Annuities Bullet-Proof Guarantees

The Baby Boom generation—a whopping 76 million individuals who are steadily marching through middle age and into the ranks of senior citizens are looking for secure, safe investment vehicles that provide stable income for their retirement while providing competitive returns.

With the stock market in a long-term consolidation phase, chopping up & down, but actually going sideways this past decade, frustrated investors are perplexed as to where to put their money.

Today the average investor is left sitting on the fence with their money.  In the 1990s, the perception was that the S&P 500 was the ticket to retiring rich and young, but that went out the window in 2000. 

In the early 2000s, real estate offered the get-rich-quick strategy of owning a few houses, then living in one and getting rental income from the others, but that hasn’t worked out either.

After the devastation many accounts experienced during the market crash of 2008, many investors realize that they cannot afford to take such huge risks with their retirement nest eggs. So many pre-retirees and retirees alike watched their investment account balances get cut in half during the downturn. Some retirees had to go back to work, and pre-retirees have had to delay retirement for several years.

This market experience has led many investors to seek some type of bullet proof guarantee for their investment.  With the market volatility over the last several years investors have looked for more conservative products that provide stability and growth. Those objectives can be met with the use of products like the equity indexed annuity.

Fixed annuities and equity index annuities sales are continuing to double each year as the population trend in the United States continues to age. An indexed annuity pays out a rate of return on your money that’s tied to an economic index, such as the S&P 500. It’s considered a hybrid of the fixed and variable types because you receive a minimum guaranteed payment, but can also enjoy a higher return when there are gains in the broader market.

More Interest When Stock Index Goes Up; No Loss When Index Goes Down:  “Fixed Index Annuities” help you capture more interest if market index(es) you choose go up. The interest adds to your account. It is not taken away if the stock index(es) go back down.

This is the best alternative to take advantage of increases that occur in the stock markets without taking any chance of loss if the markets go down. Periodically, you can adjust which stock market index(es) excess interest is calculated with. In that way the opportunity to still plan for market swings to gain extra interest is possible.  By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.

We know of no other investment that provides the kinds of benefits and protections annuities do. The deal you make with the annuity and insurance companies is that they will provide the increased benefits if you promise to keep the money in the contract for the agreed term.  

Annuities offer some wonderful investment and saving options in certain situations. Yet annuities come with mixed bag of pros and cons. When researching the Fixed Indexed Annuities PRO’s and CON’s there is a one con that is most usually discussed as a huge problem regarding these products: The “CON” is stated as such:

The problem is that a contract’s crediting method—the formula that determines how much the investor earns—can change each year at the whim of the issuer. Over 95% of index annuity sales are in products that may change at least one element of their interest crediting methodology after each reset period.

The ultimate determining factor in setting index participation in future years is not the interest rate environment or the cost of options, it is what carrier management decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any returns ultimately subjective.

Unless I misread the product, it seems reasonable to wonder why any advisor or trusted agent would advise a truly risk-averse investor—the target market for FIAs—to invest in something so unpredictable.  End Quote!

Is this true?  What would happen if we said the same argument comparing another product: “Home Ownership”:

In researching the PRO’s and CON’s of Home Ownership and have come to the conclusion that there is a one huge problem regarding these products:

The problem is that a home’s property tax method—the formula that determines how much the investor pays—can change each year at the whim of the Government. Over 95% of Home sales are in counties that may change at least one element of their tax methodology after each reset period.

The ultimate determining factor in setting taxes in future years is not the interest rate environment or the cost of the home, it is what the Government decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any future taxes ultimately subjective.

Unless I misread the tax code, it seems reasonable to wonder why any advisor or trusted real estate agent would advise any American—the target market for Home Ownership—to invest in something so unpredictable.

This argument can be used with all products not just annuities.  However the answer to the “CON”?  Fixed Indexed Annuities? Why? Because annuities is the best alternative and you can Bullet-Proof your retirement better than any other financial product offers.  

How do Annuites Bullet-Proof your investments? 

You do not invest in a fixed annuity. You pay a premium for its insurance protection. That protection is a minimum guaranteed interest rate and at least one guaranteed lifetime income option. Without question, the guarantees are valuable – arguably more so now than ever before, which is why there is an explicit internal charge for them. This charge is used to operate a comprehensive risk management program which ensures that the product provider is able to meet the guarantees.

Index crediting is how the company determines excess interest above and beyond the guaranteed rate. As for the subjective nature, you would have to look at the subjective nature of the Nation’s Federal Funds Rate. All interest rates in America are derived from this rate.

