SPIA Single Premium Immediate Annuities

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Stan: Hi, I’m Stan The Annuity Man sitting here with,

Gary: Gary from Cannex.

Stan: We’re going to be talking about Single Premium Immediate Annuities, Gary. The granddaddy of them all. The original annuity. Really, most annuity types come from Single Premium Immediate Annuities. Here’s a little background for the people out there. Some people call Immediate Annuities pension annuities, because that’s kind of what they are. This pension structure started in the Roman times. The Roman government provided a pension to Roman soldiers who were providing dutiful service to the Roman Empire. The word annuity comes from the Latin word annua, which means annual. That’s where it comes from. This is really the only type of annuity that was sold in the United States until the 1950’s. There are a lot of people that think it is still the only annuity type. Gary, tell us a little bit about Single Premium Immediate Annuities and how they work. What is a Single Premium Immediate Annuity, or as you call it an Immediate Income Annuity?

Gary: It’s a way to purchase your own pension. Using a Single Premium Immediate Annuity, your income starts the month following your purchase. You give the premium amount required to the insurance company, and in return you know exactly what monthly payment you’ll be getting back.

Stan: It’s a transfer of risk. You’re transferring the risk of outliving your money to the annuity company. They are obligated to pay you for as long as you live. Now, tell us about the payments. How can you structure them?

Gary: Oh you can structure them in a way to even include a death benefit if you want. You could essentially have payments for a lifetime, if you want.

Stan: So, if I lived to 150 they’re going to pay me.

Gary: Absolutely, or you can structure them so they pay for a certain amount of time. Structure them to pay for 20 or 30 years if you want, or choose a combination of both guaranteed payments for life and a period certain. You might want to do a combination of both to plan for the possibility you could get hit by the proverbial bus during the early years of your policy. Then your estate, or your beneficiaries, will get the remaining payments.

Stan: So, if you purchase a life contingency and live forever, the annuity carrier is obligated to pay forever. If instead you purchase a lifetime policy with 20 years certain payments, then your Learjet hits the mountain year one, your beneficiaries will get 19 more years of payments.

Gary: Absolutely. Yep.

Stan: Now, tell us about what the payments reflect. Interest and principal? What’s the combination?

Gary: Actually what you receive in an annuity payment is a combination of three types of return. You get your principal, your interest, and something called a mortality credit.

Stan: Give the elevator speech on mortality credits.

Gary: It’s your last man standing payment. For example, when you’re part of a pool of investors in a SPIA product with a life expectancy of say, 85 years old. That means you have a 50% chance of not meeting that age, or you have a 50% chance of beating that age. What happens is, as time goes on some people start passing away, the money still left in that pool goes to the remaining participants of that pool.

Stan: So, life expectancy is really the primary pricing mechanism, right?

Gary: That’s correct.

Stan: Okay. So in essence, when you’re buying an Immediate Annuity for lifetime payments, what you’re saying to the life insurance company is, “You think I’m going to live to the actuarial expected age, but I think I’m going to live longer than that. If I do, you’re on the hook to pay.” Isn’t that what we are talking about here?

Gary: Absolutely.

Stan: Then it’s hard to calculate ROI until you die, right? (Return on Investment)

Gary: That’s correct.

Stan: Do SPIAs work with IRA (qualified) or non-IRA (unqualified) money?

Gary: Both.

Stan: Inflation. Let’s talk about inflation. Can you attach increases in an effort to combat inflation?

Gary: You can. You do payment adjustments. The majority of SPIAs that are purchased today just have a flat rate, but you can add on a payment adjustment for inflation. Say you’re going to get $500 a month on a fixed basis and you want to put an inflation payment adjustment on top of that as a protection, then your payments are going to start somewhere in the neighborhood of $400, and may end with $600 payments.

Stan: So at the time of signing the contract, you can attach what’s called a Cost of Living Adjustment (COLA) increase or a Consumer Price Index Increase (CPIU). It sounds really good in theory, because your income is going to increase for the life of the policy by the selected percentage. It’s important to remember that the insurance companies have the big buildings for a reason, right? I mean they have the big logos on the planes for a reason. They don’t give anything away. So, if you buy an Immediate Annuity with a COLA, the income level is lower to start than without a COLA. A SPIA with no COLA attached has higher payments to start to make up for that increase. So, really it’s a bet. If your grandmother lived to 99 your lineage is good, and if you’re eating well and not smoking 12 packs of cigarettes a day, hey, you might put a COLA on there. You might buy an Immediate Annuity with the COLA, and then one without a COLA, right?

