Annuity Income: Do I lose control of the money?
The Annuity Man
A comment I hear from too many people about “annuities” is that they would never buy one because the annuity company would keep the money if they died early in the contract. Of course, this only describes one (“Life Only”) of over 30 different ways of structuring an annuitized payout.
The vast majority of people choose the lifetime income guarantee, but structure the policy to make sure that 100% of any unused money goes to the listed beneficiary(s) on the policy. In other words, the annuity company doesn’t keep a penny under any circumstance and it's up to you at the time of application to make sure that you (or someone in your family) gets all of the money. You are in full control of that decision on how the annuity will be structured.
Another common misconception is that when you own an “annuity,” you lose total control over the asset. Once again, that is not true about all annuity types. It only applies to a select few. Americans are typically control freaks, and like to be in charge of everything. That definitely includes their money.
But we are now living in strange, chaotic, and volatile times. The stock market is a daily trampoline of emotional and monetary highs and lows that many Americans are growing tired of. Additional lifetime income guarantees that will add to Social Security payments are becoming more attractive to the 10,000 baby boomers reaching retirement age every single day.
Annuities are the only financial product on the planet that can provide an income stream that you can never outlive. Most people love their lifetime income guarantees from Social Security, so many are now looking more closely at annuities that contractually solve for longevity risk (i.e. outliving your money).
The question is, do you need to have full control over the asset while receiving the lifetime income, or do you want it to work like Social Security?
Annuitization = No Control
The primary types of annuities that utilize “annuitization” for contractual income guarantees are Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs). All are classified as fixed annuities, all are regulated at the state level, and all are issued by life insurance companies. And by the way, all have NO annual fees and pay a very low built-in commission to the agent.
“Annuitization” means to create payments. Annuities started in the Roman Times as a lifetime income pension reward to the dutiful Roman soldiers and their families. The Latin word for payment is “annua”...which is the origin of the words “annuity” and “annuitization.”
All annuity payments (regardless of type) are a combination of return of principal plus interest. Yes...you are getting your money back with interest. The goal is to draw your account down to zero so you can be in the annuity company’s pockets, because they are on the hook to pay regardless of how long you live and regardless of how much money is in the account. Your life expectancy at the time you start the payments is the primary pricing factor with interest rates playing a secondary role.
SPIA, DIA, and QLAC “annuitized” income streams are like ripping the knob off of a water faucet. Once the lifetime income starts, you will receive income payments as long as you are breathing. You can also structure annuitization for a fixed period of time (aka: Period Certain) to have the annuitized payout happen for that specified duration you choose at the time of application. For example, a “20 Year Period Certain” will pay you (or your beneficiaries listed on the policy) 20 years of payments. After the 20 year time period, the payments stop. If you structured it “Life with 20 Year Certain,” you would be paid for life. However, if you died in year 7...there would be 13 more years of payments. Got it?
When you purchase a SPIA, DIA, or QLAC and are past the free look time period, you no longer control that asset. You are still the owner, but there are typically no liquidity or cash out provisions within the contract. You are going to get your money back, but it will be in payment form. That’s not a bad thing in my opinion, it just part of the contractual guarantee that you need to fully understand.
Non-Annuitized = Full Control
Not all annuity types fall under the “annuitization” banner. Variable Annuities (VAs), Fixed Index Annuities (FIAs), and Multi-Year Guarantee Annuities (MYGAs) are all contractual strategies that allow you to retain full control over the money. VAs, FIAs, and MYGAs are also contracts that are issued by life insurance companies.
All VAs and FIAs have annual liquidity provisions and allow you to get all of your money back (with interest/gains) without penalty after the surrender charge time period. MYGAs are the annuity industry’s version of a CD, and most (but not all) have annual liquidity provisions or allow you to peel off the interest coupon like you can with a CD or bond. MYGAs also allow you to get all of your money back with interest after the surrender charge time period has passed. With VAs, FIAs, and MYGA you fully control that asset.
In addition, Income Riders can be attached to most Variable Annuities (VAs) and Fixed Index Annuities (FIAs) at the time of application. Income Riders are a separate calculation from the accumulation value and can only be used for lifetime income guarantees. Think of Income Riders as monopoly money or a phantom account that can only be used to calculate the first lifetime income payment.
Unlike “annuitization” products, Income Riders allow you to retain full control over the asset while having a lifetime income guarantee in place. That doesn’t mean that Income Riders are better, but having control over the money does set them apart from annitized product types.
To Control..or Not To Control
With any annuity quotes for lifetime retirement income, all carriers and all products should be shopped in order to find the highest contractual guarantee for your specific situation. Once that number is established, then you determine which product type best fits your overall needs. The final step is to check the carrier ratings and claims paying ability. At the end of the process, your choice might be an annuitized product. It might be a non-annuitized product. It might be that a combination of both would fully enhance your retirement plan.
In the world of annuities, there are no perfect answers...just bad sales pitches. All annuity types (annuitized or non-annuitized) have unique benefits and limitations. The key is to fully understand both, and make your buying decision on your terms and on your time frame.