If you can guarantee what the Chairman of the Fed will do, Insurance companies could easily guarantee how they would respond. Without that crystal ball, the companies must have a device to change rates when the Fed changes rates.

After all, the index really has nothing to do with Index annuities since ZERO dollars are actually invested in the index. The Federal Funds Rate has everything to do with the adjustments because it drastically changes the reserve requirements imposed by our government.

Insurance Companies can protect you from just about any Peril they can calculate. Unfortunately, the subjective nature of the government and those that vote our representatives into office are not a covered peril!!

Insurance and annuity companies have been updating annuity designs to meet modern needs. Annuities continue to be safe while offering greater opportunity to earn and collect interest.  “Safety and Security” is built into Annuities. Mutual funds, bonds or stocks do not offer the same protections.

Modern annuities provide great security for investment. State insurance commissioners regulate annuities and testify to their security.  One of the most fundamental laws of economics – with reduced risk, there must be reduced expected returns.

Annuities are a financial product that has many lucrative offers, not only a – promising yield, but huge additional benefits and conditions that work to guarantee your investment –”PRO’s”.

• Annuities Require Reserves to Meet Obligations: State rules make the companies and their products very safe. The companies keep required reserves set aside to meet obligations.  They are audited to assure compliance with those rules. If a company were to go under, procedures have other companies take on the obligations to you so you do not lose your money in annuities.
• Annuities Have Suitability Requirements: States require annuities be sold only to people for whom they are suitable in the first place. The insurance regulators require completion of a specific form that gives the information to decide if it is a suitable investment for you. This means you get further help to evaluate the annuity contract and greater assurance it works for your needs and wishes.
• Annuities Provide Protection from Creditors: In some states, statutes protect money in an annuity or insurance policy from your creditors.  An Annuity is not often liable to garnishment or attachment in the favor of creditor of individual insured. That means annuity offers creditor protection.  Annuities also serve as excellent ‘asset protection tool’ in the case of bankruptcy.
• Annuities Have Income Tax Deferral: Annuity income is tax deferred.  Therefore, your interest can compound in a way that accrues more interest. Since fixed-annuity earnings are tax deferred, they are not marked on your tax-forms. This ultimately keeps your fixed-annuity investment off the tax record until you extract money. This gives you the required privacy feature.
• Annuities Does Not Increase Tax on Social Security:  Tax deferred interest in an annuity does not make that tax higher.
• Annuities Have Tax Favored Distributions:  When you take the money out of an annuity the distributions are treated in an income tax sensitive way. Only the portion of the payment that reflects interest earned on the principal gets taxed. The portion that is the return of your principal is not.
• Annuities Avoid New Health Care Surtax: Income in a non qualified annuity is not subject to the new 3.8% surtax that is part of health reform. It is investment income on which that tax is not paid.
• Annuities Bonuses on Your Premium:  Annuity companies often provide bonus additions to your interest bearing account for signing up. For example, if you deposit $100,000.00 into an annuity with a 10% bonus, the interest additions will be calculated as if you deposited $110,000.00. This increases compounding interest being accumulated in a deferred annuity; therefore, increasing your payouts down the road.
• Annuities Have Estate Benefits:  As the annuity is an agreement with a designated beneficiary, it offers two more protections after the death of primary candidate, including contestability and probate process. Contestability means no person can raise questions on your settlement as to who is going to get your fixed-annuity advantages after your death. The fixed-annuity investment moves immediately to the beneficiary, which minimizes the overall cost related with probating the money and avoids the characteristic holdup. This also keeps the money transfer private, which is another privacy feature.
• But what about “surrender penalties”?  Fixed annuities commonly offer penalty-free access of around ten percent of the purchase price annual. Also, annuity contracts waive penalties for withdrawals for expenses of terminal illness, long-term care and other reasons. Annuity contracts can be of different lengths, so “laddering” and other techniques can be used to plan and capture opportunities and assure needed liquidity is possible.

Annuities will not solve all retirees’ investment problems, but they can help alleviate some of the unnecessary strains caused by the market.

Long Term Care Insurance

Many people are confused of whether or not to get long-term care insurance. Most people think that they won’t need such insurance since they have personal savings to cover the costs, unaware of the drawbacks that could fall on their finances and lifestyle.

Here are some of the FAQs you need to know about long- term care insurance:

Who should buy long term care insurance (LTCI)?

Anyone who wants to protect his or her savings against the high costs of long-term care should consider purchasing LTCI.

