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Longevity Insurance for Future Income
07/03/2012 8:15 am EST
Here's a product that you're unlikely to hear about but can provide impressive income as part of a long-term strategy, writes Stan "The Annuity Man."
The most controversial topic in the annuity world is the annuity income rider. An income rider is an attached benefit to the policy that guarantees a specific growth amount that can be used for future income.
Because of the higher percentage rates that riders offer, a vast majority of agents improperly sell them to a public hungry to hear someone talk about high interest rates on anything. Unfortunately, there are millions of people who purchased an income rider and don’t know (yet) that they can only access that money as an income stream.
Income riders do work with what I call target date income planning, but it has to be positioned and explained properly.
People call me every week and say: “Stan, I have an annuity paying 7%.” No, you have an income rider that increases your income account by 7% during the deferral years. It is Monopoly money unless it is used for income. That “little” detail seems to be left out, or at a minimum glossed over, by most agents and advisors.
A new product that has just come on the annuity scene is called Longevity Insurance. Neat name, but the actual definition and function of the product is a deferred immediate annuity. In other words, Longevity Insurance is a Single Premium Immediate Annuity that you put off (i.e. defer) taking income till a future date.
You are never going to go to a "bad chicken dinner" seminar and be shown this strategy because the commissions are very low to the agent. Most agents and advisors are never going to show you this option because the commission paid on Longevity Insurance is, on average, 50% to 90% less than if they sold you a deferred annuity with an income rider.
That fact alone should be reason for you to consider Longevity Insurance. It must be good!
Because Longevity Insurance offerings have improved so much in the last few months, I am now showing both Longevity Insurance and income riders for all target date income proposals so that my clients are familiar with both choices and can decide which one best fits their specific situation.
My prediction is that the “smart money” will start moving toward Longevity Insurance based solely on the mathematical calculations when comparing target date annuity plan choices. Contractual numbers don’t lie.
There are only a handful of companies that currently offer Longevity Insurance, and the newer offerings protect your principal as well, which differs from the original versions. When compared side by side to an income rider, Longevity Insurance will provide a higher lifetime payout 100% of the time.
So what’s the catch? Below are some key points (both upside & downside) when considering Longevity Insurance as a lifetime income component within your portfolio.
Upsides of Longevity Insurance
- No annual fees.
- It will provide the highest guaranteed lifetime income payout compared to any other annuity product with income riders...period.
- You can add an annual cost of living increase (COLA) to the contract if future inflation is a concern. Please note that adding a COLA to the policy will lower the initial payout when compared to the same product without a COLA. There is normally a seven-year or longer breakeven point.
- You have to defer at least one year, but you can defer for up to 45 years! You should see those guaranteed numbers, and this is food for thought for parents and grandparents that want to set up a lifetime income stream for their kids and grandkids. Issue ages are as low as 1 year old for non-IRA accounts, and 18 for IRAs. I am really doing some unique legacy planning with this product!
- If structured properly (that’s where Stan The Annuity Man comes in!), 100% of the money is principal protected.
- Longevity Insurance is in no way attached to the stock market. It is a 100% contractually guaranteed strategy.
- Your IRA can be set up for a joint life income payout for your spouse. Longevity Insurance can be established in both a traditional IRA and a Roth IRA...as well as non-IRA accounts.
- In a non-IRA account, the lifetime income stream provides an additional tax benefit that an income rider cannot. In a non-IRA account and with a Longevity Insurance lifetime income payout, a portion of that income will be exempt from taxes. In comparison, income that is derived from an income rider is 100% taxable from a LIFO (Last In First Out) basis.
- In an IRA account, Longevity Insurance lifetime income stream will cover RMDs (Required Minimum Distributions) ongoing when you turn 70 1/2.
Downsides of Longevity Insurance
- Even though you can protect 100% of the principal, you cannot access that money in a lump-sum format. There is no cash value, or what I call a walk away amount.
- Once you decide on the actual future date your lifetime income stream is going to start (when the application paperwork is filled out), you are locked in to that specific date from a contractual standpoint. There is no flexibility. You cannot start the income earlier or later than the policy states. You have to start it on the specific date that you have chosen.
- Longevity Insurance (aka Deferred Single Premium Immediate Annuity) is still based in part on current interest rates. Let the interest-rate prediction arguments begin!
From a planning standpoint, Longevity Insurance is a great strategy for your future income needs. I am now using it with my clients for lifetime laddering strategies and for achieving the highest payout for target date income planning. If you are planning for lifetime income in the future, then Longevity Insurance has to be considered.
A reporter recently called me the National "Annuity Consumer Advocate" in the same vein as Ralph Nader and Clark Howard are for other products and services. My goal as Stan The Annuity Man is to be that person, and I hope to continually educate the public on the complex and sometimes ugly world of annuities and become the go-to resource for "all things annuity."
I recently published The Annuity Stanifesto, fully explaining in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. You can get a free copy of The Annuity Stanifesto by going to my Web site and downloading your copy.