Friday, April 11, 2008

Lifetime Income Annuities: Not on your life

Lifetime Income Annuities Promise Lifetime income. But for most, a very raw deal indeed.

Has an annuity salesperson of “financial advisor/planner” scared you, mom and dad, or grandpa or grandma into thinking they will outlive their money, becoming destitute in their golden years? What a clever fear sale indeed. Yes, it’s true that people are living much longer and they need to plan better to stretch their money over more expected years.

So bingo! Here’s the solution offered by the “trusted advisor”: a guaranteed, lifetime income. That’s right, in return for your giving your money to an insurance company, you will receive a predictable income for as long as you and if you are married, your spouse live. But wait… There’s a few catches and some basic math that isn’t often explained by the annuity seller.

For starters, unless you select a period certain benefit, if you die the next day in a car accident (for example), you have made a large, non-deductible charitable gift to… That’s right, the insurance company. They keep all of your money with nothing payable to your family. Ok, let’s now assume you instead live to be 90. The rate of return on that annuity may only be in the 2-3% range (and that’s before taxes). Granted, if you live longer, the rate of return increases. Annuity buyers are fooled easily with these income annuities for one simple reason. They are shown that if you put $100,000 in the annuity, you get say $7,000/year back. That’s a 7% return right? In a word, nope! It’s your own money back (zero return) for the first 14 plus years then you start getting a return after then.

Also, during that first 14 years, you have to pay income tax on a portion of the payment (under section IRC §72). So effectively, it may take many years more to get into the positive and earn any return. Any wonder why insurance companies are so rich and agent’s can be paid so much for offering so little?

Written by Steven Roth of Wealth Management International

Tony Bahu

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