Do Annuities Make Sense for Super Seniors?

[don]

My in-laws are 94 and 86 years old. Frustrated (and pillaged) by ZIRP, in desperation they're considering a RiverSource Life Insurance SecureProvider income annuity. Is this a crazy idea, as I suspect? (Note- my in-laws live in Florida, where there is no state income tax)


The premium amount is $100,000

Payout Options	Explanation	Monthly Income Payment	Annual Income % of Premium	Income Over Life Expectancy*	Total Guaranteed Period Income	Additional Information based on 22% Tax Bracket*
Single Life Income with 10 yrs certain	Provides you with lifetime Income stops at time of death, If die before 10 years beneficiary get remainder of the payments for remainder of 10 year period	$827.00	9.2%`	$60,536	$99,240	8.5% of each income payment may be subject to income taxes. The initial income payment is $811.35 after taxes
Single Life Income with 15 yrs certain	Provides you with lifetime income stops at time of death, If die before 15 years, beneficiary get remainder of payments for remainder of 15 year period	$636.00	7.63%	$46,555	$114,460	14.1% of each income may be subject to income taxes. The initial income payment is $616.27 after taxes

*Based of life expectancy to age 93
* Mom and Dad’s tax bracket would be lower

Payout Options	Explanation	Monthly Income Payment	Annual Income % of Payment	Income Over Life Expectancy*	Total Guaranteed Period Income	Additional Information based On 22% tax bracket*
Single Life Income with Installment Refund	Provides you with lifetime income If die before completion of 124 payments, beneficiary receives remainder of payments	$808.00	9.70%	$59,146	$100,000	7% of each income payment may be subject to income taxes. The initial income payment is $796.56 after taxes

[dcarrigg]

Re: Do Annuities Make Sense for Super Seniors?

My in-laws are 94 and 86 years old. Frustrated (and pillaged) by ZIRP, in desperation they're considering a RiverSource Life Insurance SecureProvider income annuity. Is this a crazy idea, as I suspect? (Note- my in-laws live in Florida, where there is no state income tax)


The premium amount is $100,000

Payout Options	Explanation	Monthly Income Payment	Annual Income % of Premium	Income Over Life Expectancy*	Total Guaranteed Period Income	Additional Information based on 22% Tax Bracket*
Single Life Income with 10 yrs certain	Provides you with lifetime Income stops at time of death, If die before 10 years beneficiary get remainder of the payments for remainder of 10 year period	$827.00	9.2%`	$60,536	$99,240	8.5% of each income payment may be subject to income taxes. The initial income payment is $811.35 after taxes
Single Life Income with 15 yrs certain	Provides you with lifetime income stops at time of death, If die before 15 years, beneficiary get remainder of payments for remainder of 15 year period	$636.00	7.63%	$46,555	$114,460	14.1% of each income may be subject to income taxes. The initial income payment is $616.27 after taxes

*Based of life expectancy to age 93
* Mom and Dad’s tax bracket would be lower

Payout Options	Explanation	Monthly Income Payment	Annual Income % of Payment	Income Over Life Expectancy*	Total Guaranteed Period Income	Additional Information based On 22% tax bracket*
Single Life Income with Installment Refund	Provides you with lifetime income If die before completion of 124 payments, beneficiary receives remainder of payments	$808.00	9.70%	$59,146	$100,000	7% of each income payment may be subject to income taxes. The initial income payment is $796.56 after taxes

Sounds somewhat crazy. Usually the purpose of annuities is to hedge longevity. Very, very few people make it to 110. Usually the bet is that you'll outlive the term of the annuity, and then you start 'making money' on the investment. You have to beat the actuaries tables. Otherwise, regardless of how they put it to you, you're almost sure to lose money. The income over life expectancy is telling you this.

I'd run it through an accountant. Some background's here. 'Gains' on an annuity are taxed at federal income rates rather than capital gains rates, so you're always at somewhat of a disadvantage compared to other investment vehicles.

How does a tax bracket go 'lower' here? If you have $100k free and clear for the premium, nobody's taxing it.

