Set For Life: Fixed-Immediate Annuity Offers the Allure Of Steady Income Stream
There's one annuity that doesn't have a mile-long rap sheet - the lifetime-fixed-immediate annuity. And despite its mouthful of a name, it's the easiest annuity to understand, the cheapest to buy and for some people the most desirable to own.
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The product is simple.
You surrender a sum of cash today in exchange for a fixed stream of regular payments - either immediately or at a later date. The payments continue until you die, no matter how long you live. If you die before life-expectancy tables say you would, the insurer uses your cash to pay annuity holders who live a long time. If you live a long time, you can receive far more cash than you originally put up.
This guarantee - income for life no matter how long you live - makes lifetime-fixed-immediate annuities worth investigating, especially for people over age 65.
"It's one of the few life insurance products that are not oversold," said Glenn Daily, a life insurance consultant based in New York.
Yet before you rush out and buy a lifetime-fixed-immediate annuity, take the time to learn more about the product's promises and perils. Risks loom on several fronts, life insurance analysts said.
So investors should carefully weigh two "on the one hand/on the other hand" scenarios.
Buy when you're too young - when insurers expect you'll live for a very long time - and your lump of cash generates a comparatively low monthly income. Buy when you're too old, and if you die soon thereafter, you've surrendered a sizable sum of cash and gotten little of it back.
Invest a large sum of cash all at once, and you make an irrevocable bet on long-term interest rates, because the yield on your annuity is fixed for life. On the other hand, resist the temptation to buy at all, and you risk outliving your savings.
Before reviewing each risk and reward, begin your fixed-immediate-annuity shopping with two simple facts: your age and the amount of cash you can afford to surrender for life.
In mid-July, a 70-year-old man who put down $100,000 could expect a monthly payout of between $700 and $800 a month, according to The Annuity Shopper newsletter (see www.annuityshopper.com for details).
"Look for the biggest payout you can get, from an insurer that can stand behind its guarantee to pay you for life," said Hersh Stern, publisher of The Annuity Shopper.
A.M. Best, Standard & Poor's, Moody's Investors Service, Fitch Inc. and Weiss Ratings Inc. all rank life insurers for financial fitness.
After you've found a few life insurers offering attractive monthly payments, consider whether it is the best time to buy an annuity.
Rates on 10-year U.S. Treasury notes stood at about 4.25 percent in early September. That's higher than the 3.1 percent yield 10-year U.S. Treasuries delivered in June 2003; but it's below the average yield of 6.8 percent established over the 20-year period ended Aug. 31.
Treasury yields matter because they often influence the rates that insurers pay to annuity owners. In today's low-rate climate, for example, annuitants can expect to receive anywhere from 2.75 to 4.25 percent, depending on the expected life span of the person buying the contract, said Stern, who also edits the TotalReturnAnnuities website.
Insurers pay close attention to the U.S. Treasury markets for a reason. When they write annuity contracts, they expect to make money from the so-called "spread" - the difference between the interest they pay you and the annual returns they expect to receive from fairly conservative investments.
With rates as low as they are today, it might be a better idea to invest in bank CDs, U.S. Treasury bills or short-term corporate bonds in expectation that rates - and annuity payouts - will rise in the future, said Peter Katt, a life insurance consultant in Kalamazoo, Mich.
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But don't get caught up in the waiting game forever, especially if you're approaching age 75, in good health and short of other guaranteed sources of income.
"Studies show that annuitized payments consistently last longer than lump sums," said Eric Sondergeld, director of retirement research at Limra Inc., a life insurance consulting firm based in Windsor , Conn.
Studies on annuities and why they're worth considering, especially for people expecting to live more than 15 years in retirement, can be viewed on the Internet at IFID.
If you are in good health, it's important to overcome the worry that if you buy a fixed-immediate-lifetime annuity today, and die tomorrow, you'll "lose your bet," said Rebecca Cohen, a spokeswoman for Vanguard Group.
"A lifetime-fixed-immediate annuity is a form of insurance," Cohen said, one that continuously delivers income if you live well beyond your expected life span.