Gary: Sure. You can buy multiple annuity policies.

Stan: Okay, so where does a SPIA fit in a portfolio?

Gary: Essentially you’re going to want to build an income floor, so you want to use a SPIA as a supplement to social security.

Stan: Okay, so tell me about this income floor.

Gary: During retirement you want to make sure you’re covering the mortgage and utilities and the food bills. If your pension payment and social security check can’t cover all that amount, then you may think about buying one of these products (SPIAs) to complete a guarantee of lifetime payments.

Stan: You could say, “Hey, I have this lump sum and I want to find out what the payment amount is on an Immediate Annuity payoff.”, or you might say, “Hey. I need $1272.32 to fill in an expected monthly income gap” You can reverse engineer a quote this way using the Cannex platform to find out how much premium it takes to do that.

Gary: Right. Yep.

Stan: So there are benefits and limitations because these are contracts, right? I mean this isn’t too good to be true. You know, we have to tell people the good and the bad. Let’s talk about the good.

Gary: Essentially it’s probably the most efficient way to generate income. There are no additional options or bells and whistles. What you’re paying for is what you get.

Stan: It’s efficient. You can purchase a SPIA at any age, right?

Gary: Pretty much until probably up to about 90 years old.

Stan: At 90 years old, we tap that person on the shoulder and say you don’t need lifetime income. You’ve already beat the actuaries, right?

Gary: Smoke them if you’ve got them.

Stan: Smoke them if you’ve got them. Very nice. I’ll remember that. What other benefits can we talk about here?

Gary: Well we talked about the transfer of the risk of outliving your money to the annuity carrier, so that you’re not taking on the burden of longevity. It’s also probably the most simple and easiest to understand of all the annuities.

Stan: There’s always some limitations, and I’m thinking the biggest limitation is liquidity. What are the liquidity options that you can add on at the time of contract?

Gary: Well, most of the contracts do provide a way for you to get out, but there are some rules attached.

Stan: The other limitation I see and often have to explain to people is: there’s no market attachment, there’s no growth tied to the market. Most Immediate Annuities that people buy are static payments, meaning that payment system is going to be the same every year. People go, “Well Stan, but what about inflation?” We’ve already explained that if you attach a COLA or an increase to the policy the carrier will lower the initial payment, so there’s a trade-off.

Gary: I think for the most part people are going to address inflation through other means and other investments.

Stan: A common misconception that I encounter all the time is, “Hey, when I die, the insurance company keeps the money.” So many people believe that with an Immediate Annuity when their Learjet hits the mountain, poof their money’s gone. They believe the annuity carrier keeps it, so an annuity is always a raw deal. (I don’t have a Learjet, but one day I will). What really happens to an annuity contract when the annuitant dies?

Gary: It is possible to purchase an annuity that pays for Life Only, but most of the annuities purchased today provide some type of death benefit. So, if you get annuities with a Period Certain or a Cash Refund attached, Cash Refund being the most common form purchased today, benefits will continue depending on the death benefit in place.

Stan: That means when you die, whatever is left in the account goes to the list of beneficiaries of the policy.

Gary: Absolutely.

Stan: So that clears up that common misperception about annuities. If you structure an annuity to provide death benefits it will. Should you time the purchase of SPIAs to the interest rates levels?

Gary: You could try, but.

Stan: Good luck, huh? When you need to build a guaranteed income floor, you want guaranteed income in place.

Gary: Right. Exactly.

Stan: Another misperception I run into is that annuities are all expensive. I hear comments like, “I hate all annuities, or all annuities are expensive.” Do these comments apply to Immediate Annuities?

Gary: Well, any annuity or any product will have some type of expense, but in this particular case there’s no explicit fees,

Stan: because there’s no philanthropist at annuity companies.

Gary: No, there’s no philanthropist.

Stan: How about at Cannex? There are philanthropists at Cannex, right?

Gary: No, we don’t have any.

Stan: None there. Well, there are no philanthropists at annuity companies designing free products, so they’re not giving away anything. Explain in layman’s terms what expenses are involved when people ask, “What are the expenses on an Immediate Annuity?” It is really important to understand that all annuity commissions are built into the products. What does that mean? It means you don’t see it, but that very nice agent or advisor is getting compensated to sell these annuity products. You put in $100,000 to a policy you will see $100,000, but there’s no expenses listed.