One troubling misconception that stuck on people’s mind is that long-term care is barely needed or it won’t be needed at all. Most people are also hesitant to plan for their long-term care for the belief that there are alternatives in everything. It’s only when they realize the benefits of LTCI when they learn that their health insurance or Medicaid only covers the first few weeks in the chosen facility.

Long-term care can be needed by anyone of no matter what age or health. At any given moment, the long-term care landscape in America can change: Anyone between the ages 18 and 1044 may need this type of care, however, the elderly do comprise most of nursing beds.

The verdict goes to the uninsured. They run the risk of losing their lifetime assets for a year of stay in long-term care facility. The adversities may come in between as your children and heirs will be ones to suffer your worst financial mistake. So the best way to dodge those unlikely events is by securing yourself with long-term care insurance.

How much does it cost?

There is no one-size-fits-all policy. The policy normally depends on the person’s age, health, and residence.

People with good health history can save from the premiums compared to those with medical records. For instance, a person with Alzheimer and other chronic illness will need more care and so the policy should cost higher. The price also varies from state to state. The rates in metropolitan areas are obviously higher than the rural counterparts

Older policyholders receive much expensive premiums, but it is always more practical than paying out-of-pocket expenses.  People who thinks that LTC insurance is expensive don’t realize how much he or she will have to shell out from personal savings.

Who should not buy long-term care insurance?

• Those with no means of paying the coverage.
• Without assets to protect.
• Without family to pass their assets may need not apply for long-term care insurance.

Some people with chronic illness feel that they won’t qualify for coverage due to their health condition. However, the only way to find out if you are qualified is to apply and see if you still qualify. There’s no harm trying.

A single person with no family assumes he/she doesn’t need coverage, but if he/she owns assets and needs care, LTCI will be needed.

How much nursing home costs?

In 2008, the average cost of nursing home care nationally was $75,000 per year. The costs differ in the statewide level. A private room in a nursing home in some communities amounted up to $385 a day the same year.

The prices for nursing homes increase every year. So how could an uninsured retain his or her assets without LTC insurance? Not only the nursing homes are expensive but also the home care. The rates for home health aides rise every year, making it depressing for the uninsured to cover the costs from personal finances.

Does Medicare pay long term care?

Unfortunately, only a small portion of long-term care expenses will be covered by Medicaid. You have to reach the poverty level first before qualifying for coverage. You must have $2000 total assets, with no car, home, and personal resources.

Annuity With Long Term Care Benefits

A popular alternative to standard LTC insurance and refered to as a linked benefit product.

Are you looking for a way to leverage your investments to include protection from the risk of expensive long term care? Have you been turned down (declined) for long term care insurance or does you health prevent you from applying for long term care insurance?

If you answered yes may want to consider an alternative to spending down your own nest egg to pay for long term care.

There are two types of annuities with long term care benefits. One requires health underwriting and one does not. Both are single premium fixed annuities with a long term care rider designed to cover long term care expenses.

The annuity with no underwriting provides access to long term care benefits without depleting your principal, you avoid invasive medical questions, and you can pay for in-home care.

Both annuities will provide you with financial security and long term care peace of mind with extended care protection. The annuity with underwriting will have better leverage (benefits) than the annuity without underwriting, but if you cannot health-qualify your only choice is the annuity without underwriting.

How it Works

A Hybrid Annuity contract with a Long Term Care rider will typically have a maximum monthly benefit based upon the Account Value at the time of the first benefit claim payment.  The Account Value at that time will define the initial lifetime benefit amount for the Initial Benefit Rider (IBR).  The initial lifetime benefit amount for the Extended Benefit Rider (EBR) is typically a multiple of the IBR lifetime amount.

The maximum monthly (or daily) benefit amount is derived when the initial lifetime benefit amount is established by dividing the initial lifetime benefit amount (the account value) by the number of selected benefit periods for the IBR rider.  The maximum monthly (or daily) benefit amount for the EBR will be the same as that calculated for the IBR maximum.

The benefit period for the EBR is typically derived based upon the multiple associated with the selected EBR.  An example follows:

Account Value at the time of the first benefit claim payment = $150,000
IBR Benefit Period chosen                                                            24
IBR Lifetime Benefit                                                          = $150,000
300% EBR chosen                                                                
EBR Lifetime Benefit                                                         = $300,000

Maximum monthly benefit  =  $150,000 / 24 = $6,250
EBR Benefit Period derived = $300,000 / 6250                    =          48

As claim payments are made, the account value is reduced by the full amount of the payment.  If less than the maximum benefit amount is paid, then the benefit continues until the aggregate lifetime benefit amount is paid.

