Are Annuities Right for Investors Over the Age of 85?

[Pages:4]Are Annuities Right for Investors Over the Age of 85?

At Annuity FYI, we frequently get phone calls from investors and financial advisors alike

asking us if folks over the age of 85 should be investing in annuities, and if so, which

products are available to those investors. In this article, we will look at the

appropriateness of fixed, immediate, and variable annuities for investors 85+ with four

typical goals in mind: providing income, capital preservation, capital appreciation, and

protecting the investment for heirs. For the sake of comparison, we will use an 85-year-

We will look at the appropriateness of fixed, immediate, and variable annuities for investors 85+.

old male investing $100,000. According to the Center for Disease Control, such a person will live, on average, an additional 6.5 years, to 91.5 years of age. But remember, this article is for the sake of comparison and education only ? every

investor is different, which is why you should speak with a financial advisor who

specializes in annuities before making an investment decision. In particular, you must

make sure that any surrender penalties that come with many annuities will not interfere

with your income needs. If you dont know of an advisor who specializes in annuities,

Ask Annuity FYI or Find an Annuity FYI Affiliate in your area.

Immediate Annuities with Lifetime Income Guarantees

First, lets look at immediate annuities that guarantee an income stream for as long as you live. At the time of this writing, you could invest $100,000 at age 85 in an immediate annuity that would pay $12,000 per year for life. So if you live the statistical average of

6.5 years, you would have received $78,000 ? making this a terrible investment. Now,

we speak with investors every day who say "Im healthy and my parents and their

parents all lived to be 100 years old." Well, with this lifespan, you would receive

$180,000 from the immediate annuity. While

Immediate annuities with

this is a better return on your investment, we

lifetime income guarantees

would never recommend that an investor

are generally not good

gamble in such a way with their retirement

investments for those over 85. savings. In short, immediate annuities with

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lifetime income guarantees are generally not good investments for those over 85 ? they do not provide sufficient income for folks 85+, and dont allow you to pass income or principal to your heirs.

Period Certain / Cash Refund Immediate Annuities

"Period certain" is a term that means the payments from the insurance company are guaranteed for a pre-determined length of time. Say you bought a $100,000 immediate annuity with a 15-year period at age 85. At the time of this writing, youd receive about $7,800 annually, guaranteed for 15 years. If you die before the 15-year period is over, your beneficiaries will receive $7,800 annually for the remainder of the period. So your $100,000 investment will have returned $117,000, or about a 1.1% annual return. This is not such a great return, but you could weigh it against other investment options, as well as the piece of mind of guaranteed income.

An immediate annuity with a cash refund option guarantees your beneficiaries the

difference between the initial investment and the amount paid out, should you pass

away before receiving at least your initial

An immediate annuity with cash investment as income. Say you bought a

refund option may be a viable $100,000 immediate annuity with a cash

investment if you are interested in receiving income as well as

refund option at age 85, which at the time of

ensuring that your money

this writing guarantees about $8,500

would be passed onto heirs.

annually. This is an income stream you

cannot outlive. However, should you pass

away at age 90, having only received $42,500, your heirs would receive a check for

$57,500. An immediate annuity with cash refund option may be a viable investment

choice if you are interested in receiving income as well as ensuring that your money

would be passed onto heirs.

CD-Type Fixed Annuities

CD-Type fixed annuities guarantee a specific rate for a pre-determined length of time.

While at the time of this writing fixed annuities pay relatively low rates, when you invest

Be sure that you only consider fixed annuities that waive any surrender penalties upon death.

in one you are guaranteeing your capital and have a known, fixed rate of return. As such they can be a viable investment options for investors 85+. Just be sure that you only consider fixed annuities that waive any surrender penalties upon death (you

?2013 Burgess Wever, LLC. All Rights Reserved. No part of this article may be reproduced without the express written consent of Burgess Wever, LLC.

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dont want your heirs to pay surrender penalties if you die within the surrender period), as well as fixed annuities with no "market value adjustment" (while we generally recommend products with a market value adjustment, they are inappropriate for older investors as surrendering these contracts early can devastate their value).

Variable Annuities with Lifetime Income Benefits

Variable annuities with lifetime income riders are very popular, as they allow an investor

to participate in stock market gains, while guaranteeing income one cannot outlive.

There are very few insurance companies that will issue a lifetime income rider to

Generally speaking, lifetime income benefit riders don't provide enough income for folks 85+.

someone 85+, but we are going to discuss them anyway because we get so many inquiries about them. Lets take a variable annuity with a typical lifetime income benefit rider of 5% withdrawals for life at age 85. Your $100,000 investment would guarantee a minimum of $5,000 annually for the rest of your life, regardless of

market performance. Following the CDCs life expectancy, you could expect to receive

about $32,500 from the annuity by age 91.5. The remaining account balance would be

lost, not passed onto your heirs. Generally speaking, lifetime income benefit riders dont

provide enough income for folks 85+ and as such we dont recommend them for folks

over 85.

Variable Annuities with Return of Premium Death Benefits

With a variable annuity with a return of premium death benefit, if your account value

appreciates over time you and/or your heirs are entitled to those gains. If the value

declines due to poor market conditions, your heirs would still be guaranteed the initial

premium amount, less any withdrawals (most

If the value declines due to

annuities allow you to withdraw up to 10% of

poor market conditions, your the account value per year even if you are

heirs would still be guaranteed within the surrender period). For example, say

the initial premium amount

you purchase a variable annuity worth

$100,000 with a return of premium death benefit. You pass away six years later, and

even though the account value has dropped to $77,000 because of poor market

conditions, your heirs would still be guaranteed $100,000 (assuming you took no

withdrawals). Variable annuities with return of premium death benefits may be viable investment options for investors 85+ because they allow you to participate in market gains, withdraw a portion of the account value every year, and at a minimum, guarantee

your heirs will receive at least your principal less withdrawals upon your death.

?2013 Burgess Wever, LLC. All Rights Reserved. No part of this article may be reproduced without the express written consent of Burgess Wever, LLC.

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Summary

Generally speaking, Annuity FYI believes that some types of annuities and annuity riders are inappropriate for investors 85+; others are potentially very viable investment vehicles as they can provide income, capital preservation, capital appreciation, and protect the investment for heirs. Investors 85+ need to take particular care that any surrender penalties do not interfere with income needs, and to discuss potential investment into an annuity not just with any investment advisor, but one who specializes in annuities. If you dont know of one, Ask Annuity FYI or Find an Annuity FYI Affiliate in your area.

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?2013 Burgess Wever, LLC. All Rights Reserved. No part of this article may be reproduced without the express written consent of Burgess Wever, LLC.

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