Guaranteed income for life, whether from an annuity or other insurance product rider, sounds good. But what are the pluses and minuses of the various options for securing this income guarantee? When is it smart for clients to annuitize their savings, and when is it better to secure a costly insurance rider?

The answers depend on whom you ask. "I'm not a fan of either variable annuities or fixed-index annuities with guaranteed lifetime withdrawal benefits," says Joseph Tomlinson, an actuary and financial planner from Greenville, Me. "[They're] too complicated, and the insurer can typically raise charges after the product is purchased."

Instead, he prefers single-premium immediate annuities (SPIAs), which he terms "simple products that deal directly with the risk" of outliving one's savings. The client purchases the contract from an insurance company and the insurance company pays out a set amount every month for the rest of the client's life. They are straightforward, and most clients can grasp how they work.

"I don't think most people who buy variable annuities or fixed-index annuities have a clue about what they have bought," says Tomlinson, who spent 25 years working in various investment and actuarial positions at John Hancock. "And I also wonder about how well those selling the products understand them. People should buy products they understand."

Again citing simplicity, he argues that purchasing a SPIA at retirement, rather than in advance or later, is fine. While he understands the "psychological advantage" of spreading out the purchase payments over time, doing so "makes things more complicated," he says.

For similar reasons, Tomlinson prefers SPIAs to insurance policies with a lifetime income-guarantee rider. "Much more complicated than just buying a SPIA," he says.

Yet another advantage of the immediate annuity is that it frees up other portions of a client's portfolio for more opportunistic investing. Or, as Scott Stolz, senior vice president at Raymond James private client group investment products, in St. Petersburg, Fla., puts it: "You have the flexibility to invest the remaining assets much more aggressively."

Clients, he says, worry about dipping into principal to fund a long retirement. With a lifetime income guarantee, they have greater peace of mind. "Once I know I have sufficient income for life, investing the rest of the portfolio becomes much easier," says Stolz. "And because I can afford to be more aggressive, I might actually end up with more money in the long run."

Many of the negatives of income guarantees relate to specific limitations. "The pluses are that income can be consistently generated and paid to the recipient for their lifetime," says Steve Neamtz, president and head of distribution for CBOE Vest, an asset management firm based in McLean, Va. "This in most cases comes with certain minimum levels of income based on the accumulated amount saved for the income-commencement date, allowing for solid planning around this core source of predictable income."

But there's a downside. "Some of the minuses of these programs center around lack of flexibility to alter or leave the program once annuitization is chosen," he goes on. "Income levels in some programs adjust downward or have lower minimums at future dates. There are severe penalties to liquidate from these types of offerings."

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