Fixed income annuities: two common mistakes
By Kim O'Brien
The Annuity Advocate
We often hear financial advisors and media consultants make common misstatements about this unique retirement product.
Mistake No. 1 -- The premium paid in an income annuity (also called a single premium immediate annuity or SPIA) is lost forever if you die before the payouts have been completed.
When a single premium income annuity is purchased, both parties to the contract (the annuitant and the insurance company) are often locked-in for the life of the annuitant. However, many companies offer liquidity features allowing the annuitant to cash-out of their policy by converting the remaining guaranteed payments. Other companies provide options with even more liquidity, like premium refunds. Only if your readers are aware of these features will they be able to shop around for them or ask a financial planner or insurance agent.
Lowell Aronoff, CEO of Cannex, a leading distributer of financial product data and information and NAFA member, offers this advice:
"When entering into an income annuity contract, it is best that the consumer view it as a lifetime arrangement. While it can be argued that this reduces the consumer's liquidity, the fact is that many of the consumer's retirement assets are really not liquid and will never be liquid because they are needed to cover essential expenses (e.g. food, shelter, etc.) as long as they live. By locking those assets into an income annuity the consumer receives:
1. A guaranteed stream of income to pay for essential expenses for as long as they live
2. More monthly income for the same amount of premium than from any other financial product with a similar risk profile."
1. Installment refund guarantees. These continue to make payments after the annuitant dies until 100 percent of the premium has been refunded.
2. Cash refund guarantees. This is where the annuitant's beneficiary receives a single payment that makes up the difference between the initial premium and payments received.
3. Percent of premium death benefit. This is where a defined portion of the initial premium is paid to the annuitant's beneficiary after the annuitant dies.
Mistake No. 2 -- The payments from an income annuity might be fixed or variable, and are based on the value of your underlying investments.
This is more than a misstatement -- it is absolutely wrong. It is important that the line between fixed annuities and variable annuities (whether deferred or income) is never blurred. All fixed annuities payouts, whether taken from a deferred annuity or an income annuity, state the payout amounts in the contract and guarantee them for the life of the contract. Fixed annuity payout options never are based on "your underlying investments" because in a fixed annuity -- indexed, declared rate or income -- the customer doesn't have underlying investments, the insurance company does. Income streams from variable annuities (Note: there are a few income variable annuities but most variable annuities sold today are deferred) may have fixed or variable payments and are based on the value of your underlying investments in the annuity.
In other words, the consumer takes on the risk of gains or losses to 1) interest earned; 2) premiums paid; and 3) payouts received, resulting from the gains and losses in the investments they have chosen inside their variable annuity contract.
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