fixed annuity

Posted: Thu Aug 29, 2013 04:32 pm Post Subject:

Fixed indexed annuities as they exist today, are reasonably good products. But there are so many twists and turns in the contracts, that selection of appropriate annuities requires a lot of reading. Most agents don't do that part. They simply accept the company's marketing materials as gospel and make their proclamations that this is the next best thing since sliced bread.

While the marketing hype surrounding FIAs is reasonably accurate, "You get most of the upside of what the stock market is doing, with none of the downside," the fact remains that during the accumulation phase, a 0% rate of return will result in a loss of cash accumulation value to pay the annual policy expenses, which can be in the tens or hundreds of dollars, depending on the contract and cash value. That will ultimately have an effect on the amount of monthly income one will receive if the contract is annuitized.

If the contract is annuitized, a 0% rate of return will result in a stagnant income amount, even when inflation is running at speed. The hazard in all "fixed" annuities is the loss of purchasing power due to inflation.

To avoid that, perhaps the best use of annuities is to supplement your cash flow when your available monthly income no longer meets 100% of your needs. In other words, if you currently are making ends meet with $1000 of Social Security Retirement benefits, $1000 in pension plan distributions, and $1000 from some part time income, and are not yet forced to take RMDs from IRAs or other qualified accounts, in a few years those fixed monthly income payments may have increased slightly due to inflation, but maybe your part time income has been reduced to $500, and because of inflation, your cash flow needs are now $3000 per month, but you're only collecting $2750. At that point, you approach an insurance company and say, "I need at least $250 per month in income for the rest of my life. How much will that cost?"

Based on your age, the company can tell you a fixed (or indexed) immediate annuity will provide $300 per month for $xx,xxx.00. You take money out of savings, stocks, bonds, or possibly cash value from life insurance (not always advisable) and purchase the immediate annuity to fulfill your income need today.

Because inflation marches on, in a few years, you'll need to bulk up the cash flow a few hundred dollars per month. So you repeat the process. Since you're a few years older, the cost for another $300 per month will be slightly LOWER than the first annuity. You liquidate some more assets, pay the insurance company, and now you have income from two annuities in addition to all other funding sources.

A person can have as many annuities as they have cash to fund -- you don't have to be healthy, and you simply repeat this process as often and as many times as you need to, until the insurance companies will no longer write you a new annuity. When you die, the income payments could terminate, according to the distribution option you have chosen.

What you don't do in this strategy is put all your cash assets into one annuity today. Which is not what most agents would tell you to do. Most agents will try to get all of your money into a single annuity -- which is rarely in your best interests. Just like you wouldn't (or shouldn't) put all your invested money into a single security, you don't want all your cash in one annuity. You already know the proverb: "Don't put all your eggs in one basket."

Don't rely on the words of the agent who tells you there are income guarantees even if your don't annuitize the contract. There can be limiting language in the contract to give the insurer an escape mechanism. The recent pattern in annuities has been that insurance companies are retreating from those guarantees because of the low interest rate environment we've been stuck in for the last five years or so. They cannot afford to support those guarantees, and they are disappearing from many new annuity contracts.

Finally, you don't necessarily want to do business with an insurance company whose name you've never heard, but seems to be offering a much better return than the majority of other, well-known companies. There's a reason for that. Do your due diligence and research the insurance company at the AM Best website. Only do business with companies rated "A" or higher, or only "A+" or "A++".

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