MDNews - Cleveland-Akron-Canton

+++++++++++++++++++++++++ + + +++++++++++++++++++++++++ BUSINESS SECTION  +++ +++ IS AN ANNUITY WITH A 10% Annual By Michael T. Livesay, CPA/PFS T HE SEC DEFINES an annuity as follows: “A contract between you and an insurance company that is designed to meet retire- ment and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.” To me the key word in the defi nition is contract; because that is where most people (agents, advisors and especially consumer’s) go wrong: they don’t read and understand the contract. Guarantees currently seem to be one of the most misunderstood aspects of variable and indexed annuity contracts because the agent and consumers focus too much attention on the hype of the guarantee and very little on the charges, likely outcomes and nuances of the contract. In the last couple years I have had many clients tell me that their agent has recommended an annuity that guar- antees their money will be doubled in ten years, guaranteed. This is done through an Income Rider — a contract feature purchased and added to a Variable or Fixed Indexed annuity contract. This guaranteed doubling is for a separate Income Account, not their actual Account Value (their real money), and is not accessible as a lump sum. Instead, this income number, multiplied by a lifetime income factor, equals the client’s lifetime income. Withdrawals from the Account’s Value reduce the Income Value proportionately. The problem is easy to spot. All too often a client believes this Income Value is the lump sum they can walk away with or will pass to their benefi ciaries. With an annuity you generally have three values to be concerned about. 1. Cash Value (how much you can have the day you cash it in); 2. Death Benefit (how much the benefi ciaries get if the annuitant dies); 3. Income Value (the value your lifetime benefits will be based on, multiplied by an Income Factor, which is determined by the age of the client when income is activated). The typical Income factor for a 60 year old is usually 4.5% of the income value. Let’s look at an example. A 50-year old man invests $500,000 into an annuity with a 10% annual income growth guarantee rider. This rider 56 | Cleveland-Akron-Canton MD NEWS  MDNEWS.COM  JULY-AUGUST 2011 Return Guaranteed an Illusion? guarantees the income value will go up by 10% of the deposit amount (simple interest) each year no income is taken, for a maximum of ten years, regardless of the Cash Value performance. At the end of ten years, the income account is guaranteed to have doubled, so it is now $1,000,000. Can he just take his $1,000,000 and run? No way! Based on the above contract features, he will get 4.5% of the Income Value or $45,000 per year for the rest of his life. How long does he have to live to get back his $500,000? Twenty-one years from the time he invested. After that he is in the profit zone and getting a return by collecting the insurance company’s money. Is this annuity and rider a good choice for him? Maybe or maybe not depending on how long he lives, but he at least needs to make sure he understands how he recovers his investment and what his rate of return is really expected to be inclusive of investment, insurance and rider charges. Mike Livesay is a principal of Weidrick, Livesay, Mitchell & Burge, LLP in Akron. He is a Personal Financial Specialist (PFS), as well as a CPA. n

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