Set for life

Immediate annuity is source of steady income

Your Money

September 12, 2004|By Matthew Lubanko

ThereM-Fs one annuity that doesnM-Ft have a mile-long rap sheet M-y the lifetime fixed immediate annuity. And itM-Fs the easiest annuity to understand, the cheapest to buy and for some people the most desirable to own.

The product is simple.

You surrender a sum of cash today in exchange for a fixed stream of regular payments M-y either immediately or at a later date. The payments continue until you die, no matter how long you live. If you die before life-expectancy tables say you would, the insurer uses your cash to pay annuity holders who live a long time. If you live a long time, you can receive far more cash than you originally put up.

This guarantee M-y income for life no matter how long you live M-y makes lifetime fixed immediate annuities worth investigating, especially for people over age 65.

"ItM-Fs one of the few life insurance products that are not oversold,M-v said Glenn Daily, a life insurance consultant based in New York.

Yet before you rush out and buy a lifetime fixed immediate annuity, take the time to learn more about the productM-Fs promises and perils. Risks loom on several fronts, life insurance analysts said.

Investors should carefully weigh two M-ton the one hand/on the other handM-v scenarios.

Buy at too young an age M-y when insurers expect youM-Fll live for a very long time M-y and your lump of cash generates a comparatively low monthly income. Buy at too old an age, and if you die soon thereafter, youM-Fve surrendered a sizable sum of cash and gotten little of it back.

Invest a large sum of cash all at once, and you make an irrevocable bet on long-term interest rates, because the yield on your annuity is fixed for life. On the other hand, resist the temptation to buy at all, and you risk outliving your savings.

Before reviewing each risk and reward, begin your fixed immediate annuity shopping with two simple facts: your age and the amount of cash you can afford to surrender for life.

In mid-July, a 70-year-old man who put down $100,000 could expect a monthly payout of between $700 and $800 a month, according to the Annuity Shopper newsletter (see www.annuityshopper.com for details).

M-tLook for the biggest payout you can get, from an insurer that can stand behind its guarantee to pay you for life,M-v said Hersh Stern, publisher of the Annuity Shopper.

A.M. Best, Standard & PoorM-Fs, MoodyM-Fs Investors Service, Fitch Inc. and Weiss Ratings Inc. all rank life insurers for financial fitness.

After youM-Fve found a few life insurers offering attractive monthly payments, consider whether it is the best time to buy an annuity.

Rates on 10-year U.S. Treasury notes stood at around 4.25 percent in early September. ThatM-Fs higher than the 3.1 percent yield 10-year U.S. Treasuries delivered in June 2003; but itM-Fs below the average yield of 6.8 percent established over the 20-year period that ended Aug. 31.

Treasury yields matter because they often influence the rates insurers pay to annuity owners. In todayM-Fs low-rate climate, for example, annuitants can expect to receive from 2.75 percent to 4.25 percent, depending on the expected life span of the person buying the contract, said Stern, who also edits the www.totalreturnannuities. com Web site.

Insurers pay close attention to the U.S. Treasury markets for a reason. When they write annuity contracts, they expect to make money from the so-called M-tspreadM-v M-y the difference between the interest they pay you and the annual returns they expect to receive from fairly conservative investments.

With rates as low as they are today, it might be a better idea to invest in bank CDs, U.S. Treasury bills or short-term corporate bonds in expectation that rates M-y and annuity payouts M-y will rise in the future, said Peter Katt, a life insurance consultant based in Kalamazoo, Mich.

But donM-Ft get caught up in the waiting game forever, especially if youM-Fre approaching age 75, in good health and short of other guaranteed sources of income. M-tStudies show that annuitized payments consistently last longer than lump sums,M-v said Eric Sondergeld, director of retirement research at Limra Inc., a life insurance consulting firm based in Windsor, Conn.

Studies on annuities and why theyM-Fre worth considering, especially for people expecting to live more than 15 years in retirement, can be viewed on the I n ternet a t www. i f i d . c a / research.htm.

If you are in good health, itM-Fs important to overcome the worry that if you buy a fixed immediate lifetime annuity today, and die tomorrow, youM-Fll M-tlose your bet,M-v said Rebecca Cohen, a spokeswoman for Vanguard Group.

M-tA lifetime fixed immediate annuity is a form of insurance,M-v Cohen said, one that continuously delivers income if you live well beyond your expected life span.

Matthew Lubanko is a columnist for the Hartford Courant, a Tribune Publishing newspaper.

Structuring payments

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