Annuities Flashcards
What are the most popular options for guaranteed income using hybrid annuities?
Variable annuities with guaranteed living benefits (GLBs) were introduced in the late 1990s. The two most popular GLBs are the guaranteed lifetime withdrawal benefit (GLWB) and the guaranteed minimum income benefit (GMIB). More recently the fixed indexed annuity with a GLB has been added.
(Pensionize Your Nest Egg, Milevsky et. al.)
What are VA (variable annuity) phantom income credits?
By purchasing a variable annuity with GLB but delaying making withdrawals, an income credit is added to the withdrawal base. This is used to calculate the GLB but is not cashable or available to the annuity owner.
(Pensionize Your Nest Egg, Milevsky et al.)
What does GLB stand for?
Guaranteed Living Benefits.
(Pensionize Your Nest Egg, Milevsky et. al.)
What does GLWB stand for?
Guaranteed Lifetime Withdrawal Benefit.
(Pensionize Your Nest Egg, Milevsky et. al.)
What does GMIB stand for?
Guaranteed Minimum Income Benefit.
(Pensionize Your Nest Egg, Milevsky et. al.)
How much are fees for VAs with a GLB?
The typical range is from 1 to 5 percent. In examples, 4% is used for the high end (see page 137). He also says 1 to 3 percent on page 141, but that may just be for the GLB rider.
Pensionize Your Nest Egg, Milevsky et. al.
What are some of the considerations when choosing a variable annuity?
The credit rating of the issuing company. Contract type (single life or joint life). Minimum and maximum deposits. Sales charges and expenses. Options for receiving income. When income can start. How much income you will receive. What you gain by waiting to take income. Costs of cashing out.
(Pensionize Your Nest Egg, Milevsky et. al.)
What kinds of spending strategies might be utilized when annuities are part of the spending plan?
- GLB can be used along with other fixed income to meet basic living requirements.
- Income above GLB can be used for additional activities.
- The investment portfolio can be used for additional activities or needs, such as spending emergencies.
What is the right age to annuitize?
This question can apply both to the purchase of an immediate annuity and a deferred annuity in which the annuitant can decide when the income stream should start.
Calculate the difference between the current income and income in a year. If the change in the benefit is less than what you expect to earn on your investments (those that would be used to purchase the annuity), then you should wait. If it’s more, you should purchase the annuity or turn on the benefit.
Uncertainty plays a role. If your annuity payment would grow by 4%, and you expect your investment to grow by 5%, but your investment could drop by 5%, 10%, 20%, or even more, you’re gambling by waiting.
Interest rates also play a role. If interest rates rise in the next year, the benefit of waiting may grow more than expected.
Note that the tax impact can change the answer. If you’re still earning income and are in a high tax bracket, if the annuity income is significantly taxed, and if investment growth is tax-deferred, your answer might change.
A good rule-of-thumb is that age 65 - 70 is appropriate, but adjust according to the above considerations.
What are the pros and cons of single-premium immediate annuities?
Pros
- You know exactly what your income will be. There is no downside.
- You will be able to spend more without worrying about running out of money.
- Investment management is simplified.
- You benefit from mortality credits.
- You can’t outlive the income - longevity risk is managed.
Cons
- You “lose” if you die too soon.
- The process is irreversible.
- Your income is locked in. There is no upside.
Discussion
It’s easy, perhaps typical, to think of the insurance company getting all your money if you die to soon. The truth is that while the insurance company does earn management fees and profits (which is done by the pricing of the annuity), that other people like you, but who live longer than expected, are the beneficiaries of your bad luck. Those who die earlier than expected provide mortality credits for those who live longer than expected.
What is the Implied Longevity Yield?
This is a calculation that helps determine if one should purchase an annuity now or at some future point. It attempts to answer the question “how much must I earn on my investments to justify waiting?” See Pensionize Your Nest Egg beginning on page 150. The website pensionizeyournestegg.com provides an ILY tool.
What are the pros and cons of variable annuities?
Pros
- Provide upside potential by allowing a portion of the contributed funds to be invested in stocks and bonds.
- Can provide a Guaranteed Lifetime Income Benefit through the purchase of a rider.
- Has a liquid value - money can be taken back out.
Cons
- High expenses reduce or eliminate potential benefits.
- The sales process can be misleading.
- They can be difficult to evaluate.
In the United States, what is the driver behind annuity payout rates?
It is the U. S. Treasury yield curve.
(Pensionize Your Nest Egg, Milevsky et. al. page 153)
If you are considering an annuity purchase, but you think rates are going to rise in the future, should you wait to buy?
First, you don’t know what rates will do. You are effectively flipping a coin.
Next, the answer is almost certainly “No.”
Milevsky has a tool at www.pensionizeyournestegg.com to help with this evaluation. [Note: Milevsky sold tools to CANNEX, and the site, while it exists, does not provide as much help as I thought it would.]
He does an analysis of a 65-year-old woman trying to decide if she should wait for five years or buy now. Even with a significant rise in interest rates, this example shows that money is lost.
(Pensionize Your Nest Egg, Milevsky et. al. beginning on page 155)
What is the primary challenge when evaluating annuities?
Whether evaluating “yield” or other metrics for determining the value of an annuity purchase, the great unknown is that you don’t know how long you will live.
If your primary focus is on maximizing spending ability while you are alive, an annuity is likely to be a very useful tool.
If your primary focus is on leaving a lot of money to someone else when you die, an annuity may not be as useful. Note, however, that it may be advantageous to buy single-premium life insurance with part of the money and an annuity with a reduced value. For some, this can be the best of both worlds.
