Marc Cuniberti With the market in ongoing turmoil for well over a year now and no way of telling if the recent rally in the first quarter of 2023 will stick, the annuity option has been a hot topic here on Money Matters.
Annuities are contracts between you and a large insurance company that states the insurer agrees to pay you over a period of time an amount based on the terms stated in the contract.
There are many variations on annuities and I have covered the few I recommend for many clients in the past Money Matters radio and newsprint. I often use my own annuity names when describing these to better illustrate their advantages.
Today’s flavor of the month is what I call the “Bonus Income for Life Annuity”.
Unlike Participation Annuities which give you a portion of the stock market increase measured over time, and Triggered Annuities, which promise a minimum and specific percentage return should certain things happen in the markets, Bonus Income for Life Annuities add a bonus payment to the amount a customer puts in as soon as the papers are signed, then pay a fixed lifetime income.
For illustration purposes, I always draw on real-life annuity products that actually exist when describing annuities and today is no exception.
Similar to other income-for-life products, the Bonus Income for Life Annuity ensures the customer won’t outlive their money. The payments are for life, even if it’s over and above the amount you put in. The bonus referred to means the insurer adds a bonus to the amount you put in at the moment you open the annuity.
Specifically, in this annuity, suppose you put in $100,000.00. The day the papers are signed, the insurers ADDS 20% to what you put in and subsequently would credit this account $120,000.00 immediately.
Yep, you read that right. 20% is added to your deposit.
You can’t then close the annuity and remove 120K obviously, but the 120K is there and used to calculate your lifelong payments.
You leave the money in the annuity until the day comes that you decide to “pull the trigger” and begin your lifetime payments. The payments will then continue until you die. If you want to add a spouse or significant other, you can, which means payments continue until both of you die.
Once pulled, you cannot “un-pull” the payments which means once you decide to start payments, that’s it.
How much will you get each year?
That depends on your age when you open the contract and your birth gender. The younger the age, the lower the payments. This is because the insurer is paying you for life, so the insurer rightly adjusts the payments assuming it will have to pay younger applicants for a longer period of time.
The payments can be surprisingly large. I ran one on myself at age 67, male, and if I waited only 2 years to pull the trigger at age 69, hypothetically they would pay me 8.01% on my original deposit every year for the rest of my life.
Not bad.
Wait 4 years and the payment rises to 9.44% for life and if I wait 6 years, I get an 11.33% annual percentage until the day I die.
I ran one for a 71-year-old male and the yield was even higher. If he waits 3 years, he gets a 9.46% APR for life, and waiting 5 years nets him an annual return on his money of 11.32%. Waiting 9 years gets him a whopping 17.22% on his original deposit for life.
Upon death, what hasn’t been paid out is returned to the estate and both the payments and the returned amount to the estate can also increase as the principal is tied to a variety of stock indexes.
As with all the annuities covered here on Money Matters, there is no downside risk, you can withdraw a certain amount a year if needed, early withdrawal fees over the allowed annual withdrawals may apply, and there are no medical tests or preexisting conditions that will affect issuance.
Considering I-Bonds and Treasuries currently yield fairly healthy returns, the annual yields offered by certain annuities can exceed those amounts depending on age and time of investment.
And unlike the I-Bond or short-term treasury rates, the annual percentage amount promised will never go down as long as you live. As mentioned, in fact under certain conditions, what you receive every year may even go up.
In conclusion, there may be other terms and conditions that apply and annuities are insured by the underlying insurance company and are currently not covered under the FDIC envelope. If interested, illustrations and the policies can be obtained through any annuity-licensed agent or properly licensed financial professional.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. (530)559-1214. He was voted best financial advisor in the county 2021.
