If you think Clark Howard hates all annuities, that’s not exactly correct. There are two kinds of annuities he loves, but you’ll almost never hear anyone discuss them. Let’s take a closer look…
When you retire, you may not have enough money to provide for your monthly needs from savings. So there are companies that turn a supply of money — you typically need a minimum of $100,000 — into a lifetime stream of income. Immediate payout annuities (aka life annuities) are entirely legitimate, but they pay so little in the way of commissions that they’re never pushed by salespeople.
You can get a quote for an immediate annuity from ImmediateAnnuities.com. If you have military service, you’ll also want to get a quote from USAA and maybe TIAA-Cref. Whatever you do, make sure you stick with an insurer who is rated A++ by A.M. Best. An A++ rating indicates the utmost financial strength and that the insurer will be there for the long haul.
Here’s a common concern about immediate annuities: What if you pour all your money into an immediate payout annuity and then you die shortly after? It’s true that all the money will be gone and there will be none for your heirs. If that’s your concern, then you can opt for a special provision called ‘period certain,’ which means that you’ll get a guaranteed payout (typically for 20 years) even in the event of your death. Your monthly benefit will drop by about 10% if you take the period certain option, but at least it provides something guaranteed to your heirs.
Another kind of annuity is a longevity annuity (aka longevity insurance or deferred-income annuities.) This is a simple insurance product you buy that doesn’t start paying a living benefit until you hit 85.
The Life Insurance and Market Research Association reports sales of longevity insurance policies nearly tripled from 2012 to 2014. During that time they went from $1 billion to $2.7 billion, according to the latest estimates.
The idea is that with a longevity policy in place, you could plan to blow through all the cash in your retirement plan through age 84. Because the minute you turn 85, you get a check every month for as long as you live.
Insurers offer a great benefit on longevity policies. They know from actuarial tables that most people who buy the policy won’t live to receive any money. But if you do live to age 85, you get that nice monthly check.
You won’t hear a lot of insurance agents talk about longevity policies because the commissions on them are so small. But they can be a great idea for so many situations where people might otherwise outlive their money. If you want to explore the idea of buying a policy, ask the agent for ‘the insurance policy that doesn’t pay any money until age 85.’ Different people call it different things, but they’ll know what you mean based on that description.