By popular demand, we will be continuing our conversations from last week on annuity strategies! This time, we are joined by special guest Joseph DeFazio! Joe is a seasoned financial educator and will bring a fresh perspective on lifetime annuity income and how annuities can benefit your financial life!
https://www.youtube.com/watch?v=YtZbQx8qVXc
If you're interested in guaranteed lifetime income, then this video is for you! We'll discuss the different types of annuities and explain the basics of lifetime annuity income.
Annuities: Risk TransferHow to Structure Your AnnuityWhat is a SPIA? Who Should Consider Annuities?Lifetime Annuity IncomeBook A Strategy Call
Annuities: Risk Transfer
[11:10] “An annuity is a private contract that completely transfers the risk of outliving your money to the insurance company in exchange for a premium payment. The insurance company uses bonds and [then] layers on actuarial calculations, actuarial science, that pools the risk so they can guarantee an income stream for as long as your contract specifies.”
In other words, an annuity is the inverse of whole life insurance, which transfers the risk of not living long enough to the insurance company (in exchange for a premium). Because insurance companies manage the risk of living too long AND not long enough, they’ve created balance.
How to Structure Your Annuity
There are two phases to an annuity: the accumulation phase and the annuitization phase. During the accumulation phase, you’re funding the annuity, and you can choose either a fixed rate or variable rate, both of which have their pros and cons.
In the annuitization phase, one of the choices you must make is whether you want your benefit now or later. If you choose to start receiving your benefit within 13 months, that’s called an immediate annuity. Any time after that is considered a deferred annuity.
Then, you choose how you want to receive your benefit. You can get a level payment, and increasing payment, or even a variable payment stream that would be tied to an index. The choice will likely depend on how long you expect to take income, compared to how large your annuity is.
And finally, you can choose what types of guarantees you want on that benefit. If you choose to have no guarantees, then the income benefit stops as soon as you pass on. You can also tie an annuity to someone else with a survivorship rider, which would continue to pay the income to a spouse or partner for the remainder of the annuity term.
Another way to structure it is placing a guarantee on the term, like 10 years, where it pays to someone for that term no matter what. You can also choose to simply guarantee a return of premium, so if you pass on before you’ve earned back your initial premium, it will pay a beneficiary until that benchmark.
What is a SPIA?
[15:01] “A person’s idea of an annuity is often tied to a SPIA because this is the description that most people have of an annuity.”
SPIA stands for a single premium immediate annuity. In other words, you pay for the annuity in one lump sum and begin receiving an income within the first 13 months. Since it has its own acronym, it’s what many people are familiar with when the topic of annuities comes up. That being said, a SPIA isn’t for everyone. As you can see above, there are many ways to structure an annuity to work for your particular set of needs and goals.
While the immediate nature of the SPIA may be beneficial to some, there are some things to consider. One of the major benefits of the SPIA is that you’re going to get a much higher rate of return on this than any other annuity. However, these annuities are designed to be more short-term, and any remainder goes to the life insurance company, not a beneficiary.
Generally, the best candidate is someone who is running out of money, is over 85, and wants to create the best possible end-of-life income. It’s certainly not right for everyone,