If I look at the last column, it looks to me like you're putting in $100,000 to get $98,773.44 back after taxes if the primary annuity holder passes away within 10 years. And that's probably before the M&E charges, surrender charges and management fees. Those can get substantial.

It might take a little while to set up, but if you simply want to turn $100k into monthly payments for 10 years, you can probably start with a bank account with a few bucks in it and a bunch of CDs that come to maturity at staggering terms that dump into it (ladder CD). Then set up an automatic monthly transfer from that bank account to a checking account. It doesn't hedge longevity, but you're all but guaranteed to end up with more total cash at the end of a 10 year period than if you hand it over to a life insurance company.

At the very least, I'd get the fee structure out of them, because it's not mentioned here. Their commission is coming from somewhere. It's those sweet, sweet fees that build skyscrapers and buy pinstripes. They're hiding in the fine print somewhere. Sus 'em out.

[don]

Re: Do Annuities Make Sense for Super Seniors?

Sounds somewhat crazy. Usually the purpose of annuities is to hedge longevity. Very, very few people make it to 110. Usually the bet is that you'll outlive the term of the annuity, and then you start 'making money' on the investment. You have to beat the actuaries tables. Otherwise, regardless of how they put it to you, you're almost sure to lose money. The income over life expectancy is telling you this.

I'd run it through an accountant. Some background's here. 'Gains' on an annuity are taxed at federal income rates rather than capital gains rates, so you're always at somewhat of a disadvantage compared to other investment vehicles.

How does a tax bracket go 'lower' here? If you have $100k free and clear for the premium, nobody's taxing it.

If I look at the last column, it looks to me like you're putting in $100,000 to get $98,773.44 back after taxes if the primary annuity holder passes away within 10 years. And that's probably before the M&E charges, surrender charges and management fees. Those can get substantial.

It might take a little while to set up, but if you simply want to turn $100k into monthly payments for 10 years, you can probably start with a bank account with a few bucks in it and a bunch of CDs that come to maturity at staggering terms that dump into it (ladder CD). Then set up an automatic monthly transfer from that bank account to a checking account. It doesn't hedge longevity, but you're all but guaranteed to end up with more total cash at the end of a 10 year period than if you hand it over to a life insurance company.

At the very least, I'd get the fee structure out of them, because it's not mentioned here. Their commission is coming from somewhere. It's those sweet, sweet fees that build skyscrapers and buy pinstripes. They're hiding in the fine print somewhere. Sus 'em out.

An insightful response dcarrigg. Being the son-in-law, who knows better than to discuss finances with my wife's family (her and I privately cover all fiscal bases), good advice from a third party is what's needed. This I can forward. Thanks pal.

[Thailandnotes]

Re: Do Annuities Make Sense for Super Seniors?

Annuities are a great way to give in your old age. This assumes you have more money than you need.

All educational institutions or charitable organizations like Habitat for Humanity have annuity plans. You're basically saying..."here's my money, use it, but pay me a monthly amount, and when I die or the term runs its course, the rest is yours."

Otherwise, DC is right. Sadly to say, a better bet is buying a CD that pays half a percent.

[c1ue]

Re: Do Annuities Make Sense for Super Seniors?

Short answer: crazy.

Annuities are based on some annual rate of return as well as actuarial average of payout term (i.e. expected future lifespan of recipient).

The actuarial part is more or less fixed, but the rate of return in an environment of ZIRP would be characterized as being the worst case possible. That's one major reason why the payouts vs. expected lifespan is so poor.

Or let me put this another way: if inflation kicks up - what happens to those on a fixed income?

IMO annuities are better purchased in high interest rate periods than in low ones, because then the inflation/interest rate risks are to your benefit, not detriment.

[don]

Re: Do Annuities Make Sense for Super Seniors?

Thanks guys, keep 'em comin'. I need to bury this "(nearly) always a bad notion".

[BigBagel]

Re: Do Annuities Make Sense for Super Seniors?

Don, did they try Vanguard for price comparison? I don't think I'd buy an annunity but if I was shopping I'd get numbers from them.