By: Jeff Affronti

March 27,2015

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We market insurance products with strong guarantees. Every insurance line will have different premiums required to fund certain policies. Pricing takes into account product features, risk factors and current market conditions among many other considerations. The basic idea of insurance is that the insurer is exposed to more of "the risk" than the insured. Sometimes premiums may be more than they need to be for the same "intended" coverage due to the product selected. A cost of insurance that hides in the product specifications.

When it comes to retirement income, all options should be placed on the table and compared. Leaving out viable options simply because they have fewer components, a perceived negative reputation, or just pay far less commission may have a long lasting financial impact on a retirees lifestyle.

Let's look at cost/premium associated with "insuring" a retirement income. 
A client is in need of income and wants it guaranteed for life. What options does the client have using insurance? Fixed annuities are one option. Traditionally there has been two ways to get immediate lifetime income (beginning in 1-13 months) using fixed annuities. First, the very definition of an annuity, the immediate annuity. Next, is annuitization through deferred annuities which have built-in guaranteed income factors. Finally, the newest option made available by the insurance industry, the income rider. These carriers obviously feel offering rider income to start immediately is a viable and valuable option. Most fixed annuity marketing today seems to be rider based with little to no mention of contractual minimum guarantees or annuitization options. Treating the strongest guarantees of the contract as trivial is a big marketing oversight.

So let's look through all the sizzle and at some real income numbers for an average age retiree who is just looking for guaranteed immediate income.

The Client:

  • Male age 64
  • Wants safe & guaranteed non reducing lifetime income at age 65
  • Does not want to lose any premium
  • Has $1,000,000 for this purpose
  • An "A" rated carrier or better preferred

A Fixed Index Annuity (FIA) With Guaranteed Income Rider Included:

  • Place $1,000,000 premium
  • 4.00% Enhancement Bonus = $40,000.00
  • 8.00% Simple Roll-up = $83,200.00
  • Starting Benefit Base = $1,123,000.00
  • 5.00% Lifetime Withdrawal = $56,160 Annually ($4,680 monthly)
  • Annual Fee 0.95% Annually Based on Benefit Base
    0.95% x $1,123,000 = $10,668.50 Fee
  • If death in year 11 only $922,626 will have been guaranteed minimum returned.
    - $77,374.00 (Worst case on guarantees and no gains will likely be better than this)

A Single Premium Immediate Annuity (SPIA):

Option # 1 - Use all the premium:

  • Place $1,000,000 premium
  • California Premium Tax of 2.35% = -$23,500.00
  • Starting income Premium = $976,500.00
  • Lifetime Income options:
    Life & 20 Years Certain = $61,038.96 Annual ($5,086.85 monthly) 
    Life & Refund (15.6%) = $63,972.12 Annual ($5,331.01 monthly)
  • No Fees - No Roll Up - No Bonus - Less Sizzle Yet More Income!
    (non premium tax states $65,783 Life with Refund)

Option #2 - Match the riders income:

  • Solve To Match Rider Income of $56,160 Annually ($4,680 monthly)
  • Lifetime Income options premium required including premium tax:
    $898,206.28 Life with 20 Years Certain = $101,793.72 remaining
    $853,856.28 Life with Refund (15.2 Years) = $146,143.72 remaining
  • No Fees - No Roll Up - No Bonus - Same Income - Less Premium!

What is that extra 10% to 14%insuring? Is it worth it? Could we do better?

For instance, if we look at the client for life insurance, $101,793 would get about $235,000 of coverage assuming a standard rating and a quick glance at rates. How much guaranteed money will actual make it to the client or the beneficiaries no matter how long or short the annuitant lives.

The SPIA With Life Insurance = $1,358,200: 
Day 1 guaranteed minimum return at death on the 1,000,000 premium:

  • $4,680. x 240 = $1,123,200
  • Life Ins Pays = $235,000
  • Total = $1,358,200

This client could potentially save 10% of premium, receive the same guaranteed lifetime income with no risk of premium and in-fact, guarantee a 135.8% return of premium from day 1!

Presenting the immediate annuity option when guaranteed income is desired should be automatic. If this client liked an FIA income payment starting in 1 year he may love the higher income or the lower premium the SPIA can offer! Better they find out before they pull the trigger on this FIA!

For income needs in the future the FIA's with riders offer flexibility and guaranteed income. The option to shop a SPIA with the accumulation value at the end of the surrender period gives an additional chance at higher income. If the client can not find higher income than the rider turn on the income knowing it is very competitive.

The idea is to not outlive your money. 
Maximizing it at the same time does not hurt.

Jeff Affronti 
Marketing, illustrating, building fixed annuities since 1995.

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