Once the Initial Benefit Amount is depleted, the Long Term Care benefits stop unless you had purchased the Extended Benefit Rider (EBR). This benefit initiates the Long Term Care insurance component.

These contracts also typically provide for cost of living or scheduled increases.

Annuities Provide a Trouble Free Retired Life

Potential Social Security cuts may eliminate income gains at some point in the future and baby-boomers who are trying to rebuild their nest eggs are now fearful of the stock market and frustrated with bonds’ low interest rates.

To realize a trouble-free retired life choosing a Retirement Equity Indexed Annuity Can Help.

It’s a fear that grips many especially in these tough times: Even if they have saved up all of their lives, a sudden change in fortune or a sharp decline in the value of their investments could mean you’ll outlive your retirement savings. Even people who did everything right still got hammered in the recent market crisis and many cannot retire as they wanted. 

Remember that back in October 2007, prior to the most recent market meltdown, the Dow was at 14,000 points.  Today, it’s at 10,000.

Consider the Dow, which stood at 7,487 on November 13, 1997, and then was again at 7,486 on March 18, 2009, almost 12 years later.

Because of this, people want to increase the odds that their retirement plans have a good outcome and I think that annuity products are an essential part of that.

A person’s life expectancy is a significant factor that should be considered when planning your retirement income.  Investments, pension plans, and the effects of inflation are just a few things baby boomers should take into account in planning their retirement.

This is where annuities can come into play. Most people typically consider and invest in annuities after they retire, when the fear of outliving their savings or not having sufficient income for the rest of their lives oftentimes becomes a reality. It’s a way to guarantee that your income will never run out, which is the No. 1 fear of retirees.

Immediate annuities can provide a predictable stream of income for the rest of your life. Purchased from insurance companies, immediate annuities transform a fixed sum of money into monthly payments based on your life expectancy. With both private pensions and Social Security on shaky ground, annuities may prove the only dependable source of guaranteed monthly

The first step is to establish your required expenses. Then you build a “floor” of guaranteed income in an amount sufficient to cover those required expenses for life. Funds in excess of what is needed to build the floor can be invested in a variety of ways to create additional income. 

Annuities are considered conservative, providing the ironclad guarantees and are the perfect investment for anyone who is interested in finding a low risk investment; particularly those who have just retired and are looking for a way to protect their retirement fund from the volatility of the market. In fact, not a single indexed annuity purchaser has lost a penny as a result of the market declines, bank failures, or general weakening of the economy.

Equity indexed annuities are relatively new products to the market and offer the best of all world’s to the investor. While not all equity indexed annuities are ties to the same type of index, many use the S&P 500 as their benchmark. These retirement annuities increase in value when the market rises but they don’t lose money if the market drops. Instead, they receive a fixed interest rate promised in the contract.

An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity’s value. Most fixed annuities only credit interest calculated at a rate set in the contract. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.

For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent (100 percent in some contracts) of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.

There is a price for the investor to pay when they use this type of retirement annuity. Since the company takes all the risk, they also get some of the reward when the market rises. Often contracts vary in the amount of the market growth that the company gives to the owner of the annuity. These are the annuity’s participation rates. Some companies offer as high as ninety percent of the growth while others offer as little as fifty percent.

Most people use equity indexed annuities as deferred contract, but you can use an equity indexed annuity as an immediate annuity also. The difference between the two is the time when you take payment.

On a deferred contract, you expect a payout later, or never in some cases and the funds go to a beneficiary. In an immediate annuity, you begin a stream of income right away. An immediate annuity is excellent for someone that wants payments for the rest of their life, no matter how long they survive.

Equity indexed annuities are good for those that want to keep up with inflation but still require safety. Make certain you check not only how the company calculates the return, but also how often they do it, in order to get the best policy.

North Star Focus With An Annuity

Any stage of life is unpredictable and it’s important to make sure you are invested in the right products to meet that uncertainty.  Correct and wise decisions with proper planning, taken at the right time, will promise many happy times at retirement.

The usual definition of safe money is money you cannot afford to lose. We define a safe money place as one where your principal is protected from loss as long as you follow the initial guidelines, and if you do decide to take your money and leave, you know pretty much what leaving early will cost.

The opposite is a risk money place where if you decide to take your money you don’t know what you will get back. It could be more than you put in – risk money places offer the potential for much higher returns than safe money places – but it could also be less than you started with or even zero.

The recession has been tough on America’s seniors. Fearful of the stock market, many retirees or near-retirees are shunning traditional investment vehicles like stocks, mutual funds, and real estate.