Gary: No, the way it works is like a bank CD. If you’re getting a bank CD and it’s going to give you 2% on your money, the banks really working on a return of about two and a quarter or something to that effect.

Stan: Got it.

Gary: And so what they do is keep the extra part of that return to cover their expenses.

Stan: Plus they are holding on to your money if you getting a live payment. They’re holding your money then giving it back to you over time, so they’re making a little bit of money off that held money, right?

Gary: Right.

Stan: The other misperception that I get a lot is “It’s irrevocable, Stan. You ripped the knob off the water faucet and the water comes. I can’t do anything about it.” That’s not really true, right?

Gary: No. You have some options you can change. You can make some decisions whether it’s the payment amount you get, or if you want to get part of your money back to some degree. Regardless, there are some rules that you do have to follow in the contract. So, it’s not free and easy, but again, you change your mind you can get it.

Stan: Alright, let’s look at some live Cannex quotes. We are using as an example a proverbial couple from Texas that we are going to use to run quote examples using the Cannex platform. Why Cannex? You guys bring it all to the table when you quote the annuity world. You have agreements with most carriers out there. You quote the annuity world, based on a consumer’s specific situation, then list the top contractual guarantees relevant to their particular parameters. These quotes are state specific because annuities are regulated by the state. So let’s go through some quotes. What are we quoting?

Gary: Well, let’s look at our test subjects Robert and Mary: Robert’s 65, Mary’s 62. You mentioned they’re in Texas. Let’s look at a single life quote. So, we’re just going to cover the lifetime of Robert.

Stan: So Robert really doesn’t like Mary. He wants just income.

Gary: Exactly right

Stan: Perfect.

Gary: He’s driving the Learjet by himself.

Stan: There you go.

Gary: Okay. So, let’s say he puts $100,000 in. The results show a pretty good rate at $500 a month for the rest of his life.

Stan: Period. There’s no ROI until he dies, because it’s going to continue to pay him if he lives forever.

Gary: No ROI actually with this particular one. We are also putting on a Cash Refund.

Stan: So if the Learjet does hit the mountain, before the entire premium is paid out,

Gary: Mary will get the remaining amount that was not used.

Stan: Alright. So he likes Mary. Let’s do another one where he likes Mary.

Gary: Okay.

Stan: He wants to include her, so we run a Joint Life income quote.

Gary: Okay. Say he wants Joint Life payments, and he wants to bring Mary onto the annuity contract. A Joint Life annuity will provide the same payment. It will continue even after one spouse passes away. In this case, when we add two lives into the contract, the payment goes from $500 down to $435.

Stan: Okay, so that second life brings the payment amount down. Let’s say Robert’s Ferrari hits the tree. Mary goes to the funeral, then goes to the bank to check on the annuity payment level, is it less or is it the same?

Gary: Same amount.

Stan: Alright, so Mary’s happy.

Gary: Right.

Stan: What other quotes are we running?

Gary: Well, let’s do it backwards. Let’s say they’re looking at an income floor. They say they’re looking at their mortgage, food bill and social security, and they see they have an income gap.

Stan: So to fill that gap. What’s that gap?

Gary: Let’s say $1500 bucks.

Stan: $1500 bucks. Okay let’s run that.

Gary: To cover $1500 bucks for life to fill that gap, that’s going to take about a $340,000 premium.

Stan: So you give the annuity company $340,000 and then get $1500 a month period-no matter how long you live.

Gary: That’s Joint Life with a Cash Refund.

Stan: Suppose their Bentley hits the tree, and both of them die. The beneficiaries get what’s left in the policy, because it’s a return of principal, interest, and mortality credits. It draws down on that asset the longer they live. People need to understand too: the older you are, the higher the payments. Why? Because you have less life expectancy. So, it’s really that simple.

Let’s recap Immediate Income Annuities: also called Single Premium Immediate Annuities. I refer to them as SPIAs. These are Income Now products. These are pensions. These were the original annuities, and the granddaddy of annuity products. So if you need income right now, you probably need to be looking at a SPIA. Cannex can certainly help with that by providing the best quotes in the country based on your specific situation. What would you like the people to know about SPIAs.

Gary: They’re probably the most simple annuity product out there. When you buy it for your income now needs, you know exactly what you’re going to get. Cannex gives you the opportunity to shop those carriers.

Stan: Well said. I’m Stan The Annuity Man.

Gary: I’m Gary from Cannex and we’ll see you next time.