In the golden era of career based retirements, everyone could count on a company paycheck for life in retirement. Unfortunately, in today’s new world economy, fewer and fewer employees are leaving jobs with defined benefits programs that take care of their income and health benefits. So what options do workers who have invested a lifetime of dollars into 401Ks and IRAs have for lifetime retirement income?
For those looking to create their own personal pension styled retirement, one of the options is an immediate annuity. The immediate annuity is often compared to a pension due to the similarity in how benefits are paid out and end; while both may have spousal provisions, it is typical for both to have benefits tied to a lifetime payout – where benefits end at death.
Watch as the Annuity Guys® look at the gold standard of annuities – the immediate annuity, including some of the options and strategies that people should know about when considering an immediate annuity.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
In the simplistic sense with an immediate annuity you give the insurance company a lump sum and in exchange the insurance company agrees to provide a payment stream for a set number of periods – or for the rest of your life.
An excerpt from the Annuity Guys® book “The New Retirement” covering immediate annuities.
Immediate Annuity Options
Traditional immediate annuities offer a fixed periodic payment in exchange for an initial lump sum of cash known as a premium. This type of annuity typically will not allow future access to the initial cash paid into the premium funding the immediate annuity. In essence, the cash asset or lump sum allocated to the immediate annuity is forfeited and is no longer accessible in its entirety. It is instead converted to a stream.
Throughout the years, there have been some modifications to the original immediate annuity design. Many of these annuity features – which may or may not be available on all immediate annuities or offered by all insurance companies, are discussed below:
Inflation Protection: With this feature, the immediate annuity income payments offer some form of a hedge against inflation. Here, the annuity owner may choose to have his or her income payments increase by a certain percentage each year, typically around 3 percent. Another choice may be to have the annuity income payments actually tied to an inflation measure by the use of a consumer price index. When either of these options are chosen, the initial payout of the annuity usually starts at a lower income level.
There are several different ways to structure an immediate annuity with regard to the income payment options. These options include:
Refund, Installment, & Period Certain Death Benefit Options: The refund option on immediate annuities has typically been either a cash refund or an installment refund, ensuring that at the annuity owners/annuitants pre-mature death the beneficiary will receive an amount of money that represents the difference between the initial premium and the amount of the income payments that the annuitant received during his or her life. These options, however, reduce the amount of the systematic income payout when comparing to life only with no beneficiary benefits.
Variable payments: With variable immediate annuities, the annuitant is allowed to direct the initial allocation into various investment options such as mutual fund^s – aka–sub-accounts. Therefore, depending upon the investment performance of the sub-accounts, the annuitant’s periodic annuity income payments could certainly go up or down.
Life only: A life-only immediate annuity can also be referred to as a straight life annuity. This means that the annuitant will receive the highest allowable annuity income payments based on his or her average life expectancy, regardless of how long that duration may be. At death payments will cease and all of the initial premium will be to the insurance company’s benefit or detriment based upon the annuitant’s actual date of death based on the life expectancy underwriting calculations.
Certain period: This structure is not considered to be a life annuity. Rather, the annuity payments will only go on for a fixed or certain period of time, such as five, ten, or fifteen years. Even if the annuitant is still living at the end of the stated time period, the annuity payments will cease at that time. However, should annuitant pass away within that time period, income payments will continue to be paid to beneficiary(s) until the period of time ends.
Life with period certain (or certain and life): This immediate annuity payment option structure is a combination of both the life and the certain period structures – meaning, the annuity will pay income benefits to the annuitant for life with a smaller income amount than straight life only. However, if the annuitant passes away before the end a specified period of time, of say ten years, then the beneficiary(s) will continue to receive income payments from the annuity until the end of that ten-year time period.
Life with cash refund: This can be considered a money-back **guarantee annuity. The income benefit payout is for life. If the annuitant passes away before all initial premium has been paid-out, the total amount of payments paid to the annuity owner will then be subtracted from the initial premium paid and the balance will be paid to the annuitant’s beneficiary(s) in a lump sum payment.
Life with installment refund: This, too, can be considered a money-back **guarantee annuity. This immediate annuity payout option is similar to the life with cash refund option, except that the annuitant’s beneficiary(s) will continue to receive the monthly annuity income instead of a lump sum until the full amount of the premium has been paid back.
Joint and Survivor: This annuity income payout option will **guarantee that the income payments will continue for the lives of both annuitants. Along with this, period certain options can also be added. This particular payout option is mainly used with married couples in order to provide income as long as either one is still alive.
COLA SPIA: This annuity income payout structure has payments that increase or decrease by a floating percentage which fluctuates when tied to a consumer price index each year. In this case, however, the initial income benefit will likely be lower compared to those which are non-COLA (cost of living adjustment) annuities.
Read more on immediate annuities in the New Retirement – download the e-version today free.