How Does this Annuity Really Work?

[MartinJ]

This seems too good to be true. I'm copying text below. Does this simply mean that after 10 years I get $1,000 per month. Not sure what 8% has to do with it. Perhaps the income base grows at 8% until age 65?

"Annuities allow you the option to opt for income for life. For example, if you purchased a $100,000 lifetime fixed annuity with a 8% income rider at age 55 and waited until age 65 to begin receiving distributions, you’d receive a guaranteed $1,000 per month for the remainder of your life. This is preferable to some people who don’t have the time or skill to manage a stock portfolio and do not want to deal with the ups and downs of the market. Peace of mind is a great addition to have during a quality retirement."

 

[DHK]

Income benefit: $100,000 x 8% step-up x 10 years = $215,892 income base.

$12,000/yr ($1,000/month) = ~5.5% distribution rate.

I like that it's generally simple to calculate.

What is the company rated? I'm willing to bet it's a B rated company.

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Note that the step-up is to calculate lifetime income benefits only. It is not a "walk away" lump-sum value.

 

[MartinJ]

About a quarter the way down the page... annuitieshq dot com /articles

 

[DHK]

Anybody can say anything they want in an article as long as they keep it conceptual and not make it into an advertisement.

 

[KenP]

This seems too good to be true. I'm copying text below. Does this simply mean that after 10 years I get $1,000 per month. Not sure what 8% has to do with it. Perhaps the income base grows at 8% until age 65?

"Annuities allow you the option to opt for income for life. For example, if you purchased a $100,000 lifetime fixed annuity with a 8% income rider at age 55 and waited until age 65 to begin receiving distributions, you’d receive a guaranteed $1,000 per month for the remainder of your life. This is preferable to some people who don’t have the time or skill to manage a stock portfolio and do not want to deal with the ups and downs of the market. Peace of mind is a great addition to have during a quality retirement."

This is why insurance companies excel at this type of product, though. They have a wealth of data on mortality to know, on average, when you'll die. So they give you a chunk of their returns through the accumulation phase, then when it annuitizes they can guarantee income for life. This is because they can figure out roughly how many years you're actually likely to live.

If you die early, they keep the proceeds (assuming you didn't get riders or anything like that that would change this) and get a nice extra profit. If you're a stubborn bastard and go on to live much longer than statistically expected, they have to shell out more money and possibly take a loss. Thus is the insurance biz

 

[DHK]

Um... they may not "keep the proceeds" unless it is a SPIA - an immediate annuity that has the highest distribution payout.

With indexed annuities that have lifetime income benefit riders, they pay out the principal of your balance back to you first. During that time, the remaining principal is earning indexed-based interest credits.

If you pass away and you haven't received all your principal, then your beneficiaries can receive it in a lump sum.

If you pass away and you HAVE received all your principal, then your beneficiaries get nothing - unless you had a joint-life payout rider, then the spouse (typically) will continue to receive payouts until they pass away.

 

[Tahoe Ray]

Um... they may not "keep the proceeds" unless it is a SPIA - an immediate annuity that has the highest distribution payout.

With indexed annuities that have lifetime income benefit riders, they pay out the principal of your balance back to you first. During that time, the remaining principal is earning indexed-based interest credits.

If you pass away and you haven't received all your principal, then your beneficiaries can receive it in a lump sum.

If you pass away and you HAVE received all your principal, then your beneficiaries get nothing - unless you had a joint-life payout rider, then the spouse (typically) will continue to receive payouts until they pass away.

And even SPIAs have several death benefit options...although obviously those options reduce your income.