Safe Money - 1-25-25

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been an insurance agent for over twenty
four years. During that time, I've learned a few insurance strategies,
like using annuities as safe money harbors or using cash

(00:23):
value life insurance to supplement retirement income. Just a reminder,
you can call our office at five six three three
three two two two zero zero if you'd like to
enroll into one of my virtual Medicare community meetings that
I do via zoom. I give one every month, or

(00:43):
you can email me at CRAIGT Craigshillig dot com and
again that's cr Aig at cr Aig scchi LLLG dot com.
Today I'd like to discuss with you immediate annuities single

(01:07):
premium immediate annuities. They're sometimes called spias. Immediate annuities can
provide lifetime income and can offer a measure of relief
from retirement income concerns by providing a dependable payment for
the rest of your life. Running out of income is
a primary concern for most retirees, Immediate annuities offer a

(01:32):
financial alternative to help meet retirement income needs by providing
a steady stream of income designed to last through retirement.
But that's not all. Think of an immediate annuity as
a paycheck or a playcheck. As a paycheck, I use
this strategy to fund ongoing fixed expenses like monthly utilities, rent,

(02:00):
mortgage payments, health insurance premiums, whether currently or into retirement
via Medicare costs, taxes sometimes property taxes these days, also
your homeowner's insurance policies. As a play check, I have
clients to use this strategy to help offset the costs

(02:22):
of their hobby or passion voting, golfing, tennis, pickleball, target shooting,
if you're a member of a golf league or a
bowling league, travel, sometimes even a country club membership, whatever
that hobby costs on any annual or monthly basis. Maybe

(02:43):
we fund this for a three or five year period,
and then we'll readdress the issue. Let's go through some verbiage,
and then I'll give you some real world examples. What
is an immediate annuity. An immediate annuity is a contract
between you and an annuity issuer like an insurance company,

(03:03):
to which you pay a single lump sum of money
in exchange for the issuer's promise to make payments to
you for a fixed period of time or for the
rest of your life. Immediate annuities may appeal to you
if you're looking for an income you cannot outlive, and
or to have assured completion. Characteristics of an immediate annuity

(03:29):
a steady stream of payments, either for a fixed period
of time such as ten years, or the rest of
your life. The issuer assumes all the investment risk. Generally,
you pay ordinary income taxes on the part of each
payment that represents earnings or interests credited to your account.

(03:50):
The remaining portion is considered a return of your investment
and is not subject to taxation. You relinquish control over
the money you invest in the immediate annuity. While there
are some exceptions, usually you receive a fixed payments with
little or no variation in the amount of timing of

(04:11):
each payment. If you choose a life only payment option,
you may not live long enough to receive the return
of all your investment, since payment cease at your death
with this option. How does an immediate annuity work. As
the name implies, an immediate annuity begins to pay you

(04:33):
a stream of income immediately. Immediately in insurance terms, is
usually thirty to forty five days. The amount of income
you receive is based on a number of factors, including
your age of the time of purchase, your gender, when
payments will be made to only you or to you

(04:54):
in another person, and whether payments will be made for
a fixed period of time or for the rest of
your life. What are some of your payment options? Most
immediate annuities include a number of payment options that can
affect the amount of the payment you receive. If you
have a pension, you may recall seeing these types of

(05:15):
options when you picked your pension payout. The most common
payment choices are life only, installment, refund, life with periods certain,
joint end, survivor, or period certain. So let's talk about

(05:36):
life only first. Life only payments are based on payments
based on your age. Payments continue until you die, at
which time all payments stop. This option will pay the
highest amount of payment, but can also have the highest
amount of risk. Understand that if you sign up for
a life only option and you die the next month,

(05:59):
you'll only got one payment, there's no refund. The insurance
company keeps the rest of that money, and this is
inherently where some of the scary stories about annuities come from.
Installment refund or cash refund. If you die prior to
receiving at least the return of your investment in the

(06:21):
immediate annuity, the beneficiary you name in the policy will
receive an amount equal to the difference between what you
invested and what you received. The beneficiary will receive this
amount in either a lump sum cash refund or in payments.
They can do an installment refund if they want to.

