Tag: single premium deferred annuity

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Annuities Fixed Index Annuities Retirement Income Planning

How Flexible are Flexible Premium Deferred Annuities?

When planning for retirement, you need to generate sustainable income that will meet your projected inflation-adjusted financial needs during various stages. This often requires multiple income-generating sources that ideally start, and potentially stop, to match your projected needs at different stages of retirement.

A diversified portfolio of fixed income investments that’s part of your overall portfolio generally needs to be designed to provide the desired after-tax income amounts and timing of same. The planning is complicated, should begin well in advance of retirement, and needs to be monitored and updated on a regular basis.

One popular investment that’s designed for the fixed income portion of a retirement income plan is a fixed index annuity (“FIA”) with an income rider. When you invest in a FIA, you’re purchasing a deferred annuity. As defined in the Glossary, a deferred annuity is an annuity that doesn’t mature or begin making payments until some future date.

Deferred Annuity Types

There are two types of deferred annuities, both of which are suitable for inclusion in a retirement income plan: (a) single premium deferred annuity (“SPDA”) and (b) flexible premium deferred annuity (“FPDA”). The basic difference between the two is the allowable investment frequency. A SPDA is a one-time investment whereas a FPDA provides for multiple investments in the same annuity.

The key to understanding FPDA’s, including how they will fit into a particular retirement income plan, is that flexibility is in the eye of the beholder, or, in this case, the insurance carrier that issues a particular product. While a FPDA by definition allows for multiple premiums, the number of years the additional premiums may be added and/or the premium amounts are often limited by the terms of an annuity contract. This can be problematic where ongoing investments of specific amounts are required to achieve a targeted level of retirement income.

Types of Flexibility Restrictions

While many FPDA’s provide for indefinite additional investments, several have a limited defined window of opportunity. To give you an idea of the possibilities, let’s take a look at the FIA offerings available through the life insurance agency with which I’m associated.

Of the 52 FIA’s currently offered by 14 carriers, all of which are highly rated, 25 are SPDA’s and 27, or 52%, are FPDA’s. 16 of the 27, or 59%, of the FPDA’s have no restrictions regarding the number of years additional premiums may be added or the amounts of same.

That leaves 11 FPDA’s with restrictions, seven of which limit the number of years that additional premiums may be added and four limit the additional premium amount. The seven FPDA’s that limit the number of years uses either one or three years as the limitation. The four that limit the premium amount are all offered by the same carrier which limits additional premiums to $25,000 per year.

Retirement income planning requires flexibility. The ability to make unlimited additional investments after the first contract year without restriction as to dollar amount is an important consideration in many cases when evaluating FIA’s with income riders. In summary, the type of fixed income annuity and product that you’re evaluating needs to dovetail with your projected financial needs to increase your opportunity for success.

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Annuities Fixed Index Annuities Retirement Income Planning

Retirement Income Planner Key to Success When Investing in Fixed Index Annuities

Last week’s post presented a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities (“FIA’s”). As evidenced by the questions, themselves, as well as the number of questions, this is a very technical area that requires specialized expertise.

So where do you find answers to the various questions? Assuming that investment in one or more FIA’s makes sense in your financial situation, where should you go to purchase these long-term investments? The remainder of this post will assume that you’re considering FIA’s in the context of a retirement income plan.

Unlike investing in the stock market, where you can utilize the services of an investment manager or be a do-it-yourselfer, you must purchase fixed index annuities from a licensed life insurance agent who has the requisite training to sell annuities. Life insurance agents can sell different types of insurance products, including life, disability, and long-term care insurance, as well as annuities. Life insurance companies, life insurance agents, types of products, and the specific products that can be sold, are regulated by an insurance body in each state.

Not every life insurance agent sells annuities. Some only sell variable annuities. Furthermore, there are several different types of fixed annuities, including single premium deferred annuities (“SPDA’s”), single premium immediate annuities (“SPIA’s), deferred income annuities (“DIA’s), and FIA’s. FIA’s are a unique type of fixed annuity that requires specialized expertise and training, and, as such, aren’t offered by every life insurance agent who sells fixed annuities.

