Engaging in financial planning for your future can be daunting -- and confusing. It can be discouraging, too, because you will likely run into roadblocks here and there. For example, perhaps your health will keep you from qualifying for an affordable and satisfactory life insurance policy. Or maybe long-term care insurance just seems too expensive, though you fear needing it one day. Annuities can be the answer to a bunch of your financial needs -- so let's learn more about them.
The ABCs of annuities
Annuities come in a variety of forms -- immediate vs. deferred (paying you immediately rather than starting at some point when you're older), fixed vs. variable (certain payouts rather than payouts tied to the performance of the market or part of the market), lifetime vs. fixed-period (paying until death or paying for a certain span of time), and so on.
Immediate or deferred fixed annuities are smart options for many retirees or those approaching retirement. Indexed annuities, though, are more problematic and less suited to many people, charging steep fees and/or carrying hefty early withdrawal penalties.
An immediate fixed annuity can provide you with monthly checks to live off of for the rest of your life. As an example, $100,000 can buy a 70-year-old man about $640 per month, or $7,700 per year. A $300,000 purchase can generate about $23,000 annually. Annuities can be structured in many ways, such as offering inflation protection (in exchange for lower benefits) and spousal benefits.
Instead of life insurance
There are many reasons you might be rejected as an applicant for a life insurance policy. You might have pre-existing health conditions that would make insuring you unprofitable. Or, you might simply work in a very dangerous occupation, such as roofing, construction, logging, or waste collection.
If you were hoping to have a life insurance policy in place to support a loved one should you die, you're not out of luck. You might be able to buy an annuity with a guaranteed term. If such a policy guarantees 20 years of payments, for example, and you die after 13 years, your beneficiary can receive the payments for the next seven years -- or a lump-sum payment. A joint annuity can serve a similar purpose, continuing payments to a surviving partner when one partner dies.
Instead of long-term care insurance
Long-term care insurance has become a big problem for many parties -- often unaffordable for consumers and at the same time not very profitable for insurers, either. That's in part because of how likely many of us are to need long-term care at some point.
If you can afford it, you might buy an immediate annuity to cover living expenses and also to assist with long-term care costs if necessary. You don't have to be in good health to buy one -- you just need to have its cost.
You can also be a bit more strategic about it. For example, if you're now 65 and you don't expect to need any long-term care until you're at least 75, you might buy a "deferred" annuity, also referred to as "longevity insurance." It's an annuity that begins payments when you're older, such as in 10 or 15 years. This can be a great solution if you're pretty sure that your nest egg will last you through most or all of your retirement, but are worried about long-term care costs that might pop up later in life. If so, you can enjoy payments from the deferred annuity at that point, applying them toward long-term care or any other needs, such as living expenses. Best of all, deferred annuities are less costly than immediate annuities, so it can pay to buy one long before you want to start receiving income.
Another option available is a hybrid deferred annuity that includes some long-term care coverage. There are different varieties available, but one kind lets you accumulate money that can then produce a monthly benefit. If your account is not tapped for long-term care over its initial term, it can be redeemed for its accumulated value, it can be left to grow, or it can serve future long-term care needs. It even allows beneficiaries to receive leftover sums after your death, too.
With any annuities you're considering, it's smart to consult a financial advisor to compare your options and perhaps discover some you hadn't even known about. One way or another, though, be sure to plan for your future financial security.