Annuities, often vital components of retirement planning, can serve many purposes and suit many different types of clients. That can lead to many misunderstandings.
Essentially contracts offered by insurance companies, they’re often recommended as a solution for longevity risk—i.e., the fear of outliving your money. The longer you live, the more value you’re likely to get out of your annuity. But unlike life insurance, annuities can be bought without a medical checkup.
So should clients consider their own health and longevity expectations before buying this product?
Health And Longevity
The answer is a qualified yes. “A person in poor health and with a limited life expectancy may not see much of a need for protected lifetime income in retirement,” says Adam Lalla, vice president of competitive market solutions at Radnor, Pa.-based Lincoln Financial Distributors, referring to one of the key benefits of many annuity contracts. “However, many clients are unaware what their actual life expectancy could be.”
A 65-year-old married couple has about a 50% chance that one spouse will live past age 90, Lalla says. “Clients cannot predict how long their retirement assets will need to last, and annuities can provide predictable income throughout retirement.”
Still, the premise holds true. It’s the nature of the insurance business. “People that pass before their life expectancy subsidize those that live beyond their life expectancy,” says Scott Stolz, a president at Raymond James Insurance Group in St. Petersburg, Fla. “Therefore, the longer you live, the more income you will receive relative to the amount placed into the annuity.”
That means a client’s health and longevity should be on the advisor’s mind, even if they are not on the client’s. “Professional, licensed insurance agents definitely should consider health and longevity expectations in their recommendations to clients,” says Michael Zmistowski of Financial Planning Advisors in Tampa, Fla. “The financial plan must consider health and longevity.”
Forfeiting Is A Myth
One of the big myths with annuities is that once you die, you must forfeit the asset and the lifetime income, an especially painful prospect if you imagine dying young.
But that’s only if you take the income over one life—and only to maximize the payouts.
“You could buy an annuity that works that way,” says Stolz. “In fact, because such a payment would be based solely on one life, it would pay the most income per dollar invested. In reality, almost no one chooses such an option.”