(06:45):
Let's talk about life with periods certain. With this option,
the issuer does not guarantee the return of your investment. Rather,
it guarantees a minimum period of time during which payments
will be made made for the rest of your life.
But if you die prior to the end of a
minimum payment period, usually between five and twenty five years,

(07:09):
the payments will continue to be made to your beneficiary
for the remainder of that period of time, but no longer.
Now let's talk about joint and survivor. This option provides
payments for the lives of two people. Typically you and
your spouse. When either of you dies, payments continue to

(07:30):
be made for the life of the survivor. You can
elect to have these survivor payments remain the same or
be reduced to a percentage of the original payment, such
as maybe two thirds. The joint in survivor option can
also be added to life with period certain option. In
this case, the issuer will make payments until both of

(07:54):
you have died, or for the period of time you selected,
whichever is longer. Let's talk about period certain. This option
provides a guaranteed payment for the fixed period of time
that you specify a five year period certain, ten, fifteen,
maybe twenty years certain. If you die prior to the

(08:17):
end of the chosen period, your beneficiary will continue to
receive payments for the remainder of that fixed period. The
payment option you selected affects the amount of each payment.
For example, life only payments will be larger than payments
for life with a period certain, but life with period

(08:41):
certain payments will be less than payments for a fixed period.
So I'll give you the example. A sixty year old
man invests one hundred grand in a media anew and
are annual payments of two and sixty dollars for the
rest of his life, or six thousand, six hundred ninety
six per year for life with a minimum of twenty years,

(09:05):
or twenty dollars per year if he chooses payments for
a fixed period of twenty years. Now, there are other
factors to consider an immediate annuity. It can offer a
measure of relief from retirement income concerns by providing a
dependable payment for the rest of your life. However, as

(09:30):
with most investments, there are other factors to consider before
deciding if investing in an immedia annuity is the right
choice for you. First, be sure the payment option you
select will address your income needs. They always ask about liquidity.
For instance, if you're in poor health and have others

(09:52):
who depend on you for financial support, selecting a life
only payment option may not be appropriate because payments stop
at your death, removing a valuable source of income from
your survivors. Secondly, if you're considering a life only payment option,

(10:13):
be aware that it may take many years before you
receive at least the return of your investment from that
immediate annuity. A seventy year old man who invests one
hundred thousand and selects a life only option would generate
annual payments of about and sixty dollars. They will have
to live about fourteen years to receive the return of

(10:36):
the one hundred thousand dollars that they put into that account,
or to age eighty four. Third, consider whether there are
better alternatives for providing income. For example, it's possible the
interests are dividend from investments such as bonds and dividend
producing stocks could produce more income than you could get

(10:58):
from an immediate annuity the same period of time, based
on the same investment amount. In addition, these types of
investments usually are more liquid than immediate annuities, giving you
the opportunity to increase your withdrawals if you need more money.
On the other hand, though and amedia annuity, it provides

(11:18):
a guaranteed stream of income regardless of changing interest rates
or investment returns. Of course, guarantees are subject to the claim,
spending and ability of that annuity insurance company. Let's talk
about the exclusion ratio. The exclusion ratio is simply their

(11:39):
percentage of an investor's return that is not subject to taxes.
The exclusion ratio is a percentage with a dollar amount
equal to the return of an initial investment. Any return
above the exclusion ratio is subject to taxes, such as
a capital gain tax. Most of the time, the exclusion

(12:02):
ratio applies to non qualified annuities. Let's talk about how
the exclusionary the exclusion ratio works. The exclusion ratio arises
mainly through different forms of non qualified insurance annuities. When
receiving payments from an a media annuity or when you're

(12:23):
taking annuitization, part of every payment an innuitan receives is
considered to be a return to principle, which is not taxed.
The remaining portion of the payment consists of interest earnings
and is taxable. The exclusion ratio determines the taxable and
non taxable portions of each payment. The exclusion ratio formula

(12:49):
is as follows. You take your investment in a contract
divided by the expected return. So I give you an example.
Let's say a sixty year old band named Alex purchases
a fifty thousand dollars media annuity. The insurance company assumes
Alex has a twenty year life expectancy and promises to
pay Alex two hundred and eighty four dollars a month. Thus,

