Life income, with a cash refund
MR. WATSON: Well, you might like this next one. It's a life income, with a cash refund. It's going to pay a lower amount per month, maybe $700. But if I die after receiving $20,000, my wife would receive $80,000 in cash. This pays a beneficiary if I die early, but it is going to pay less money per month while I am alive. The dollar amounts I’m using are just for the example. The point is that if I die before the bucket is exhausted, my beneficiary get’s whatever is left in the bucket as a lump sum. And guys, this is not life insurance, so there is no tax-free benefit after I annuitize. My beneficiary will have to claim the interest portion as earned income just like I had to. Whenever money comes out of an annuity, the interest portion is ALWAYS taxable income, no matter what.
Life income, with installment refund
MR. WATSON: Life income, with installment refund. Same as above but pays the balance out in installments.
Every option, other than a straight life income, pays a beneficiary if the annuitant dies early, it has a survivorship option. But with an installment refund, how is she going to get the money? In installments. It might pay me $725 a month. But if I die, after receiving $725 a month, for a total of $30,000, then she would continue getting the same $725 a month until the balance of the remaining $70,000, was paid out. If she died before it was paid out, it would go to the next beneficiary, and again, whatever portion of that $725 was interest will have to be claimed as income each year.
MR. WATSON: The whole idea is that every one of these options, other than the straight life income option, pays a beneficiary if you die early, and the full benefit will be paid out. Does that make sense?
STUDENTS: Um-hmm.
MR. WATSON: You have have to choose one of these options when you are ready to annuitize. You don't choose them when you buy the annuity. You agree?
STUDENT: I do. But you can't change it when you're -
MR. WATSON: Once you annuitize it, you're done.
STUDENT: But if you haven't annuitized it yet -
MR. WATSON: -- you can do all kinds of things. Good way to look at it is, with an annuity, it's a glorified savings account during the accumulation period. It's glorified because you are not paying taxes on the interest (growth). You are putting money in like any other kind of investment, and it's sheltered from taxes while it is in there. An unlimited amount of money you can put into it. Does this make sense so far?
STUDENT: Yes.
Life income, with a 10-year period certain.
MR. WATSON: Another option is a life income with a 10-year period certain. It pays the annuitant for life or it pays for 10 years, whichever lasts longer. If I'm still living beyond that 10-year period, let's say I'm 98, doing a little dance, got my hat on, cigar in one hand, a cocktail in the other, living large, everything is cool. Am I still getting paid? Yes. If I live to be 120 years old, am I still getting paid? Yes.
STUDENT: I'm not sure what you mean by it being a 10-year period certain.
MR. WATSON: It guarantees to pay for ten years OR life, whichever lasts the longest. As long as I'm living, i am getting paid.
MR. WATSON: Guys, life income with a 10-year period certain - listen to how I phrase it - it pays for life or 10 years, whichever lasts the longest. In this case, which has lasted the longest? My life. So I'm still getting paid. If I died in year 2, it would pay for how long?
STUDENTS: Eight years.
MR. WATSON: Then it's over. Do you agree?
STUDENTS: Yes.
MR. WATSON: A good example: Look, Jersey is my wife. She's 55 years old. I'd choose this one, life income with a 10 year period certain, so if I died, she could continue to get a check until the ten years us up. Got it?
MR. WATSON: If I died five years from now, she will be what age? 60. It would pay her for how many more years?
STUDENTS: Five years.
MR. WATSON: At that time, she would be what age?
STUDENTS: 65.
MR. WATSON: Now, everybody with me?
STUDENTS: Yes.
MR. WATSON: So in that example, I’m making sure that if I die that she still has that extra money coming in until she’s about retirement age. It could be life with a 15-year period certain, or life with a 20-year period certain. The point is that if I die within the time-frame, the family still has money coming in until the end of the time-frame. Might be until the kids are out of school or whatever. And again, she’s going to have to claim the interest portion of the check as earned income, just like I had to.