Since a FIA is a unique long-term investment with several moving parts in the base product as well as the income rider that change on a regular basis in response to market conditions, it’s important to work with an independent life insurance agent who has access to at least two dozen FIA’s offered by at least six different highly-rated life insurance companies, and sells them on a regular basis.

Going beyond locating a life insurance agent who (a) sells annuities, (b) sells fixed annuities, (c) sells FIA’s, and (d) is an independent agent with access to several different FIA’s offered by several different highly-rated life insurance companies, there are other considerations to keep in mind before purchasing a FIA. First and foremost, you need to recognize and understand the fact that retirement income planning is a specialized discipline, it’s complicated, there are many risks that need to be considered, and mistakes can be costly.

Given the fact that the purchase of a FIA with an income rider for retirement income planning purposes is typically a lifetime investment that often requires a large upfront financial commitment and potentially ongoing periodic investments, it’s especially important that you work with the right individual. Specifically, the person you choose should be a professional retirement income planner. What exactly is a retirement income planner? Sounds like the subject of another post.

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Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 3 of 5

Retirement Income Center - Puzzle

I hope that you’re enjoying this series so far comparing two innovative retirement income planning tools – fixed index annuities (“FIAs”) with income riders and deferred income annuities (“DIAs”). Of the 12 features offered by FIAs with income riders that are listed in Part 1, we’ve looked at three features that are also offered by DIAs, and five that aren’t applicable to DIAs.

This post will discuss the remaining four features that are applicable to DIAs on a limited basis. They are as follows:

  1. Known future income amount at time of initial and ongoing investments
  2. Flexible income start date
  3. Greater income amount the longer you defer your income start date
  4. Death benefit

Known Future Income Amount at Time of Initial and Ongoing Investments

One of the really cool things about fixed income annuities from a retirement income planning perspective is the ability to structure a guaranteed (subject to the claims paying ability of individual life insurance companies) income stream to match one’s income needs. In the case of both FIA’s with income riders and DIA’s, the amount of the future income stream is known at the time of initial and ongoing investments.

When you purchase a DIA, a known amount of income, with or without an annual inflation factor, will be paid to you as an annuity beginning at a specified future date for either a specified number of months or for life, either single or joint as applicable. With traditional DIA’s, you make a one-time investment; however, there are a handful of products that offer you the ability to make ongoing investments.

Unlike traditional DIA’s where you generally make a single investment and you receive a specified amount of income beginning at a specified date, FIA’s with income riders have more variations. For one thing, assuming you’re working with a flexible– vs. a single-premium FIA, you have the ability to make ongoing investments in a single FIA. In addition, the income start date, which will be discussed in the next section, is flexible. While the future income amount is known at the time of initial and ongoing investments, both of these variables combine to offer a much broader range of possibilities than a traditional DIA when it comes to the income withdrawal amount.

Flexible Income Start Date

All FIAs with income riders have a flexible income start date with the ability to begin income withdrawals either in the year of purchase or one year from the date of purchase assuming you’ve reached a specified age, generally 50. There’s no requirement with FIA income riders to commit to the income start date at the time of purchase, and, furthermore, you don’t have to ever start taking income withdrawals if you choose not to do so.

Per the previous section, traditional DIAs begin their income payouts at a specified future date. There are some nontraditional DIAs that provide for a flexible income start date similar to FIAs with income riders.

Greater Income Amount the Longer You Defer Your Income Start Date

With all fixed income annuities where the income isn’t payable during the first year, i.e., single premium immediate annuities, or “SPIAs,” the longer you defer your income start date, the greater the amount of income you will receive. This is true whether the income payment is for a fixed term, as it is with some DIAs, or if it’s for life.

FIAs with income riders, with their built-in flexible income start date, include this feature. In order to obtain this benefit with a traditional DIA, you need to choose a later income start date at the time of purchase.

