You normally think of financial magazine articles picking their annual top 25 stocks, mutual funds or ETF’s, and what, where and how to use them in a diverse financial portfolio. Recently there have been more articles appearing on a certain type of annuity which could provide more stability for those people who are already receiving incomes.
All types of annuities including deferred (fixed interest rates), Indexed, Variable and Variable Immediate annuities provide some type of income options. The subject of this article is Income (also know as Immediate) Annuities.
Income annuities have been around since the late 1800’s. In their simplest description, the insurance company is given a single premium and in turn, they pay out a specific monthly (or other payment mode) income. As people get older, many become less risk tolerant (compared to securities value changes) and may want an income they can count on.*
A good place for using Income Annuities is for fixed expenses such as a mortgage, utilities, food, entertainment, or other known costs. Some advisors may suggest putting 10%, 20% or more of assets in an Income Annuity. In any case proper planning and all considerations should be given before making any financial decisions.
Laddering (sometimes used with Bond purchases) is buying an Income Annuity every couple of years. This generally will provide increased incomes due to the persons increase in age which is factored into annuity pricing. In fact, if there is a history of serious health issues, some income options could actually increase the income payout.
Once the income begins in most cases there is no cash value to get back while living. The income amount is normally fixed unless an inflation option is used which decreased the initial income.
So how long does income last? You can pick many options including Life Only (pays out the highest income), a specified number of years or for Life with a minimum number of years guaranteed for one or two combined annuitants on one policy.
Taxation: For non-qualified (non-pension source) money, a special tax exclusion is given to part of the income. This tax exclusion (ratio) continues until the total income received equals the original premium amount.
There is certainly a place for Income Annuities and if the ups and downs of asset values are intolerable, having the cushion of a known income may help someone sleep a little easier.*
* Guaranteed income subject to credit and financial worthiness of issuing insurance company which is regulated by each State Insurance Commissioners office. Each State also has a special trust fund set up to provide funds for each policy up to a specific amount in case of a company’s default.
