There are variable annuities on the market that offer “living benefits”, which are being marketed to seniors. They may sound appealing, but are these types of annuities really worth looking into? According to the AARP, living benefit annuities are primarily peddled by insurance agents, financial planners and stockbrokers. Living benefit annuities are a combination package that’s part investment and part guaranteed income.
The investment portion involves investing a lump sum amount of your retirement savings into stock-and-bond “subaccounts”. Like mutual funds and stocks, these subaccounts are affected by fluctuations in the market, so you’re taking a chance on either netting good long-term gains or suffering a loss should market conditions go bad. You can withdraw from these accounts, either as a lump sum or periodic payments, from the subaccount when you retire.
With the guaranteed income part of a living benefit annuity, your insurance company agrees to credit your original investment with a yearly fixed increase. The increase is typically a 5 percent gain plus a higher dollar amount if your investments perform well. Even if they don’t, you’re still guaranteed the minimum yearly increase. The downside is that you can’t withdraw this portion in a lump sum. Instead, you get a fixed withdrawal rate for the rest of your life.
Living benefit annuities are very expensive. If you’re considering a living benefit annuities as retirement saving option, discuss with your elder law attorney or a financial planner to make sure this is the right option for you.