(13:12):
Alex's initial investment of fifty thousand dollars is expected to
grow to sixty eighty one hundred and sixty. However, the
insurance company is required to spread Alex's fifty thousand dollars
over twenty years, which equals around two hundred and eight
dollars a month. The IRS does not tax the first

(13:33):
two hundred and eight dollars of Alex's monthly payment from
the insurance company because it's rightly considers that a tax
free return of their principle. Depending on other factors such
as Alex's overall income and the retirement status, the payment
above two hundred eight dollars would be taxed, so only

(13:54):
seventy six dollars a month is taxed in Alice's In
Alex's case, an exclusion ratio will expire when all the
principle in a contract has been received. Assuming you reach
that point in the contract when the entire amount of
principle has been exhausted, the entire annuity payment will then

(14:17):
be taxable. The exclusion ratio can be an effective performance
measure for certain investments requiring tax strategies or enhanced risk
management techniques. Many insurance products are not technically financial securities,
they offer the benefit of fewer restrictions on tax, regulatory,

(14:43):
and oversite burdens. Savvy investors can use these instruments to
engineer unique income and return streams otherwise unavailable to conventional securities.
One such technique could include using a non qualified insurance
annuity in lieu of cash. In this case, the exclusion

(15:06):
ratio can offer a contract holder insight into the length
of time to recover principle before capital gains taxes become
a factor. Should you consider an immedia annuity? An Amedia
annuity can be a useful financial tool. You may want
to consider the purchase of an Amedia annuity if you

(15:26):
want a stream of income you cannot outlive, You have
a sum of money that you would like to turn
into a regular source of income, and you aren't interested
in leaving the money to your heirs. If you want
to leave a portion of the money as a legacy,
and a media annuity may not be a good choice.
What about if you're uncomfortable with investments that have a

(15:49):
significant risk of loss. If subjecting your money to risk
of loss associated with investing in securities does not appeal
to you, and AMEDIA annuity may provide a way to
transfer that risk to an insurance company. While the income
guaranteed by the immediate annuity is subject to the claims

(16:10):
paying ability of the annuity issuer, the immediate annuity payments
are not subject to stock market risk. You expect to
live for a long time if you're healthy and you
have longevity in your family, and immedia annuity is an
investment to consider. Let me give you some real world examples.

(16:33):
I've had grandparents and parents that we're purchasing a life
insurance policy on a grandchild or a child that uses
speed to fund the paid up cash value life insurance policy,
throwing a disability waiver, a premium and some guaranteed insurability options,
and this gift can last the course of the grandchild

(16:54):
or child's lifetime. This guarantees that the child has a
totally funded policy, they can't be canceled, and the parents
or grandparents can buy the policy premium at a discount.
So if the total annual premiums of a life insurance
policy are fifteen thousand dollars over ten or twenty years,

(17:15):
depending on SPIA rates at that time, they can usually
buy the amount of money, or they can buy that
amount of money for a five to ten percent, sometimes
a twelve percent discount. It does depend on interest rates
and the issuing companies' ability to pay premiums. Some spe
it companies that we work for that we work with

(17:41):
change rates every one to two weeks, depending on the company. Remember,
this is then guaranteed and finalized. Here's another example. We
use a split annuity strategy where we park a portion
of money into a SPIE for say five years, and
the other we put into a fixed indextinuity. The spee

(18:03):
of money is spending down for sixty months or for
over a five year period, it doesn't matter if it's monthly,
semi or annually. At the end of five years, this
money is spent and the other portion of the split
annuity is invested some into an indextenuity that is trying
to read over that five year period. Then at the

(18:25):
end of five years we'll do another split annuity. We'll
do it again. So using one hundred thousand dollars, we
park thirty thousand into a speA and the other seventy
into a fixed indextinuity. Now the thirty k is just
an estimate. Depending on the spear rates at any given time,
that amount could be more or less than the actual

(18:46):
amount of premium. Remember, you usually get a discount on
the actual cost when using a speA. It's kind of
like buying food at Costco or Sam's Wholesale. Annuities offer
these benefits guaranteed income for life, tax advantages, continued payments
to airs, freedom from probate, investment, diversification, and versatility. How

