by marcp » Tue Aug 14, 2012 10:15 am
What is the recommended percent of a draw down of an annuity valued at $300000.00? With a probable life expectancy of 20 years. It also includes same amount death benefit that can be tapped in to. Are the payouts monthly or yearly? Just curious. Any advice or thought appreciated.
Posted: Wed Aug 15, 2012 06:07 am Post Subject:
It also includes same amount death benefit that can be tapped in to.
You misunderstand the annuity slightly. The Cash Value of your annuity is equivalent to (or less than) the death benefit payable to your beneficiary if you die prior to annuitizing the contract. It is not a separate fund.
As you draw cash out of the contract, you deplete the death benefit for your beneficiary by the same amount.
What is the proper amount of draw? Most persons should not draw down more than 5% of the beginning of the year cash value (even if the contract permits 10% free of surrender charges. Assuming you are past age 59-1/2, you can create any kind of systematic withdrawal plan that you prefer. Fixed payment, fixed period, decreasing payment, increasing payment. It's up to you and the insurance company to agree on something. Without annuitizing your contract, you could change your withdrawal plan at any time, or take additional distributions at any time.
If you earned 0% interest, a fixed payment of $15,000 per year would simply exhaust your annuity's cash value in 20 years. Because your annuity (assuming it's not a variable annuity) has a minimum interest guarantee, your money will last a little longer.
A 5% draw of each year's [reducing] annual contract value with 0% interest would not exhaust the policy's cash value in your (or your beneficiary's) remaining lifetime (it would still provide about $0.50 per year after more than 200 years of decreasing payments with no interest added!). After 10 years of payments, your annuity payment would be a bit more than $787 per month, and your annuity value at the end of that time would still be more than $179,000 (having taken out $122,915 in ten years' worth of [decreasing] annual payments. Adding a small amount of interest each year, such as 3%, just makes everything a bit better for you.
Understand that as you draw down the cash value, you have less to earn interest on each year.
You ask if the payments are monthly or yearly. That's entirely up to you. $15,000 annually would be paid at the rate of $1,250 per month. Depending on how long you've owned the annuity, it probably all represents interest initially, making 100% of your annuity payments taxable to you as income in the first year of distribution. Interest added each year will be paid along with other long term interest before any principal will be distributed tax-free from a non-qualified annuity.
In this declining payment example, if you were credited 3% interest only once per year, your next year's account value would be $293,550, and your 5% annual draw would equal $14,677.50 ($1223.13 per month). Again, most or all taxable. And the payments would last a few centuries.
If you took a $15,000 fixed payment annually ($1,250 monthly) instead, with 3% interest credited at year end, your annuity would exhaust in 30 years (with a final payment of $8338 in the 30th year). Your $300,000 annuity would have returned $143,338 in additional interest over that time (all of it taxable as income when received). Modern annuity contracts can offer you a guaranteed lifetime income benefit similar to this without annuitizing, but the annual payment amount would be somewhat smaller. (The insurance companies will probably stop offering this feature soon, as their actuaries are predicting the policies will ultimately cost more than the insurance company has been counting on the last several years.)
Not too bad. Depending on your age, annuitizing could pay more per year with a guarantee of payments for your entire lifetime. Even beyond 30 years. But you might have to agree to leave any undistributed money remaining in the contract with the insurance company in order to get that larger payment. It is one of several standard annuity distribution options. Others are available, but each will result in lower payments and different taxation issues.
When making a decision to start taking money out of an annuity -- whether through a systematic withdrawal plan or by annuitizing, seek out independent, unbiased analysis such as this to help you evaluate all of your options. Most agents do a poor job of helping their clients in this regard -- because they don't understand the concepts and/or cannot do the math. The insurance company will only give you answers to the questions you ask. Don't ask all the right questions and you won't get all the right answers,
Posted: Thu Aug 16, 2012 08:02 am Post Subject: Cost of Life Insurance
Cost of Life Insurance
[Link removed per TOU]
Cost of life insurance ultimately depends on many factors including your age, gender, weight, if you’re a smoker, the amount
you wish to take out, the period you plan on taking it out for, whether you’re a healthy weight, have an illness (terminal or not)
and whether or not you work in a hazardous environment.
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