Immediate Annuities – The Extremely Risky Income Proposition? Part 2
Recently, I mentioned one of the issues you confront with an immediate annuity is the fact that you must choose a payout term when you decide you want an immediate annuity. Well, here is one of the biggest challenges. If you want the most money, you would choose a straight life payout (not recommended but you’ll see why and the whole catch-22 about it). In a straight life payout, again, the insurance company is choosing a payout for you determined by their own life expectancy tables. We already discussed why this could put you at a great disadvantage, but it gets worse!
If you choose a straight life payout, you are basically saying pay me until I die. This is the way you get the most money. HOWEVER, if you die in 2 months, they keep the rest of the money! It’s the end of the game for you and your money goes to the insurance company. So how can you protect yourself? Well, I can’t tell you all the ways in a short excerpt but I will show you the challenge.
You can choose a life and joint survivor option meaning you and your spouse for example. The payments will then be lessened and also lessened to the extent of the youngest of the joint survivors in addition…you get less money. You could choose a lifetime and 10 year payout meaning no matter what happens you (and your estate) would get paid for a minimum of 10 years in the event that you die before the 10 years. And if you don’t you get paid for life. Again, you get paid less. The insurance company has to hedge their money.
That is the risk. Everything you do to mitigate your risk, the insurance company mitigates their risk. It is a no-win situation. You can’t get enough money from them UNLESS you live WAY longer than they expect you to. That’s the only way to win the immediate annuity game.
Now, in all fairness, there are appropriate situations for the immediate annuity and they certainly fit in very specific areas of an investment portfolio. But these are few and must be done properly by a knowledgeable adviser. Otherwise, you lose!
There are many more aspects to immediate annuities one must be aware of. I hope this helps.