner/educators can be valuable when you are close to making a decision on an annuity. Avoid insurance salesman that are just pushing their higher commission products. There is typically no cost to you when using a licensed planner or insurance agent. So it is always in your best interest to use an experienced planner/educator to avoid irreversible retirement mistakes. State laws all require annuity purchases to be made through a licensed planner or insurance agent.

Question: If you are 70 and buy a single life immediate annuity for $300,000 with a maximum payout of say, $21,000 per year, and you die after two years how much would go to your heirs?

Answer: Zero, nada, nothing would go to your heirs. It all goes to the insurance company! Consider one of the new Living Benefit Lifetime Income Rider Guarantees. It may pay around $18,000 per year **guaranteed for life; however, if you die it is possible that your heirs could receive more than the $300,000 you started with.