Death Benefit

Income withdrawal is an optional rider with FIAs. The base product has an accumulation value that’s increased by initial and ongoing investments, premium bonuses, and interest credits and is decreased by withdrawals and surrender and income rider charges. To the extent that there’s accumulation value remaining upon the death of the owner(s), it’s paid to the contract’s beneficiaries as a death benefit.

Traditional DIAs may or may not include a death benefit prior to annuitization. Once annuitization occurs, there’s generally no death benefit payable. If you opt for a traditional DIA that includes a death benefit before annuitization, the amount of the benefit will generally be equal to your investment amount; however, the tradeoff will be a reduced income amount than would otherwise be payable by a similar product that doesn’t include a death benefit.

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Annuities Fixed Index Annuities

When Should You Begin Investing in Income Rider Fixed Index Annuities?

Retirement Income Center - Runners

The last two posts, When Should You Begin Your Lifetime Retirement Payout? – Parts 1 and 2, analyzed the different possibilities for timing of commencement of income withdrawals from a fixed index annuity (“FIA”), assuming that you purchase an income rider. As discussed, while the timing should be targeted when designing a retirement income plan before any FIA’s are purchased, the income withdrawal starting date is open-ended. As a matter of fact, as pointed out in Part 2, there’s no requirement to ever exercise your income rider.

Let’s take a look at the front end of the retirement income planning timing decision. Assuming that your primary reason for purchasing one or more FIA’s is to provide you, and your spouse or significant other if applicable, with guaranteed (subject to the claims-paying ability of individual life insurance companies) predictable lifetime income with a flexible starting date, and further assuming that you purchase an optional income rider, when should you begin investing in FIA’s?

Before answering this question, it should be emphasized that investment in a particular FIA doesn’t have to be a one-time transaction. There are two types of FIA’s – single premium deferred annuities, or “SPDA’s,” and flexible premium deferred annuities, or “FPDA’s,” with the latter permitting multiple investments. Of the 256 FIA’s on the market today, 171, or 66.8%, can be coupled with guaranteed minimum withdrawal benefits (“GMWB’s”), or income riders. Of the 171 GLWB FIA’s, 110, or 64.3%, are FPDA’s. How’s that for alphabet soup?

Whether making a one-time investment using a SPDA or FPDA, or multiple investments in a FPDA, in order to take advantage of the magic of FIA income riders, the one-time or initial investment, assuming it’s the largest investment, should be made a minimum of five years, and preferably ten to twenty years, before the income withdrawal starting date.

If you read the April 2, 2012 post, How is Your Fixed Index Annuity’s Income Account Value Calculated?, you know that there are six potential variables that are used in the calculation of the income account value that’s used to determine the amount of income that you will receive from a particular FIA. In addition to the initial and subsequent investment amounts, potential premium bonuses, interest rate and interest crediting method, i.e., simple or compound, one of the key variables is the interest period.

The interest period, or accumulation phase, as it’s otherwise known, is a finite period of time, with one, or a combination of, three possibilities: (a) until income is started, (b) specified number of years, or (c) specified age. The longer the interest period, the greater your income account value will be. For riders that use a specified number of years, ten is common, although it can be as long as twenty.

Assuming an investment of $100,000 in a FIA with an income rider that offers 6% compounding for 15 years, the income account value will grow to $126,248 in five years, or $226,090 in 15 years, or approximately $100,000 greater if the investment was made ten years sooner. Assuming the individual is 65 when both values are reached, he/she wants to begin income withdrawals, and the contract provides for a 5% withdrawal rate, the annual withdrawal, or lifetime retirement payments (“LRP”), will be $6,312 ($126,248 x 5%) in the first case, or $11,305 ($226,090 x 5%), or almost $5,000 greater, in the second case where the initial investment was made ten years sooner.

In summary, the earlier that you begin investing in fixed index annuities relative to the projected year that you will need to begin taking income withdrawals to meet the projected income shortfall in your retirement income plan, the more time your FIA income rider will have to work its magic, and the greater your lifetime income will be.