Income Annuity Information
We have provided you with some Income Annuity Information in this post. The term “Income Annuity” is a catch all. We use this term for any annuity that produces guaranteed future income. There are three types of annuities that can create guaranteed future income. These annuities are either a SPIA (Single Premium Immediate Annuity), a deferred income annuity or an annuity (fixed indexed or Variable) with an income rider. All three have different sweet spots which can help someone determine when to use each type. A review of each is provided below.
- A single premium deferred annuity creates immediate income that will last for a pre defined amount of time. You can use the annuities to provide income for one person for life, or a couple for both lives. Although, you can also use it for a set amount of time such as 20 years. The biggest thing to be aware of is that the insured no longer owns the lump sum. The insurance company and/or bank takes control of the lump sum of money. They take the money in return for paying a guaranteed income stream that will not change. If someone puts $300,000 in a SPIA with a life with 20 years certain option, this will guarantee payment for life. In the event that the investor dies prior to receiving payment for the 20 years, the beneficiary will receive the income until they have received the total 20 years of payments. The trade off is that the insured no longer has access to the lump sum of money.
WHY WOULD SOMEONE USE THIS?-
- A SPIA will pay out the higher ratio of guaranteed income than the income rider or the deferred income annuity. This is most useful for someone that has other assets and can afford to dedicate a portion of assets to create a guaranteed income stream. The lump sum is no longer available so it is important to have other liquid assets if you decide to use this option.
Deferred Income Annuity-
- The product is very similar to a SPIA. The difference is that income does not start immediately. It starts at a pre determined future date. The longer the deferral the higher the future income payment is. You can calculate payments on a guaranteed bases. The insured will know exactly how much they will get at that future date.
WHY WOULD SOMEONE USE THIS?-
- If the insured has a need for future income, this is a good way to create an income stream without having to worry about market performance or anything else. They just dedicate the amount of money they need and then they can be sure income will start when it is necessary. The flaw is that the future income payout is not competitive with the future income payout that some other riders create.
- When an income rider is attached to a fixed indexed annuity or a variable annuity it allows the insured to create a future income at any year they choose. They do not need to pre determine the year income will be taken and they can see exactly what the income would be in any given year. They also maintain control over the lump sum investment and can continue to accrue interest on the money. The income payout exceeds that paid by the Deferred Income Annuity. It is critical however, that you pick the most competitive company, as the guaranteed payout amounts vary tremendously. This depends on the company that you choose to use. Additionally, there is an annual fee on most income riders.
WHY WOULD SOMEONE USE THIS?
- If someone is looking for the highest deferred guaranteed income payment, the right income rider is the best option. In fact, you would also maintain control of the lump sum investment if you use this approach.