Which Option Works for You?
Posted on April 9, 2014
There are many annuity options to choose from when you are looking into expanding your financial portfolio.
Many wealthy people, after maxing out tax deferred options such as their 401(k) and IRA, put their most tax inefficient investments into a low cost variable annuity.
These low-cost annuities come with unexpected benefits. For instance, by not offering income guarantees, these annuities can include a wider range of investment options. The stripped-down, low-cost annuities are a bright spot in an industry still burdened by difficult market conditions.
The dominance of variable annuities is gradually eroding by several variations of fixed-type annuities, all of which are included in Barron’s top 50: fixed index annuities (offer guaranteed payouts plus the potential to participate in stock index performances); deferred-income annuities (require upfront lump sums to guarantee specified income streams years/decades to come); and immediate annuities (turn lump sums into income streams immediately).
As insurers have been tightening or eliminating income guarantees on variable annuities, they’ve been adding income benefits to their fixed index annuities, and investors are snapping them up. Though almost unheard of five years ago, now approximately 60% of fixed index annuities are sold with living benefit riders.
With fixed index annuities, insurers buy bonds and options on the index the annuity is pegged to. If the options do well, investors enjoy some of the index’s upside. If not, the options expire with no impact.
The best comparison for fixed index annuities, however, is not the stock market, but other fixed-income products. Look at the numbers…five-year CD rates are paying around 1%, while index annuities give you the ability to not lose money and potentially get 4% .
A new area of the market is giving fixed index and variable annuities with income guarantees some competition. Deferred-income annuities, sometimes known as longevity insurance, are funded immediately to set up guaranteed annual income down the road.
A year ago, only a few companies, including New York Life, Symetra, and MetLife offered these. Since then, Western & Southern, MassMutual, ING, and Protective have jumped into the market. New York Life has some of the highest payouts, and is competing directly with the living-benefit riders sold with other kinds of annuities. “Our deferred-income annuities are guaranteeing 40% more income than the average variable-annuity income rider,” says Matt Grove, a senior managing director at New York Life.
With these annuities, even waiting a few years to turn on income can make a big difference in the amount you get. New York Life is hoping this will entice younger investors, and now markets to people in the 30-40 age bracket.
The industry’s simplest product, immediate annuities, still has strong sales because companies can turn a lump sum into an immediate income stream, usually for life. In a basic contract, when you die, any principal left in the contract stays with the insurer, but you can customize products to avoid this and meet your needs. For example, you have to arrange income for the combined life expectancies of you and your spouse. Costs of these variations on the contracts show up in lower guaranteed payments.
Research shows immediate annuities can pay out more income than investors can derive on their own through their personal investments due to insurers pooling investor assets and spreading the risk. It’s these kinds of calculations that insurers do best — allowing you as the investor, to retire with peace of mind when the time comes.
Interested in learning more about the option that would fit for you? Contact me to set up a consultation!
John Bulbrook, Bulbrook Drislane – IN-FORCE ™ Secondary Market, Finance and Investments, Secondary Market, Annuities, Fixed Term Annuities, Life Insurance, Structured Settlements, Previously Owned Annuities, Pre Owned Annuities, Immediate Annuities, Factored Structured, Settlement Secondary Market Annuity, Aftermarket annuity, Inforce fixed term annuities, Inforce fixed term annuity, Inforce annuity, Deferred Variable Annuity, Inherited Annuity, Equity Annuities, Straight Life Annuity, Non Qualified Annuity, Mutual Fund Settlement, 20 Year Annuity, 10 Year Annuity, 5 Year Annuity – Click here for his Facebook,Twitter, LinkedIn, Google Plus