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Annuities and Lifetime Income Guarantees



“When you die all the money left in your annuity goes to the insurance company not your heirs”. THIS IS NOT TRUE. If you purchase a life only SPIA with no period certain then this will happen. A life only SPIA will allow for the highest income stream based on your life expectancy, but upon death the remainder will go to the insurance carrier. This only applies to a SPIA with a life only payout. SPIA – Single Premium Immediate Annuity: SPIAs offer an immediate income stream for the period that you desire i.e., 2,3,4,5,6,7,8,9,10 years, life, life with guaranteed certain of 5, 10, 20 years. When deciding to use a SPIA for income you essentially annuitize your money. In most cases you do not have access to your principal in emergencies, only your income stream. You are also locked in to an interest rate between 1% and 3% depending on when you purchased your SPIA. However with fixed annuities this is not the case. The diversification of your money is one of the most important concepts to understand within your financial plan. These types of contracts are for the money you cannot afford to lose. This information is provided to help give you a brief understanding of how Guaranteed Lifetime Income Benefits work. This may be a great replacement or compliment to your existing CD, bond, IRA, 401k and even a portion of your Savings.

Annuities are the only way to guarantee a lifetime income stream, but there are many different annuities to choose from:


(Some would say "the lifetime income benefits available on fixed annuities today work much like a pension, tax deferred and create a lifetime income guarantee) pension definition: A regular payment made during a person's retirement from an investment fund to which that person has contributed...

Some Fixed and Fixed Index Annuities offer more flexibility, more choices and more growth potential in how and when you decide to distribute your income in retirement with their lifetime income riders. These riders are purchased as an addition to the fixed or fixed index annuity product. There is usually a fee associated with these types of riders and the way the fee is calculated will vary from contract to contract.

What Guaranteed Income Really Means when referencing an annuity rider:
Annuity riders can guarantee income for life, but just how much income can they generate? These annuity riders will help you to determine when to retire based on a guaranteed minimum income without indexing assumptions.

Annuities are great for tax free accumulation without stock market risk. However, given low interest rates, the interest rates on FIA’s (Fixed Indexed Annuities) are not very exciting. Fortunately, an added income rider to an annuity contract (also called a guaranteed withdrawal benefit rider or GWBR or a lifetime income benefit rider or LIBR) can be a godsend when it comes to guaranteeing great income that will last if the client lives to 87, 97 or 127. The problem is that producers must do an honest job of explaining what these riders do – and what they do not do.To illustrate, consider the following discussion while discussing retirement planning and longevity:

Thought: “I have an annuity and I am making 6.5% annually compounded on my money, guaranteed!”
Fact: “NO, you are not making a guaranteed annual rate of 6.5% on your money. In this market that is impossible. The insurance company is only making 2-3% on the money you give them, how can they pay you 6.5% every year?
Thought: “YES, I am! My agent told me that as long as I defer taking out the money I am guaranteed to make 6.5% every year?”
Fact: “NO, the financial advisor who told you that was either misleading you or more likely just doesn't understand how the product works. What you purchased was a rider to an annuity contract. The rider, which you pay for at a rate of about $650.00-$950.00 per $100,000 of annuity premium, guarantees that you will make 6.5% per year credited not to your money in the annuity (i.e:, money that you can take out in a lump sum or that will go to your beneficiaries). Rather, the rider says that the insurance company will credit 6.5% to a separate income-only account from which you can only use to take out annual income for life (no matter how long you live). Not only that, but the insurance company tells you what percentage of the account you can take out. The amount credited to your money in the annuity (what they call the contract value) is more like 3-4 percent if the market goes up and nothing if the market goes down, so you cannot lose your principal due to market losses”

Thought: “So why exactly isn't that considered 6.5% on my money”?
Answer: “Let me give you an example”:

Example: Jim Brown, 50 year old man has $100,000 in an old 401k (This is not all of Jim's Money)

Jims Goals with this portion of money:

  • He does not want his 401k at risk any longer.
  • He wants to retire at 70.
  • He needs his 401k to do what it was originally intended to do, guarantee to supplement his future retirement income.

Let’s explore a hypothetical case to see how a guaranteed Lifetime Income benefit can insure a future retirement income that Jim cannot outlive. Create your own plan here.

After completing a fact finding analysis of Jim's financial situation and goals, Jim's Safe Money Advisor recommends taking the $100,000 of his 401k savings to purchase an annuity with a Guaranteed Lifetime Income Benefit.


Income Concept IllHypothetical return; for illustration purposes only. Not a prediction of future performance. There is a rider fee that will come out of the cash value to provide the income benefit. This fee will continue to be taken against the contract value as long as the contract is in force or the rider is terminated. *Income account value can only be taken as income to the initial contract owner. All Guaranteed Lifetime Income Riders are different. Please consult with a trusted Safe Money Representative before choosing these types of products.

Important Things to consider before choosing the right annuity with a lifetime income rider.

1. What is the Fee?
2. How is the fee calculated? Cash Value Calculation or Income Value Calculation?
3. Is the fee calculated based on the income account value or the accumulation / cash value?

*If the fee is calculated on the income account value... then the fee will increase every year while in deferral, based on the income account value growth percentage. Therefore depleting the accumulation value/ cash value faster. The lifetime income you receive from these types of contracts may illustrate a higher lifetime income payout, but the value of the contract that will pass on to your beneficiaries will be less. Also, If there is an emergency and you need access to more money, the additional money you need may not be available due to the way the riders fee was calculated.

There are income riders that offer 5%, 6%, 7%, 8%, 10% and even 14% guaranteed income account growth annually. Some grow interest compounding and some are simple interest. Some have payout percentages based on age and others are a flat percentage no matter what is the age of the contract owner. Some have cash value fees ranging from .0050% to 2% annually and some do not have any internal fees. But they all provide a guaranteed lifetime income based on the financial strength of the issuing insurance company. Not all Income riders are the same.


Gregory Bernhardt, CFP
Certified Financial Planner
Asset Protection/Retirement Income Planner
San Francisco Bay Area | Financial Services
Education: University of Colorado

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