Annuities
Annuities are a form of life insurance that provide a guaranteed income either for a certain time or life. The type of annuity we use most commonly is called a Single Payment Immediate Annuity (SPIA). They usually have “period certain” and “life”. Here is what that means:
- a SINGLE PAYMENT or lump sum premium is paid
- IMMEDIATE means it must make its first payment to you within 12 months
- a PERIOD CERTAIN means it will pay for an agreed number of years even if you die before the number of years have passed
- LIFE means if you live longer than the “period certain” it continues to pay until you die
Lets say you are 55 years old and you want to buy an annuity to pay for your long term care insurance premium of $2,000. Let’s also say you have an IRA with $300,000 in it. We would create an IRA – SPIA rollover with lets say $36,000. This would then pay the $2,000 for 25 years (period certain). If you die at year eight, the money would continue to be paid for the rest of the 25 years to your heirs. On the other hand, if you live to age 99 or 104 it will continue to pay until you pass away.
Some easy math using the above example would show that you paid in $36,000. The SPIA paid out a minimum of 25 X $2,000 or $50,000. In the end your money is gone but you saved 28% on your premium. If you live to 90, the SPIA would pay out an extra $20,000. The average rate of return usually runs about 4.6% to 5.2% depending on the prime rate.