(19:12):
about a more practical example. Say I want to buy
a car truck and pay cash. The manufacturer is offering
me a zero percent for sixty months, so let's say
five years. Let's use fifty thousand dollars. And let's also
say I want to establish some credit over a period
of time. Maybe I'm a surviving widow and I don't

(19:34):
have much credit established, but I have enough to get
a zero percent offer. I could just pay the dealership
to fifty thousand dollars cash and walk away, or I
could buy a speA and pay that either annually or
monthly over a five year period. Monthly payments would be
eight hundred and thirty four dollars a month, and it

(19:55):
would only cost me forty five thousand, six hundred and
ninety one dollars For that fifty thousand dollars payment, I
just saved four three hundred and nine dollars on my
auto purchase. Retirements of today and tomorrow aren't going to
look the same as those of our parents or grandparents' generations,

(20:16):
and that's the good news. People are living longer in
healthier lives, with retirement looking less like a slowdown than
a new chapter in life. A change in how retirement
looks and how long it lasts also mean looking at
how you can make your savings an income from varied
sources last as long as you do enter annuities. Annuities

(20:42):
are a financial instrument that allow you to both save
money on a tax favored basis and create an income
for life. When they are used along with other retirement
planning tools, annuities can help form a solid financial base
for your retirement. Here's a real life story from Life Happens.

(21:08):
It's a paradise. That's how Linda Billings describes her new
home in Sarasota, Florida. Most days you'll find this Virginia
transplant out walking along the beach, attending a fitness class
meeting up with friends and yes, still working part time
at sixty eight, Linda doesn't want to give up what
she loves to do. She likes to write about astrobiology

(21:29):
for NASA. I find it endlessly interesting and challenging work,
but I just don't want to do it full time anymore.
Thanks to the strategies she put in place for her
retirement with the help of her insurance professional, Linda doesn't
have to work. As part of the planning they did,
Linda purchased several annuities, which now cover one hundred percent

(21:51):
of her current and anticipated monthly expenses. What appealed to
Linda about annuities was their security and dependability, the peace
of mind of not running out of money in retirement,
and she adds that as a single woman, there's a
comfort knowing she'll have a guaranteed income stream for life.

(22:13):
I don't worry when I go to bed. I don't
fret about my financial situation anymore. How many people headed
for retirement are able to say that, Linda billance, here
are some general effects you should know about an annuity.
As with any long term planning, it makes sense to
sit down with an experience insurance professional to walk through

(22:34):
your options. The guarantees are based on the claims paying
and ability of the issuer of that annuity. A retirement
income you can't outlive. It's a contract. There's different types
of annuities. There may be fees and charges, It can
have additional benefits and yes, help is available. An annuity

(22:58):
is a contract with an insurance company that you enter into.
You purchase an annuity with the terms to meet your needs,
such as how you'll pay for it immediately or over time,
and then when will you start taking your payments and
for how long. Which type you choose depends on your
personal financial situation, how long before you need to start

(23:22):
taking the income payments, and the risk you're willing to
take in the accumulation phase, if there is one. When
you transfer your risk of outliving your income to a
company which in turn guarantees a stable income, there may
be fees and charges involved. These depend on the type
of annuity you purchase. Generally, the more risk you transfer

(23:45):
to the company, the higher the fees are going to be.
Depending on the type of annuity you get, your money
can grow tax deferred until you need it, and can
have the ability to protect your beneficiary as well insurance
professionals have the training, expertise and licensing to help you
navigate the annuity landscape specifically and your retirement planning in general.

(24:12):
Here's another thought. You could call me to discuss this.
Think about it, let's talk. Don't forget. I give monthly
virtual meetings regarding Medicare. I give. I do these on
two different companies every month. In one meeting, I'll cover
Medicare supplement plans with a standalone drug plan. That meeting,

(24:32):
sponsored by well Mark United Healthcare, is the sponsor of
my other meeting, I focus on Medicare advantage plans known
as Medicare Parts C, and I cover benefits from that plaatform.
You can call my office at five six three three
three two two two zero zero for the zoom meeting
codes and additional dates and times. You're also welcome to

(24:55):
email me at Craig at Craigshilig dot com and that's
cr a I G at c R A I G
S c h I L l I G dot com.
I'd be happy to send you the zoom link meeting codes.
This is Craig Schillig with Safe Money