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An Immediate Annuity Guarantees Life-Long Income. Imagine that your clients are finally enjoying the freedom and fun of retirement. Their children have flown the nest, the pressures of a career are behind them, and they are in good health and able to travel, socialize and pursue interests such as volunteer work. There’s just one nagging worry. They are not sure just how many years of retirement they are facing, and planning a life income that could last to a ripe old age is a challenge.
Living a long and healthy life is wonderful, but an extremely common concern for retirees is that they may outlive their savings. Americans are living longer than ever. At the same time, issues with corporate pensions, the Social Security system and a volatile stock market do little to allay fears of running out of money. One answer could lie with a little-known insurance product called an immediate income annuity, also known as a life annuity.
One of the great features of life annuities is their ability to provide your clients with income for the rest of their days – in effect, a lifetime stream of income that your clients can never outlive. Even if they live to a ripe old age of 120, they are still guaranteed payment from the insurance company if they chose to receive annuity payments for life. (Other payout options are available as well, known as “period certain annuities.”)
With all of the different kinds of investments out there, your clients may have heard of deferred annuities, but were never really sure what they were. Deferred annuities can be a great way to put away money for the future, and taxes do not have to be paid on it until later in life. With these ways to save, your clients can earn much more on their principle than they would with a standard interest bearing bank account.
Deferred annuities give clients a contract with an insurance company that allows them to invest a little at a time for a prescribed number of years, and then at the end of that period they can either get a lump sum payment, or they can turn it over to an immediate annuity. There are penalties for early withdrawals which varies from company to company and they usually last only until the account has broken even, which also differs between investments.
Fixed Equity Indexed Annuities
Fixed equity index annuities have grown in popularity among retirees to the point where as many as 30% of all annuities sold are now indexed to a popular fund, index, or other investment product.
Index annuities are annuities based on the value of another investment product. For stocks, the most common is the S&P 500 index. An annuity based on the value of the S&P 500 index will rise, but never fall with subsequent one-year changes in the value of the index.
Be advised, the way interest works in fixed equity indexed annuities is different than that of traditional annuities. The insurance company writing the note will buy a one year option in the specific index to be tracked. At the end of the one year term, if the index is up from a year ago, then the option is cashed out, and the proceeds are added to the value of the annuity. At that point the insurance company buys another option for the next year. However, if the index has dropped in the one year term, the option is left to expire and no interest is accrued for that year. You can see why these products are so popular as they offer upside with zero downside. Plus, like all annuities, the growth is tax-deferred, so you can rack up profits before ever paying a single dime to Uncle Sam.