It is recommended that you look at your investment portfolio to make sure that you do not have all of your money in one place. In other words, make sure that you diversify your portfolio. First of all, remember there is no such thing as a “best” option for everyone, but flexibility is key to any plan.  

The most popular investments for retirees and the mix that many financial experts suggest are a mix of bonds and annuities. So what would be the best type of investment between Mutual Funds, CD’s, or annuities?

Annuities have long been one investment vehicle used by those putting together their retirement planning portfolios. Annuities may not be the only investment people use to plan for their golden years, but it is one the most popular, safe, and secure ways.

Interest in annuities is growing, reflecting a need for more financial self-reliance at a time when pensions are disappearing and there is increased anxiety about whether savings will survive a volatile stock market. The problem for retirees and near-retirees seeking financial safety is that it’s better to set your goals and then decide on which risks you’re willing to take and which you want to avoid.  Annuities can help seniors reduce risk

And now they have a new dilemma: what to do with the money they do have left. Many are turning to fixed and fixed indexed annuities because of their unique ability to provide a guaranteed income stream, as well as tax efficiency during both the accumulation and income distribution planning phases.

Many retirees who held immediate annuities enjoyed welcome security during the stock market meltdown that began in 2008.  They didn’t lose their savings — they continued to get their paychecks. Income annuities are the most efficient way of providing income in retirement and can pay as much as 6 percent to 8 percent of the purchase amount per year for life. 

Annuities can help meet several goals – First of all, they protect against the common worry of outliving your money.  Annuities allow you to receive income for life, no matter how long it is. Annuities could be helpful, especially if your biggest concern is outliving your assets, but they’re not a panacea. You still have to step back and make sure you have enough money overall to meet your retirement needs.”

Most annuities also insulate you from some or all market volatility which is a key reason for the change for the more conservative orientation of investors in the wake of the severe recession beginning in 2007 and a concurrent plunge in equity values that did great damage to clients’ portfolios and retirement plans.  It’s nice to know that at least a percentage of your portfolio is secure.

Once you begin receiving payments from the life annuity, you will have a steady income to depend on throughout your retirement to supplement the social security and assist in paying the medical expenses that Medicare does not cover.

Here’s an overview of the annuity world:

Immediate annuities. These are the traditional, plain vanilla annuities. You deposit an amount with the insurer, and the insurer begins making regular payments. Payments can be monthly, quarterly, or annually. Most immediate annuities make fixed payments, but some offer variable payments. The variable payments can be inflation indexed or be tied to the portfolio of investments selected by the annuity owner.

You can receive payments for your life, the joint life of you and a beneficiary (such as your spouse), a period of years, or life with a guarantee for a minimum period of years. The highest payout is for your life or a period of years shorter than your life expectancy. The other options result in lower initial payouts.

Studies show that having a portion of your retirement portfolio in immediate annuities reduces the risk of running out of money during retirement. “Annuities help stabilize a portfolio’s value and returns. They also can allow you to take more risk with the rest of your portfolio.

Equity index annuities. These are deferred annuities. The account compounds returns tax deferred until distributions begin. The returns of these annuities are tied to the performance of a stock market index. Popular annuities are tied to equity indexes like the S&P 500, and may offer returns that are close to the stock market. Usually there is an annual floor or guaranteed return of 2 percent to 3 percent. Many also have an annual cap or maximum return of around 10 percent.

EIAs usually guarantee the account against losses. “Sometimes 100 percent of the principal is guaranteed; sometimes only 90 percent or so is guaranteed. EIAs generally are for conservative investors who want a chance at higher returns than traditional conservative investments offer but can’t tolerate the risks of stock markets or other growth investments.

Hybrid policies. Some annuities can be used to pay for long-term care. A typical combo policy will pay up to two or three times the account’s value for long-term care over a period of about six years. For example, an annuity’s value is $150,000 when the owner needs long-term care. The policy will pay up to $300,000 to $450,000 after a long-term care claim is filed. The annuity does not earn income after a claim is filed, and the account’s value for other purposes is reduced.

There are many annuity features to choose from. “You need to remember that each of these features and protections costs money. They will reduce either your earnings or your payout. The reason to buy an annuity usually is to create a stream of guaranteed retirement income. However, inflation protection is the feature most likely to be worth the cost.

Another buying tip: The longer you wait to purchase an immediate annuity and begin income payouts, the higher your lifetime income will be.

The magnetic needle of a compass does not point in any and all directions to focus on many stars, it points to one central North Star. This single focus has directed countless beings to safety and security over many centuries. Knowing your own central focus will bring the same serenity to your life.