Simpler Is Better with SPIAs
02/16/2012 11:02 am EST
Low commissions steer many advisors away from recommending these annuity vehicles, although they can often be the most advantageous for individual investors, writes Stan Haithcock of Stantheannuityman.com.
Here is a fact: you are never going to be invited to a “bad chicken dinner” seminar where the agent is going to be talking about Single Premium Immediate Annuities (SPIAs).
The reason is that these types of lifetime income annuities pay the lowest commissions of all commercial annuities. In other words, bad for the agent…good for the consumer. That reason alone should make you look closer at the merits of SPIAs.
Annuities can be great additions to your portfolio if they solve a specific problem and provide the “transfer of risk” solution you are looking for. The problem is that the tail ends up wagging the dog, with most agents and advisors pushing high-commission deferred annuities instead of actually trying to find the best annuity solution for the client.
It is my mission in life to try to stop this madness, because the right annuity placed correctly within your portfolio can really add value. OK, I’ll step off of my soapbox now, and tell you why an SPIA is the best “pro-client” annuity available.
Less than 10% of all annuity sales every year (which is way over $150 billion) goes to SPIAs. The previous paragraph explains why. These lifetime income annuities function just like your pension payments and your Social Security payments. It is a “transfer of risk” to the insurance company to pay you (or you and your spouse) for the rest of your life, regardless of how long you live.
I recommend that you structure your SPIA in one of two ways: either “Life with Cash Refund” or “Life with Installment Refund.” Either way, you are guaranteed that 100% will go to your listed beneficiaries, not the insurance company.
That is the biggest fallacy I run across when I recommend Single Premium Immediate Annuities (SPIAs). Let me repeat: the insurance company does not keep one penny of the money when the SPIA is structured in either of the ways I recommended above.
For those of you who think “income riders” attached to your deferred annuity will beat an SPIA payment, you are sadly mistaken…and overpaid for the price of that rider. In every scenario of deferral or age, an SPIA will mathematically and contractually outperform all riders—period. Even in this low-interest-rate environment, SPIAs are the best answer for lifetime income available today.
SPIAs can also combat inflation by adding an annual, contractual cost of living increase to your lifetime income stream. For example, you could contractually add a “cost of living” benefit increase to your SPIA that would increase your income annually by the specific percentage you choose. A 3% contractual increase would increase your annual income by 3% annually for the rest of your life.
Understand that the carrier does lower your first payment when this rider is attached, but it is a true “transfer of risk” strategy that you can never outlive…and not leave any money to the insurance company when the SPIA is structured properly.
Some newer SPIAs will increase your income stream after year five if there has been a significant increase in rates during the first five years of your policy. I really like that product, because you are “transferring the risk” to the insurance company and benefiting from any rate increases. Not a bad deal for lifetime income that factors in future changes in interest rates.
Single Premium Immediate Annuities (SPIAs) are quoted on a weekly basis. I tell my clients that it is like a gallon of milk. If you want to lock in the quoted contractual rate, you have about seven days to do it before the payout rates might change again.
Insurance companies base the lifetime income payment on your age/life expectancy. The older you are, the higher the contractual percentage payout. Also, there are about 50 companies that actively compete and quote SPIAs on a nationwide basis. E-mail me at email@example.com if you would like to see what the highest payout would be for your specific situation.
So the next time your agent/advisor/broker/"master of the universe” starts pushing a deferred annuity down your throat, ask them to run a side-by-side income for life calculation with a Single Premium Immediate Annuity. As they try to steer you away, just keep saying: “Just the facts please…just show me the facts.”
If you need a lifetime income stream, and the facts are shown, you will add a Single Premium Immediate Annuity to your income portfolio.
I consider myself the national “Annuity Consumer Advocate” in the same vain as Ralph Nader and Clark Howard are for other products and services. I hope to continually educate the public on the complex and sometimes ugly world of annuities.
I just published The Annuity Owner’s Manual that fully explains in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. You can get a copy of The Annuity Owner’s Manual for free by just going to my Web site and downloading your copy. I will also be happy to mail you a hard copy if you prefer.