Feeling a little shaky there, old fellow?
The insurance industry has just the thing for you.
If you’re old enough and sick enough, and likely to croak before too many years, insurance companies will give you a sweet deal on an immediate pay annuity.
Hand over a small fortune, and they will send you a fatter-than-usual check every month for the rest of your life, which the company expects will be short.
It’s called a “medically underwritten single premium immediate annuity.”
If you’re not sick, the insurance industry will sell you a regular immediate annuity as well, with no medical checkup required. It just won’t pay as much.
Whether sick or healthy, immediate annuities are an option for retirees who fear that they’ll run out of money before they die. You pay the insurance company now, and the company promises a monthly check for life, starting immediately.
For instance, a healthy 65-year-old with $100,000 to put down would get an income of about $525 per month, with a 2 percent yearly inflation adjustment, according to quotes gathered from immediateannuities.com. That’s a 6.15 percent payout.
It’s a bet with the insurance company. The company is betting that you’ll die fairly soon and the company will get to keep all or most of the money you paid in. You’re betting that you’ll live long and keep collecting.
That’s why the sick get a more lucrative payout. Take for instance, an 87-year-old woman with diabetes, and who has had a stroke. Hand over about $204,000, and Genworth Financial will pay her $40,000 per year for life — nearly a 20 percent annual payout.
Medically underwritten annuities generally pay 10 to 50 percent more than regular annuities, depending on age and illness, says Jerry Larkin, a vice president at Genworth.
Calculated coldly, it’s hard to lose on an immediate-annuity bet, since you won’t miss the money if you’re dead. On the other hand, your greedy heirs might curse your departed soul.
So, companies offer annuity options with partial payouts on death. Some agree to send checks for five or 10 years even if you die in the meantime, with your heirs pocketing the money.
Of course, you’ll get less every month if you choose those options.
An immediate annuity starts paying right away. It differs from a deferred annuity, which takes your money now but pays at some date in the future.
Deferred annuities, variable and fixed, have issues with high fees, fat commissions for salespeople and surrender penalties that can make them unattractive. An immediate annuity is a cleaner product.
You can buy immediate annuities that pay until one spouse, or both, are dead, with smaller checks for covering both lives. A healthy couple, both 65, would get about $430 a month on a $100,000 annuity that pays until both die.
Old folks have an annuity in Social Security. That’s not normally enough to keep you in house and home and Caribbean cruises. Most of us rely on savings to fill the gap. Whether an annuity makes sense as a gap filler depends on your circumstances.
An annuity provides peace of mind. It means a monthly check for life. If the insurance company fails — a rare event — most annuitants still get paid. Missouri and Illinois have state guarantee associations that back an annuity up to $250,000 in present value. But it’s best to stick with companies rated at least A by A.M. Best.
On the other hand, there is danger in putting too much savings into an annuity.
Retirement contains some nasty surprises, many of them medical. Fidelity, the mutual fund company, estimates that the typical retired couple will pay $245,000 out of pocket during retirement for health care — Medicare and supplement premiums, home health care and the like.
Once the money is in the annuity, it’s gone. It can’t help when the car blows up, or the roof fails.
A study by staffers at the Congressional Budget Office and the Wharton School of the University of Pennsylvania found that a quarter to a third of households should consider an annuity, given the risk that they’ll need the money for other things.
People who buy medically underwritten annuities often need help getting along, either through in-home help or an assisted-living home. An annuity can mean they can always afford the help.
Still, Larkin says Genworth tries to look at the entire situation before deciding how much, if any, should be put in an annuity.
There’s a also decent chance you’d do better investing your money rather than handing it to an insurance company. Since 1928, the stock market has produced annual returns averaging nearly 10 percent, although it has had some spectacular crashes along the way. A collection of investment-grade intermediate-term bonds would yield about 2.4 percent now. You’ll get your money back when the bond matures — unless the issuer goes broke.
With an annuity, you can’t spend your savings down to nothing or lose it to a scam artist. In that way, an annuity becomes a form of “dementia insurance.”
Other studies point toward a middle ground, notes Harold Evensky, a professor of personal finance at Texas Tech University. They say putting 25 to 50 percent of savings in an annuity is the best balance.
Today’s low interest rates are a problem, since they’re keeping payouts low on annuities, says Evensky. Investors might do well to wait, hoping rates rise in years to come.
Waiting has another benefit. The older you are, the fatter the checks insurers will provide. Evensky recommends waiting until age 70 before taking an annuity.
Evensky doesn’t see much sense in taking an annuity if your health is already bad, even if the insurer promises a bigger payout. The insurance company is likely to win that bet, he says.