Many investors are introduced to index annuities with income riders at dinner seminars and through TV and Internet advertising. Often cloaked in marketing terms like ‘hybrid index annuities’ or ‘Next Gen Annuities’, these are typically index annuity contracts bundled with income riders and other add on benefits.
Indeed, many people coming to us at DCF Annuities think that monthly income with long term care benefits are the ONLY thing index annuities do.
In reality, index annuities first and foremost should be considered a safe money allocation, a place where your capital is protected from loss. They are safe, and in their purest form, they are simple and efficient.
But insurance companies are in an arms race to add riders, options, and benefits to these basic contracts. People like a silver bullet, one-stop shopping solution, and these hybrid annuities are to retirement planning what WalMart is to retail.
There is nothing inherently wrong with index annuity contracts that are bundled with income, longterm care and death benefit riders. They do the job they are intended to do.
But the question is, is it a job you need done????
Index Annuities With Income Riders Are The Jack of All Trades Annuity
But, as everyone knows, the jack of all trades is the master of none. When an annuity has every feature and benefit available, the sum of those parts drags down performance of the whole thing.
In short, an annuity that tries to do everything will do no one thing very well.
With every benefit, feature, or rider, there are costs to the insurance company. The more benefits, the more expensive it is to offer the contract.
It’s only natural then that benefits get toned down to manageable levels for the carrier. It’s not wrong, it’s just business- there is no such thing as a free lunch.
In the end, many of the components of a ‘hybrid annuity’ ultimately do not offer as competitive a benefit as you can find through ‘pure play’ offerings.
Understand the Features, Benefits, AND the Costs
Let’s look through each of the bundled benefits typically seen in a hybrid annuity contract, and outline the ‘pure play’ alternative options.
Need long term care? Buy long term care insurance, instead of relying on a watered down rider in the annuity.
Need lifetime monthly income? A pure income contract, when purchased at an optimal time, will outperform nearly all other options.
Need to leave an inheritance? Life insurance has been used for centuries for exactly this need, and it’s tax free to the heirs. Also, a longterm lump sum or fixed annuity contract placed today guarantees the future outcome you desire.
Need income for a few years? Period certain Secondary Market Annuities are more efficient and higher yield.
Need safety of principal? Growth oriented index annuities protect principal with market linked growth potential. More efficient, no fees
Need options? In many situations, using the free withdrawal provision of a growth oriented index annuity for income needs is more efficient that any income rider.
What Benefits Do You Need?
If you are like most of our clients, chances are good that you already have some guaranteed income and have protected some of your assets.
You may have guaranteed income from another annuity, a pension, real estate, or some other source. You may only need to make a few enhancements to your plans and investments.
But most likely, there is something about an annuity that appeals to you, which is why you’re reading this page.
The first step is to identify the benefits that appeal the most and that you need the most. Then it’s a much easier matter to pick right annuity for you in retirement.
These are the primary components that can be isolated- there are contracts that maximize one, or sometimes two of these components. Put all three into one contract, however, and all will suffer.
- Safety: Annuities are safe money allocations that in most situations offer superior qualities to most other ‘safe money’ asset classes like bonds. See ‘Annuities are Enhanced Bonds‘
- Growth: Index annuities were made to capture a reasonable amount of growth in good times and lock in that principal and prior earnings down times. See ‘Growth Oriented Index Annuities’
- Income: If you want maximum income then focus on a contract that is specifically designed for income alone. See ‘Index Annuities For Income‘