Unlike other types of vehicles, annuities are the only financial instrument capable of paying a guaranteed lifetime income. They are the only one on the planet. No individual investor can duplicate what insurance companies can offer you with paying you a guaranteed income stream.
Nor can any other asset class do what annuities do. They have contractual guarantees backing them.
Dollar-for-dollar capital reserve requirements, as well as mortality estimates built into every single payout by the insurance company, makes these income promises quite dependable. In this sense, annuities have a monopoly on lifetime income.
You can choose to receive guaranteed income for a certain timespan. Say you need guaranteed income for just 10 years. Then your guaranteed income can be structured to last for that long. Or you can receive guaranteed income for the rest of your life, regardless of how the markets perform.
Maximize Lifetime Income for You and Your Spouse
You could even put the insurance company on the hook for paying you guaranteed income for you and your spouse’s lifetimes. But it should be noted that the more guarantees you have in your payout, the lower the payout will be.
A straight life payout will pay you the most money every month out of all of the available payout options. Joint life and life with period certain options will pay less because there is less chance that the payout will stop when you die.
But the biggest advantage of the guaranteed payout? The insurance carrier must continue to pay you your monthly payment even if you completely deplete the amount of money that you originally used to purchase the annuity.
Lifetime Income Keeps on Giving
The insurance company can’t stop paying you if you outlive your principal and earnings. And perhaps the only real disadvantage here is that once you annuitize the contract (a one-time event that converts your annuity contract from accumulating money to paying it out) you are effectively surrendering control of your money.
Once the payout begins, that switch-to-payments change can’t be stopped or altered for any reason.
Another disadvantage of annuities is that on one payout option, the insurance company will keep any excess money in the contract that isn’t paid out before payments stop.
Why Most People Don’t Choose the Life Payout
With a straight single life payout, say someone purchases a $100,000 contract and then starts withdrawing $500 a month ten years later when they are retired. The insurance company will keep the remainder of the money if the annuitant dies after receiving only one payment.
This payout option is also called a life-only payout. However, with other payout options, your heirs will receive the remaining sum of money.
For this reason, most people combine a life payout with a period certain, such as 20 years. Then, if they die before collecting back the entire amount that was originally put into the contract, the insurance company must continue to make payments to the beneficiary on the contract until 20 years of payments have been made.
So, say someone chooses a life payout with a 20-year period certain and then dies three years later? Then the insurance carrier must continue to make payments to the beneficiary for the next 17 years.
This also holds true for joint life payouts, joint and survivor payouts, and either type of joint payout with a period certain.
It’s also possible to simply choose a period certain to receive your payments, such as 30 years. As with a life payout with a period certain, the insurance carrier must make good on its promises.
It must make the remaining payments owed to the beneficiary on the contract if the annuitant dies before collecting 30 years of payments.
Other Options if You Want More Control of Your Money
If you want to keep control of your money, you don’t have to “annuitize” your annuity dollars, or convert those monies into a series of payments over time. Instead, many fixed index annuities come with a “lifetime withdrawal rider” that lets you receive lifetime payments.
The rider also lets you keep some control over your money, including how and when you can access some of it. Some lifetime withdrawal features with fixed indexed annuities also allow you to turn on and off income at will, with certain conditions.
This can be a handy feature for tax years when you don’t need the income. Again, your financial professional can walk you through your options and see if a contract with this feature might make sense for you.
Do Annuities Pay More Than Other Instruments?
Not only can annuities pay out a guaranteed stream of income for life. They can almost certainly pay more than many other types of assets. You might want to take a good look at them especially if you are looking for sufficient income for life.
For example, if you compare a guaranteed annuity payout from a $100,000 purchase with the income generated by the purchase of a $100,000 corporate bond fund, the annuity payment is likely to beat the monthly interest generated by the bond fund.
This is because the annuity company can spread its risk out over thousands of policyholders. Meanwhile, the bond fund can only pay interest based on the prevailing interest rate environment.
Even if rates increase, thus generating more interest, the share price of the fund will decline to offset this. This is because bond prices and interest rates are inversely related.
When interest rates go up, bond prices decline and vice-versa. Your principal isn’t guaranteed in a bond fund, even one that invests solely in Treasury securities.
Of course, you can invest directly in Treasury securities and get a guaranteed interest rate, but chances are it still won’t be as much as an annuity can pay.
The same holds true for municipal and corporate bonds and bond funds as well as CDs and savings bonds. It’s true that interest rates do have an impact on annuity payouts, as payouts are higher when interest rates are higher.
Resilience in Low-Interest Conditions
But the value of the annuity payments won’t decline when rates rise. Once the contract is annuitized, the insurance company assumes all of the various types of investment risk. This includes market risk, interest rate risk, and reinvestment rate risk.
If you need a guaranteed stream of income that you can’t outlive no matter how long you live, then an annuity may be right for you. Consult your financial advisor today for more information on annuities and how they can benefit you.
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