What Makes an Annuity So Special Anyway?

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A recent survey commissioned by the Metropolitan Life Insurance Company’s Senior Marketing Institute discovered that many people, if not most, do not fully understand or appreciate the unique qualities of the typical income annuity contract. Furthermore, the situation is made more difficult because too many “financial experts” writing in various publications do not fully understand them either. This product is too important not to be understood correctly by the people with the greatest need for it!

In its most simplistic form, the buyer of an income annuity contract, in exchange for a lump sum of money, is unconditionally guaranteed to enjoy a specified income for the rest of his life, whether he lives to age 70 or to age 120. No other investment or savings account can do that.

A simple illustration can put all this into perspective. Let us assume that Mr. Jones purchases an income annuity contract from the XYZ Life Insurance Company. He has done his homework, thoroughly checked out the company’s financial history and is satisfied that the company will be around to honor its commitment. This is perhaps one of the first and most important things anyone can do. Because annuities are long-term contracts, you want to be sure the company will be there ten, twenty, or fifty years into the future. Many insurance companies are already revising their mortality tables, and extending the life expectancy to 120 years from the old assumptions of 100 years.

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The next step is to determine what he will receive as an income. (Again shop around because payout rates vary.) But for this example, let us assume that he decides the XYZ Insurance Co. contract is competitive. He decides to set aside $250,000 into the annuity. XYZ Insurance Company prepares a quote that guarantees him $1,200+ per month for as long as he lives. Aside from all the other positive considerations including tax benefits, there isn’t anything in the market place that can compare.

Consider that at age 65, Mr. Jones has a life expectancy of about 24 years. To achieve the same income level, his $250,000 would have to gross at least 2.85% every year for the next 24 years! What are the chances of that happening? Slim to none. Look at what has happened to the stock market, CDs, Treasury Bills, Corporate Bonds, Mutual Funds, and so on over the last three years. You can readily see the unparalleled opportunity and benefit the annuity offers and without any worries whether the income will be there each month.

Finally, suppose Mr. Jones is one of those lucky people with good genes. Instead of living 24 years, he lives 34 years. What does he do? With the annuity, Mr. Jones doesn’t have to worry as he would with any other type of investment.

With the advantages discussed here plus many others, the income annuity contract, by providing a basic income guarantee as illustrated above, is far superior to most other investment income opportunities.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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