Annuities for the Middle Class American

Income annuities are immediate annuities suitable for the middle class American, as they provide a specific, guaranteed amount of income. While most middle-income people consider annuities to be more investment products than insurance products, annuities should be considered as a way to insure both current assets and future income. Income annuities for middle class Americans insure that they will receive income over a number of years. The amount of time can be limited to 5, 10, 20 or more years, or it can be for as long as the annuity owner is alive. Guaranteed income annuities can also be bought with an option known as a “period certain” guarantee. This provides guaranteed income to a spouse or beneficiary after the death of the original annuity owner.

When a middle class American purchases a guaranteed income annuity, he or she in effect transfers the risk of outliving his or her assets to the insurance company. Because an income annuity provides for guaranteed payouts, the payouts are based on the risk the investor presents to the insurance company of living beyond the amount of premium he or she has used to purchase the annuity. Like all other insurance products, including health and car, annuities should be considered in terms of risk transfer. When a car owner buys car insurance, he or she is transferring the financial risk of repairs following an accident to the insurance company, in exchange for the premiums he or she pays each month. An annuity transfers the risk of living past accumulated assets.

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Generating Lifetime Income with Annuities

A Certified Financial Planner will mention “longevity risk” when it comes to annuities for the middle class American. The term means the risk someone has of outliving his or her savings. Based on information provided by the Internal Revenue Service, the average middle-class 70-year-old man should expect to live until he is 87. That means he will live 11 years longer than the often-quoted life expectancy age of 78. It’s important to know that life expectancy is calculated on the average age a person born today will die. But, the older a person gets, the more likely he or she will be to live past the commonly accepted average life expectancy age. For a large number of middle class Americans, retirement savings will need to last upwards of 20 years, not 10.

Because women tend to live longer than men, annuity income can also be guaranteed for a wife who survives her husband. A great feature of some annuities is a death benefit that is paid to a spouse or beneficiary should the annuity owner die before the entire premium amount is returned. If the annuity owner bought a $500,000 annuity and received payouts totaling $100,00 at the time of death, the spouse or beneficiary would receive $400,000.

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Life Expectancy

Annuity companies use actuaries to calculate the life expectancy of an annuity owner. Actuaries review personal medical history, education, and lifestyle choices to estimate how many years the payouts will need to be made. This information is then combined with the face value of the annuity and the desired length of the payouts to establish the amount of money that is to be paid out with each payment. The annuitant, especially a middle class annuitant without other assets, will want to live longer than the annuity company expects him or her to in order to collect additional payouts.

Immediate Income Annuities

Income annuities begin payouts immediately. They provide a guaranteed amount of income each month once the contract is established. A middle-class American who needs immediate, guaranteed income might realize that over several years, an immediate annuity can provide a level of superior financial protection. An income annuity does not typically expose an investor to the extremes of the equities markets. To protect against the loss of purchasing power due to inflation, a Cost of Living Adjustment (COLA) rider can be included. Middle class annuitants should know that a COLA rider would decrease the level of the payouts during the first years of the contract.

Income annuities are often referred to as “personal pensions”. For middle class Americans who no longer receive pensions from employers, funding a guaranteed income annuity with a lump sum premium is another way to provide financial security in retirement. The yield on a guaranteed income annuity can be fixed or variable. Variable annuities often provide a higher yield than other investments such as CDs. It is very important to understand, however, that unlike CDs, savings and checking accounts, the Federal Deposit Insurance Corporation (FDIC) does not insure annuities sold by life insurance companies.

Comparing Annuities to Stocks, Bonds and CDs

Income in retirement might find an income annuity will provide greater security and stability. Unlike equities and debt instruments, which can significantly increase an investor’s risk of losing capital, income from annuities is guaranteed. A guaranteed income annuity might also pay a higher rate of interest than a CD. While CDs do have a place in the retired middle class American’s portfolio as liquid cash assets, they are prone to reduced amounts of interest paid.  CDs are interest rate sensitive in that the rate paid is tied to underlying investments, such as US Treasuries and money the bank earns on cash accounts, mortgages, etc.

For many middle class Americans, guaranteed income annuities are a safe way to ensure monthly income for life. Even during difficult economic times, the middle class annuity investor can rest easy knowing that his or her payouts will be received as promised. While most insurance companies have maintained payouts under even the most stressful economic conditions, annuity investors should always make sure that the insurance company they purchase the annuity from is rated A+ or higher by at least one credit rating agency.

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