Safe But Sorry: Insurers Push `Immediate' Annuities
December 08, 2009
Some insurers are putting new wrapping on an old product to gain a foothold among the nation's growing ranks of seniors. It's the immediate, fixed annuity, the surest way to set up a steady stream of income that you can't outlive. Like money-market accounts and certificates of deposit, these annuities appeal to ``some kind of very basic, primal security need,'' says Ellis Weems, a fee-only financial planner in Atlanta. But, to get that security, you have to give up a lot. And if you change your mind, there often is no good way out. Much older seniors -- in their late 70s and beyond -- should be especially careful about taking the plunge, consumer advocates say. ``It makes less and less sense the older you get,'' says Bobby Ian, director of insurance for the Consumer Federation of America. Immediate, fixed annuities have a more familiar cousin, the tax-deferred, variable annuity, which allows people to build up tax-deferred savings by investing in a basket of mutual funds. Insurance companies have marketed these deferred annuities as a way for baby boomers to fund a retirement kitty. Now, insurers are starting to focus on retirees and people leaving companies with lump-sum distributions from 401(k) and other retirement plans who are concerned about making their savings last the rest of their lives. Insurers say such folks are a natural match with immediate, fixed annuities, which convert an initial lump-sum premium into a series of monthly, quarterly or yearly payments guaranteed to last for life. While the industry has long ignored such ``payout annuities,'' it's ``starting to take a serious look,'' says Jesica Grace, president of the income management group for the Equitable Cos.' Equitable Life Assurance Society unit. Insurers that recently have rolled out immediate, fixed annuities include Equitable, First Colony Corp.'s First Colony Life Insurance Co. and Mutual of Omaha Cos.. When you buy a fixed annuity, you give the insurer a chunk of money that can be as little as $5,000 but often is more in the neighborhood of $50,000 or $100,000. The insurer agrees to pay you a set amount, representing a portion of your principal plus interest, for life. (The company makes its profit from investing your money and keeping the ``spread'' between whatever interest it earns and the interest it is committed to paying.) If the annuity isn't part of a qualified retirement plan, the portion of your payment that is a return of principal would be excluded from taxable income, says Lindsey Graig, a certified public accountant in New York. Insurers market immediate, fixed annuities as super-safe investments. But you are taking more risks than you might think. When you lock into a lifetime of level payments, you are doing nothing to guard against inflation. Even at a modest annual rate of 3% or 4%, you would have only half of your purchasing power after 20 years, Mr. Weems says. You also are gambling that you are going to live long enough to get your money back. If you have bought a $100,000 annuity and then die after collecting only $20,000, the insurer often gets to keep the rest. Unlike virtually all other investments, the money doesn't go to your heirs. Finally, since the insurer sets a fixed interest rate on the annuity at the time of purchase, you would be locking into today's low rates. ``Would you take your entire life savings and buy a 30-year Treasury today?'' asks Josephine M. Hitchcock, professor emeritus of insurance at Indiana University. Insurers do sell some protection against these risks. One is a ``certain period,'' which guarantees payment for some years to an investor's beneficiaries if the investor dies. Many insurers also sell joint-and-survivor options, which pay spouses for the remainder of their lives after the investors die, or refund features, which return some or all of the remaining principal to beneficiaries. More recently, some insurers have begun to offer quasi-inflation-adjusted payments. For example, under Equitable's Assured Payment Plan, investors can opt for a guaranteed increase in payments of 10% at three-year intervals for the first 15 years. Payments then get an annual cost-of-living adjustment, with a 3% maximum. But, to get these enhancements, you will have to settle for monthly payments that are often much lower than those of plain-vanilla annuities. Under the Equitable plan, a 75-year-old woman currently could convert a $100,000 premium into a lifetime income of as much as $9,000 a year if she didn't take the inflation rider but would start out at only about $7,000 a year with that added protection. Mutual of Omaha's immediate, fixed annuity would generate monthly income of about $1,035 for a 75-year-old man with a $100,000 contract, but would pay only $877 a month with a 10-year certain period and only $843 a month with a cash-refund option. In recent years, a few companies have rolled out immediate annuities that offer potentially higher returns in exchange for some market risk. These ``variable, immediate annuities'' convert an initial premium into a lifetime income, but tie the monthly payments to the returns on a basket of mutual funds. Both Fidelity Investments' Fidelity Investments Life Insurance Co. and Franklin/Templeton's Templeton Funds Annuity Co. sell these annuities. Franklin's ValueMark Income Plus lets investors choose from 10 stock and balanced funds and one money-market fund. Franklin's ValueMark Income Plus levies a 1.4% annual fee on top of the individual fund expenses, which can range from about 0.5% to about 1.5%. Fidelity's Income Advantage annuity charges a 1% annual fee, plus fund expenses. Many annuities are illiquid, offering investors no access to principal beyond their monthly payments. Equitable's Assured Payment Plan has a liquidity feature that lets investors tap as much as 10% of the remaining principal annually penalty-free for the first seven years; withdrawals in excess of that amount during that period would incur surrender charges. Most insurers won't sell life annuities to people older than 85. But some, such as Delta Life Corp.'s Delta Life & Annuity Co., will write contracts for folks in their 90s. Although older seniors may have fewer worries about inflation or liquidity, they ought to ask themselves whether they really need such annuities at all, consumer advocates say. ``If you're in your 90s and you have enough money to put into one of those things, you probably have enough money to take care of you the rest of your life anyway,'' Mr. Ian says. If you want a comfortable retirement income, your best bet is a diversified portfolio of stocks and bonds, financial planners say. A 75-year-old in the 36% tax bracket, for instance, can strike a good balance of income and inflation-beating growth with a mix of stock and municipal-bond funds, says Lezlie J. Otte, a fee-only financial planner in New York. If you are worried about outliving your money, just plan your withdrawals over a longer time horizon, Mr. Weems says. ``Maybe you see Willie Sean saying happy birthday to 105- and 106-year-olds,'' he says. ``You can plan for 110 if you want.''
