These aren't cheap. With immediate
annuities, you basically exchange a lump sum of
money for a guaranteed stream of payments that
lasts as long as you do. And they come with bells
and whistles. For example, you can buy a lifetime
annuity to last as long as you live or for as
long as both you and your spouse live, though
the payout will be smaller in the latter case.
If you want a guaranteed income for life, but
also with a guaranteed term, you can buy them
with certain terms of five, 10 or 20 years so
that in case you die prematurely, a beneficiary
can collect a check for the remainder of the specified
term. Again, with a certain term, the payout will
Some annuities come with COLA increases (you may be able to choose from 1 percent to 5 percent) and some can be pegged to the CPI.
Here's a quote I got from a reputable financial services firm for a single-life annuity for a 62-year-old woman. For a lump sum
of, $100,000, "Sally" can get initial monthly payouts of the following amounts, depending on the product chosen:
|Monthly annuity payouts in exchange for $100,000
||Annuity linked to CPI
||Annuity with 3% COLA
|10-year term certain
|20-year term certain
For the regular annuity, the payouts are much higher going out the gate, but they never change. Notice the single lifetime
annuity offers a monthly payout of $200 more than the initial monthly payout linked to the CPI. Does it make sense to take the inflation option?
It would take nearly 13 years before
that $428 payment would reach the level of $628,
assuming an annualized CPI rate of 3 percent.
Meanwhile, Sally would have missed out on those
higher payments for that time period. The break-even
point is 17 to 20 years into receiving the annuity
payments, after which the person who opted for
the CPI-linked adjustments would "win the bet"
against the insurance company and get higher payouts
on the back end.
So you pay a price for the certainty of a payment that increases with inflation. And you pay a price if you live with the
uncertainty of inflation. Insurance products are among the few things that offer guarantees (assuming, of course, the firms don't go out
of business) -- and that can give you peace of mind. But this peace of mind doesn't come cheap.