Create dependable income needed to replace a breadwinner's earnings
MEDFORD, OR / ACCESSWIRE / May 1, 2024 / Life insurance is a foundation of financial planning for anyone with dependents. Sufficient life insurance means the death of a breadwinner won't be a financial catastrophe, says Ken Nuss, CEO of AnnuityAdvantage.
If your spouse or another provider dies and you need to replace the income he or she brought in-usually wages or self-employment income - what are the best options for using the death benefit of a life insurance policy to create sufficient lasting income?
Each family's situation is different, but some general advice applies. First, determine how much cash you need to cover immediate expenses and future liquidity and how much ongoing income you need.
"Today, with interest rates up, options are better than a couple of years ago," Nuss says.
Get the policy payout under your control as soon as possible. The best course usually is to place the funds in a money-market fund that will pay a good interest rate until you decide on what to do, he says.
Fixed-rate annuities guarantee interest
A deferred fixed-rate annuity is the insurance industry's version of the bank certificate of deposit (CD). It too guarantees a set rate of interest for a term but is not backed up by FDIC.
If you're in your late fifties or older, this kind of annuity, also known as a multi-year guaranteed annuity (MYGA), can be a great place to deploy life insurance proceeds. Rates are up, typically higher than CD rates. You now can get up to 5.96%.
Most MYGAs provide some liquidity, often allowing the owner to withdraw up to 10% of the policy value annually without penalty. Any interest you earn is not taxed until it's withdrawn.
If you're younger and need current income, a MYGA has a big drawback. If you withdraw money before age 59½ you'll pay a 10% IRS penalty on any interest you receive plus normal federal and state income taxes. Permanently disabled people are exempt from the penalty.
Lifetime annuity provides more income than other options
With an income annuity, you convert a lump sum into a stream of income that starts almost immediately. A single premium immediate annuity, or SPIA, is bought with a lump sum. A lifetime annuity is the most popular variant, but you can buy one with a set term, such as 20 years.
Income from a lifetime annuity is not subject to the pre-59½ tax penalty. Here's why it produces the most income.
Each income payment includes both taxable interest and non-taxable return of principal. Typically, the tax-free portion is larger. The two usually combine to give you more monthly income than you could get any other way, and certainly more than you can get from any other guaranteed-rate vehicle.
Create your own pension
You can choose to receive monthly, quarterly or semi-annual annuity payments. While much of the income is your own money coming back to you, it's convenient and guaranteed, and your remaining principal is earning a good rate over the years.
"Think of an immediate annuity as your private pension," Nuss says.
A lifetime annuity normally has no cash surrender value. If you have other significant savings or investments, putting the entire death benefit toward one might make sense. But if you don't, it wouldn't.
What's unique about a lifetime annuity is that the same income will keep coming to you no matter how long you live. If you live past your life expectancy, the annuity will have paid back your entire principal, but you'll still get the same guaranteed payments. This is why it's often called "longevity" insurance.
Shop to get the best payout
One word of caution: some insurers let you convert the death benefit into a lifetime annuity directly. "It's not a good idea to accept that option immediately because the odds aren't high that the company that provided the life insurance will also offer the best deal on an annuity," Nuss says.
The AnnuityAdvantage site helps you shop to get the most guaranteed income available.
About Ken Nuss and AnnuityAdvantage
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. He's a nationally recognized annuity expert and prolific writer on retirement income. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com - or by calling (800) 239-0356.
Media contact: Henry Stimpson
henry@stimpsoncommunications.com
SOURCE: AnnuityAdvantage
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