Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Are the New Life Insurance Annuities Worth the Cost?

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Insurers want you to buy more annuities. They expect that as the Baby Boomers age they will need dependable sources of lifetime income, and annuities will provide a large portion of that income.

The sticking point is that many people do not want to buy annuities, because the annuity payments last only for life. If the owner dies too soon the insurance company benefits at the expense of the heirs.

Insurers are addressing this obstacle by creating new features for annuities. One new policy is endorsed by AARP and soon will be marketed to all its members.

The annuity, issued by New York Life Insurance Co., has a cash back feature. If the annuity owner dies before his life expectancy, and the distributions paid have not at least equaled the premiums paid, the insurer will return the difference. This immediate annuity, known as the AARP Lifetime Income Program, can be purchased with a lump sum of as little as $5,000.

The annuity, of course, does not make your heirs whole. It guarantees only a return of your investment, not of any income that would have been earned on that investment. The cash back feature also comes at a price. The payout will be about 10% less than for an identical annuity without the feature. AARP recently estimated that the annuity will make an annual payout to a 65-year-old man of roughly 7% of the premiums. A $100,000 investment will pay $7,000 annually. Other insurers are rolling out annuities with similar features. Each investor has to decide if this form of life insurance is worth the cost.

Another consideration is that the annuity does not provide inflation protection. The payout is fixed for life. As we discussed in last month’s visit, there are annuities available with payouts that vary over time. Another potential drawback of immediate annuities is that there is a limited ability to withdraw money beyond the fixed payout.

Inflation protection and liquidity must be provided by other parts of the portfolio. That is why few people put all of their retirement portfolios into such annuities. An allocation of up to 50% can provide a floor on lifetime income that guarantees the basic living expenses will be paid. The rest of the portfolio should be invested for some growth so that purchasing power is protected over time and cash will be available when needed.

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