Need an Annuity? Take the PILL Test
11/28/2011 8:15 am EST
Most people who own annuities don’t really know what they own, and why they own it…other than the fact that their trusted advisor said that an annuity is what they needed, says Stan Haithcock of StantheAnnuityMan.com.
Annuities get a bad rap, and most of it is deserved. The “bad chicken dinner” seminars, the “too good to be true” pitch, or the trusted advisor that all of the sudden wants to put a large portion or all of your assets into a variable annuity. Yes, the annuity industry has earned its bad reputation.
There are over $4 trillion of annuities currently held in the United States, and that amount grows by over $200 billion annually. That makes this a big problem.
Annuities are in essence contractual guarantees. That is how they should be considered, and in a perfect world, sold. When you are considering an annuity for your portfolio, there are two initial questions that you need to ask yourself:
- What specific goal or problem am I looking to solve?
- Will the contractual guarantees within that policy solve that specific goal or problem?
Here’s the reality: There are only four problems annuities should solve within your portfolio:
- P rincipal Protection
- I ncome For Life
- L egacy
- L ong-Term Care
That’s it. The acronym is an easy to remember word: P.I.L.L.
Annuities should be used as “transfer of risk” solutions to your portfolio. You are transferring the risk to the insurance company, instead of shouldering the risk yourself. The older you are, the more “transfer of risk” assets you need to provide coverage for problems like lifetime income or long-term care.
I always advise people to look at their total portfolio and see how much risk they are shouldering, and how much risk they have transferred. Most people are alarmed at how little risk they have transferred when they look at their portfolio in that manner.
Let’s look at the P.I.L.L. to see how annuities might be able to compliment your portfolio.
NEXT: Principal Protection|pagebreak|
In a world of low interest rates, this has been a tough few years for the “savers.” There are really only 5 places where you can get real principal protection:
- Money Market (FDIC backed)
- Municipal Bonds (insured)
- Fixed Annuities
Fixed Annuities are backed by the full faith and credit of the issuing carrier, and each state has a guarantee fund that backs each policy for a certain dollar amount. You can go to www.nolhga.com to find out your specific state’s coverage.
Insurance companies and annuities are “confidence” products, and the industry self-regulates pretty efficiently. MetLife’s (MET) recent purchase of the insurance arm of AIG (AIG) is a good example of that.
Also, annuities are regulated at the state level, and the capital requirements for insurance companies are much more stringent than banks.
I—Income For Life
If you are fortunate enough to be receiving pension payments from a previous employer, that is an annuity income stream payment. If you receive a Social Security payment, that is an annuity income stream payment as well.
However, you might need more guaranteed income or you might be afraid of outliving your money. That is where annuities can compliment your portfolio.
Annuities were initially developed hundreds of years ago for income, and in most cases, lifetime income. There are two ways to use annuities for income:
- Income Now or Immediate Income
- Income Later or Target Date Income
Using only the contractual guarantees, an annuity can provide a lifetime income stream for you (and your spouse if applicable) and transfer that payment risk to the insurance company.
Many people are fortunate enough to have enough assets that the main focus becomes how to leave as much or more to the family or charity. Fixed annuities can provide contractually guaranteed growth, without market volatility.
Some fixed annuities have been designed to be placed within an IRA to combat Required Minimum Distributions (RMDs), by providing growth guarantees to offset your annual RMD withdrawal, so you can leave your IRA intact regardless of how many RMDs are taken.
Again, you need to look at your portfolio from a legacy standpoint, and ask yourself how much risk you are shouldering…or willing to shoulder. A contractually guaranteed fixed-annuity strategy might be the turnkey approach that takes the worry out of your planning.
We all are living longer, and most of us would like to be taken care of in our own homes instead of a facility. Long-term care annuities provide this type of coverage without losing control of the money like traditional long-term care products.
Coverage can be guaranteed with some products, and some products require a phone interview. The bottom line is that you can get coverage with annuities, regardless of your health situation…and retain control of your money in case you do not need long-term care. Transfer the risk with “full control” long-term care fixed annuities.
So does an annuity fit into your portfolio? Does your portfolio need a “transfer of risk”? Does your portfolio need to solve for a specific problem or goal? Maybe a P.I.L.L. is the answer.