Kerry Peabody, Long Term Care Insurance Specialist, Clark Insurance
Let’s take a break from long term care, and talk about an issue that my clients are becoming more concerned with. There’s another risk that comes with a long life, and that’s outliving your money. Most of us retire with some money tucked away in savings. For some of us, it’s a little. For others, it’s a lot. For most, it’s somewhere in the middle. The concern for those of us in the middle is “What if my money runs out before I do?”
Well, there are some very good financial tools that you can use to solve that problem – annuities. Annuities are perhaps the most misunderstood and maligned financial services product on the market, but as with any tool, when they’re used properly, and for the right reason, they’re an excellent choice. Imagine this – what if, when the market crashed in 2008, your money had continued to grow? Wouldn’t that have been a nice feeling? That’s what annuities can do.
There are two primary kinds of annuities – deferred annuities, and immediate annuities. The two products are designed to do very different things.
Deferred annuities are savings tools. You agree to leave your money with an insurance company for a certain period – usually from 3-7 years – and in return, the insurance company agrees to pay you a fixed return. For instance, you might purchase a 6 year annuity, and the company promises to pay you 3.4% on that money, every year, guaranteed. It doesn’t matter what the stock market does; there’s no tie to your money and the market. Unlike a CD or a money market account, your money will grow tax-free while it’s in the annuity. So, you make more because you’re not taxed until you take the money out.
In return, you’ve promised to leave the money with the company for 6 years. If you take it out early, you pay a penalty. This is known as a surrender charge. Many good annuities will actually let you take a portion of your money out each year without a surrender charge, but you need to make sure you know how your annuity works before you buy it.
So, a deferred annuity is a tax-advantaged savings tool that guarantees you a specific return on your money, and defers taxes while the money grows. That’s not all the complicated, is it?
The second type is an immediate annuity. These are sometimes called “income annuities,” because that’s what they do – they create a stream of income that’s guaranteed not to run out. In effect, an immediate annuity lets you buy your own pension.
Let’s say you’re a 70 year old man, and you’ve got some money in CDs. You’d like to boost your monthly income a bit, but you don’t want to start drawing money from the CD, because you’re afraid it will run out. What if, instead, you put $75,000 into a life annuity? You’d be guaranteed a check for roughly $535, every month, for the rest of your life – no matter how long you lived. (This uses current rates with an A rated carrier.) If you lived to the ripe old age of 130, the money would still be coming, every month.
Conversely, if you passed away next week, the money’s gone. That’s the downside to an immediate annuity, but that’s how carriers can pay the other guy until 130! But, if you’re worried about this happening, there’s a way to fix it.
You could choose a life annuity with a period certain. This means the annuity would pay for the rest of your life, no matter how long you lived, or for at least “X” number of years. For instance, that 70 year old could purchase “life with a 10 year period certain.” He’d begin getting a check for $500 ever month for as long as he lived. BUT… if he died the week after buying the annuity, the payments would continue for the full 10 year period certain. They would simply pay to his beneficiary.
So, annuities are an excellent tool, and the type of annuity you choose depends on what you’re trying to accomplish. As with any insurance product, there are some ground rules.
1) NEVER buy anything you don’t understand.
2) NEVER buy from a carrier that’s not rated “A” or better with the major ratings agencies – Standard & Poors, Moody’s, and A.M. Best. The products are guaranteed by the insurance company, so you need to work with solid, credible carriers.
3) NEVER let yourself be pressured into buying anything you’re not ready to buy.
And finally, be sure to work with an insurance professional who represents several companies. As with any product, the best answer isn’t always a single company. An independent agent will be able to help you “shop around,” and find the best plan.
Next time, we’ll talk a bit further about annuity options, and how they can help you secure your retirement income. Thanks!