Where the annuity income game is really played
The three-card monte hustle has returned to the streets of New York City to fleece the uninformed and overconfident dreamers of their hard earned money. The “annuity-sales monte” is targeting well-meaning consumers as well.
It’s very important to know how the annuity sales game is being played and where to focus.
“Annuity payout” defined
received a call this past week, and the knee jerk comment made was “I hear annuity payouts are low, so I’m going to wait.” Annuity payouts?
All annuity lifetime income streams are primarily based on your life expectancy at the time you take the payment. If you set the payment up joint, the lifetime payout would then be determined by both of your life expectancies. Interest rates do play a role in pricing, and if rates are higher you will get a better “payout.” However, if you are going to time interest rates, then good luck to you. Actuarial tables are always the dominant force when it comes to annuity payouts, and those haven’t changed in a while.
Getting your money back
All annuity payouts, when you turn on a lifetime-income stream, are a combination of return of principal and interest. I know that it is a common agent sales pitch to sell the dream of the accumulation value keeping up with the money being taken out, but that is just proposal pie-in-the-sky nonsense. It sounds good in a sales pitch, and is what people want to hear, but won’t happen in most cases if you outlive your life expectancy.
Your bet with the annuity carrier
When you turn on a lifetime income stream from any annuity, you are in essence making a bet with the issuing carrier. You are betting that you are going to live longer than their actuaries’ think you are going to live. And if you do outlive your life expectancy, then the annuity company is on the hook to pay you.
That’s the value proposition of an annuity lifetime income stream. You are transferring the risk to the annuity company to pay you regardless of how long you live. It’s also important to know that you can structure those transfer of risk payments so that 100% of the money goes to someone in your family if you pass away before your life expectancy. In other words, the annuity company won’t keep a penny.
Taking your eyes off the prize
In the world of indexed and variable annuity sales, policy add-ons like upfront bonuses or high percentage income riders are where the “annuity sales monte games” are played. Don’t be distracted by these sales gimmicks, and always make your decision on the contractual guarantees of the policy.
Just because an annuity has an upfront bonus or a high percentage income rider doesn’t mean that it offers the top contractual income guarantee when compared with other products. More often than not, the annuities that have no whistles and bells have the highest guaranteed payout.
100 pennies in a dollar
Annuity companies have the big buildings for a reason. That reason is that they don’t give anything away. Trust me on this fact. If there is an upfront bonus or high percentage income rider, then something is probably being taken away within the policy. That’s just common sense if you think about it, but is too often forgotten by too many dream seeking annuity buyers.
Actuarial payout is the Holy Grail
Where you need to always focus your attention with any lifetime annuity payout is the actuarial percentage used to determine the guaranteed income stream. This percentage is based on your life expectancy. The older you are, the higher your actuarial percentage and the higher the payout. This is where the games are played with agents, carriers, and annuity products. Always keep your eyes on the actuarial payout percentage. That is the annuity Holy Grail when determining income.
Whether you need lifetime income to start right now, or at a future date, ask your agent or adviser to show you the highest contractual payouts with five or more highly-rated carriers. From those guaranteed numbers, your decision should be very simple.
Originally published 1.13.15 by MarketWatch.com – http://www.marketwatch.com/story/where-the-annuity-income-game-is-really-played-2015-01-13