Question: I need to supplement my income stream right now and have been shown an immediate annuity by one agent and an indexed annuity by another agent. The products seem very different. Which is the best one to buy?
Ernie from Billings, Montana
Answer: Thanks for the question Ernie. Immediate annuities (i.e. Single Premium Immediate Annuities) and indexed annuities are drastically different strategies, so I’m a little surprised that you were shown both for income needed to start right now. Since that is what you were pitched by the agents, let’s take a look at the good, the bad, and the limitations of both strategies so you can make an informed decision.
Highest Contractual Guarantee
In the Annuity Realityville that me and my clients live in, you should always own an annuity for the contractual guarantees only. In essence, that means you make your decision on what the annuity will do, not what it might do. With that being said, if you need income to start right now and pay you for the rest of your life, then an immediate annuity will provide the highest contractual guaranteed payout. That’s a fact. Just as a side note, an immediate annuity pays the agent a much lower commission than an index annuity. Food for thought.
If you need the annuity contract to be flexible, and adapt to possible changes in your life, then an indexed annuity would actually be a better choice over an immediate annuity. Single Premium Immediate Annuities are rigid contracts with no flexibility, and typically no liquidity provisions.
However, there is a major “catch” to this contractual flexibility. Indexed annuities (aka: fixed indexed annuities) will give you the needed flexibility, but the payout will be significantly lower (than an immediate annuity) because of this feature.
Fees & Commissions
Here’s where the rubber might be meeting the road with the recommendations you have been shown. Immediate annuities do provide the highest contractually guaranteed payout for “income now” situations, and they also pay the annuity agent the lowest commission of all annuity types.
Fixed indexed annuities are more flexible, provide a much lower contractual payout, but typically pay the annuity agent a very high commission because most of these products sold have at least a 10 year surrender charge period. Always remember, the longer the surrender charge period and the more complex the product, the higher the commission to the agent. In addition, there are annual fees for the life of the policy where as immediate annuities have no annual fees.
What would Stan The Annuity Man do?
Any client of mine that wants income to start right now, I only recommend Single Premium Immediate Annuities. In my opinion, buying an indexed annuity for immediate income is like fitting a square peg into a round hole.
As for the flexibility issue, if a client of mine needs flexibility and immediate income, then I would recommend splitting up the money and by purchasing an immediate annuity and also keeping an adequate amount in cash. I am not a believer in indexed annuities for immediate income. Indexed annuities were designed to compete with CD rates from an accumulation standpoint, but I primarily use them with attached income riders for future/target date/income later type planning.
Immediate annuities are the original annuity design (i.e. Roman times), and are still the most simplistic and transparent solution for income now needs. I hope this clarifies things for you and thanks again for the question.
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