Something I hear far too often from people when talking about annuities is how they would never buy one. Their main reasoning, they believe the annuity company would keep the money if they died early in the contract. Of course, this only describes one (“Life Only”) of over 30 different ways of structuring an annuitized payout.
A quick way to combat the losing money concern is choosing the lifetime income guarantee but structuring the policy to make sure that 100% of any unused money goes to the listed beneficiary(s) on the policy. In other words, the annuity company does not keep a penny under any circumstance. That being said, it's up to you at the time of application to make sure that you (or someone in your family) gets all of the money. You are in full control of that decision on how the annuity will be structured.
Another common misconception is that when you own an “annuity,” you lose total control over the asset. Again, that is not true about all annuity types. It only applies to a select few. Americans are typically control freaks and like to oversee everything. That includes their money.
But we are now living in strange, chaotic, and volatile times. The stock market is a daily trampoline of emotional and monetary highs and lows that many Americans are growing tired of. To the 10,000 baby boomers reaching retirement age every single day, additional lifetime income guarantees that will add to Social Security payments are becoming more attractive.
Annuities are the only financial product on the planet that can provide an income stream that you can never outlive. Most people love their lifetime income guarantees from Social Security, so many are now looking more closely at annuities that contractually solve for longevity risk (i.e. outliving your money).
The question is, do you need to have full control over the asset while receiving the lifetime income, or do you want it to work like Social Security?
The primary types of annuities that utilize “annuitization” for contractual income guarantees are; Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs). All are classified as fixed annuities, all are regulated at the state level, and all are issued by life insurance companies. Also, all have NO annual fees and pay a very low built-in commission to the agent.
Annuities started in the Roman Times as a lifetime income pension reward to the dutiful Roman soldiers and their families. The Latin word for payment is “annua” which is the origin of the words “annuity” and “annuitization.”
All annuity payments (regardless of type) are a combination of return of principal plus interest. That’s right...you are getting your money back with interest. The goal is to draw your account down to zero. The annuity companies are on the hook to pay regardless of how long you live and regardless of how much money is in the account. Your life expectancy at the time you start the payments is the primary pricing factor with interest rates playing a secondary role.
Once the lifetime income starts, you will receive income payments as long as you are breathing. SPIA, DIA, and QLAC “annuitized” income streams are like ripping the knob off of a water faucet. You can also structure annuitization for a fixed time period (aka Period Certain) to have the annuitized payout happen for that specified duration you choose at the time of application. For instance, a “20 Year Period Certain” will pay you (or your beneficiaries listed on the policy) 20 years of payments. After 20 years, the payments stop. If you structured it “Life with 20 Year Certain,” you would be paid for life. However, if you died in year 7...there would be 13 more years of payments. Make sense?
When you purchase a SPIA, DIA, or QLAC and are past the free look period, you no longer control that asset. You are still the owner, but there are typically no liquidity or cash-out provisions within the contract. You will get your money back, but it will be in the form of payments. That’s not a bad thing, in my opinion, it’s just part of the contractual guarantee that you need to fully understand.
Not all annuity types fall under the “annuitization” banner. Variable Annuities (VAs), Fixed Index Annuities (FIAs), and Multi-Year Guarantee Annuities (MYGAs) are all contractual strategies that allow you to retain full control over the money. VAs, FIAs, and MYGAs are also contracts that are issued by life insurance companies.
All VAs and FIAs have annual liquidity provisions and allow you to get all of your money back (with interest/gains) without penalty after the surrender charge period. MYGAs are the annuity industry’s version of a CD, and most have annual liquidity provisions or allow you to peel off the interest coupon (like you can with a CD or bond). MYGAs also allow you to get all of your money back with interest after the surrender charge period has passed. With VAs, FIAs, and MYGA you fully control that asset.
Also, at the time of application, Income Riders can be attached to most Variable Annuities (VAs) and Fixed Index Annuities (FIAs). Income Riders are a separate calculation from the accumulation value and can only be used for lifetime income guarantees. Think of Income Riders as monopoly money or a phantom account that can only be used to calculate the first-lifetime income payment.
Unlike “annuitization” products, Income Riders allow you to retain full control over the asset while having a lifetime income guarantee in place. That doesn’t mean that Income Riders are better but having control over the money does set them apart from annuitized product types.
All carriers and all products should be shopped to find the highest contractual guarantee for your specific situation with any annuity quotes for lifetime retirement income. After that number is established, then you determine which product type best fits your overall needs. The final step is to check the carrier ratings and claims-paying ability. At the end of the process, your choice might be an annuitized product, it might be a non-annuitized product. It might be that a combination of both would fully enhance your retirement plan.
In the world of annuities, there are no perfect answers...just bad sales pitches. All annuity types (annuitized or non-annuitized) have unique benefits and limitations. The key is to fully understand both and make your buying decision on your terms and on your time frame.