STUDENT: What's the minimum amount to start an annuity?
MR. WATSON: Each company has a different starting amount. It may be as little as $25 a month. Point is, the more money you put into it, later, when you annuitize it, the more money you will receive. Make sense? We are talking in general about annuities.
MR. WATSON: Hey, guys. Are you okay so far with annuities? Everybody all right? If not, call us or email us. You are putting money into a bucket. It's like a savings account. That money is invested, and you're not paying taxes while it's growing. They are called tax-deferred annuities.
MR. WATSON: So we've covered how money is put in the bucket. So you put in a lump sum or periodic payments, and those payments can be fixed or flexible. Do you agree?
STUDENTS: Yes.
MR. WATSON: There are deferred annuities and immediate annuities. Immediate annuities are always funded with a lump sum. You agree?
STUDENTS: Um-hmm.
MR. WATSON: What determines how much your monthly income will be? There are several factors.
- The amount of money in the annuity (the more you put in, the more you get back)
- Age - someone 55 has a shorter life expectancy than some age 35 - if everything else was the same, then the person age 55 would get more per month because the company is paying him/her over a shorter period of time
- Sex - women live longer than men - if both were the same age, then a man's monthly amount would be higher
- Interest rate the insurance company is paying - the higher the interest rate, the more the monthly benefit
- Payout options - discussed below
Pay-out Options (know these)
MR. WATSON: Whenever you are ready to annuitize, there are are 5 ways to receive your money as a stream of income and each one will affect how much your monthly check will be. An annuitant will choose one of these when they are ready to annuitize. You cannot change the option you chose after you annuitize, so once you annuitize and choose an option, that’s it.
- Straight Life
- Life Income - cash refund
- Life Income - installment refund
- Life Income - 10 year period certain
- Joint & Survivor
MR. WATSON: With all of these options, the annuitant gets paid for life. No matter what. But IF there is a beneficiary, that person NEVER gets paid for life. The best the beneficiary can get is whatever is left in the bucket if the annuitant dies early. As you will see, some options don’t have a beneficiary, so if the annuitant dies early the insurance company keeps the money left in your bucket at the time you die. With other options, if you die early there is a beneficiary and the insurance company will have to pay the rest of the bucket to that person. We’ll talk about these options. But you need to remember:
- the annuitant always gets life income, and
- that a beneficiary never gets life income (if there is a beneficiary at all).
Straight life income. (Only one annuitant, no beneficiary)
MR. WATSON: How long will that pay you?
STUDENTS: Life.
MR. WATSON: As long as you can fog up the mirror. You agree? It's the highest payout benefit amount (monthly payout) because it’s the riskiest. Let's assume we have $100,000 in the bucket. We have already determined how it got in there. Making up a number, let's say it's paying $1,000 a month.
MR. WATSON: Here's my wife. If I die after one month-
STUDENT: She gets all the money?
MR. WATSON: NO! She gets nothing. If I die after one payout, if I die after receiving one check, she gets nothing. There's absolutely no beneficiary option with a straight life payout.
STUDENT: But you put $100,000 into it, which is your money. In your will you can't give it to your wife as a beneficiary?
MR. WATSON: The will has nothing to do with this. The annuity is its own contract and we have to follow the payout option you chose when you annuitized, which has nothing to do with a will. This first option is a very risky option, but it pays a higher monthly amount. This option has the highest pay-out but there is no survivorship option, no beneficiary. A lot more risk.
STUDENT: Where's the money go?
MR. WATSON: Insurance company keeps it. (They use that money to pay those who are living longer.) But there are other options that pay to the beneficiary, that provide for survivorship benefits.
MR. WATSON: Everybody all right? Do you like this option?
STUDENTS: No! Maybe for a single person.