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Thread: Annuities

  1. #1
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    Annuities

    I'm looking for information about annuities. If you can help me out please pm me. Thanks

  2. #2
    Quote Originally Posted by HACKNSACK44 View Post
    I'm looking for information about annuities. If you can help me out please pm me. Thanks
    Can you provide a bit more context to your question? in simplest terms, annuities are insurance products where the buyer contributes money now with the promise of getting paid in future installments.

    That said, annuities can be rather complex financial planning tools. They often carry very high commissions (which can, in my opinion, create a situation where the selling party - usually an insurance company salesperson - has a financial incentive to recommend a product that may not be in your the best interest) and are often misrepresented as a way to improve/guarantee returns while avoiding/minimizing taxation.

    The simplest (and in my opinion the only useful) type of annuity is a fixed immediate annuity. With this type of annuity, the customer pays a lump sum now in exchange for a guaranteed future stream of periodic payments. For example, pay $100k now and get a monthly payment of $425 each month util you die. The $425 never increases or decreases and will be paid until you die, whether that is next month or if you live to 110 years old. This can be a useful tool, especially for those who have significant assets, as it allows you to 'lock-in' a certain amount of income. It's important to note that very few immediate annuities have any sort of cost-of-living adjustments, which can be important if the income is expected to continue for decades. Immediate annuities are frequently used when settling a personal injury lawsuit. The insurance company will settled with the injured party by guaranteeing them $1k per month for the rest of their life (for example). Lotteries frequently pay-out this way too. Immediateannuities.com lets you plug in different amounts and payment periods with no registration or obligation.

    There a several other types of variable future annuities that invest payments in an underlying mutual funds. Future payment amounts are dependent on how well those underlying investment perform. Unless you are sophisticated and knowledgeable investor with a trustworthy financial adviser, I would steer clear of these all together. They are typically sold using best case examples while overstating the tax advantages. Annual expenses can exceed 4% which drag total returns down significantly.

  3. #3
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    Quote Originally Posted by quadfather View Post
    Can you provide a bit more context to your question? in simplest terms, annuities are insurance products where the buyer contributes money now with the promise of getting paid in future installments.

    That said, annuities can be rather complex financial planning tools. They often carry very high commissions (which can, in my opinion, create a situation where the selling party - usually an insurance company salesperson - has a financial incentive to recommend a product that may not be in your the best interest) and are often misrepresented as a way to improve/guarantee returns while avoiding/minimizing taxation.

    The simplest (and in my opinion the only useful) type of annuity is a fixed immediate annuity. With this type of annuity, the customer pays a lump sum now in exchange for a guaranteed future stream of periodic payments. For example, pay $100k now and get a monthly payment of $425 each month util you die. The $425 never increases or decreases and will be paid until you die, whether that is next month or if you live to 110 years old. This can be a useful tool, especially for those who have significant assets, as it allows you to 'lock-in' a certain amount of income. It's important to note that very few immediate annuities have any sort of cost-of-living adjustments, which can be important if the income is expected to continue for decades. Immediate annuities are frequently used when settling a personal injury lawsuit. The insurance company will settled with the injured party by guaranteeing them $1k per month for the rest of their life (for example). Lotteries frequently pay-out this way too. Immediateannuities.com lets you plug in different amounts and payment periods with no registration or obligation.

    There a several other types of variable future annuities that invest payments in an underlying mutual funds. Future payment amounts are dependent on how well those underlying investment perform. Unless you are sophisticated and knowledgeable investor with a trustworthy financial adviser, I would steer clear of these all together. They are typically sold using best case examples while overstating the tax advantages. Annual expenses can exceed 4% which drag total returns down significantly.
    Thanks for your reply. I'm considering settling my case. I would need an annuity that pays me for life with a guarantee of 20 years. I'm 45. If I was to settle for lets say 2M. How much would I get yearly?

  4. #4
    For annuities there is a thing called "present value" of the annuity, which is based on the current interest rate. In basic terms it means you'd rather have 2 million dollars today than 2 million dollars paid out at $100,000 a year for the next 20 years (assuming your a rational person and expect inflation and interest rates to still exist in 20 years).

    Are you asking if you get a one time settlement of $2,000,000 and opt to receive that as an annuity rather than a lump sum how much would you get yearly?

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    Quote Originally Posted by funklab View Post
    For annuities there is a thing called "present value" of the annuity, which is based on the current interest rate. In basic terms it means you'd rather have 2 million dollars today than 2 million dollars paid out at $100,000 a year for the next 20 years (assuming your a rational person and expect inflation and interest rates to still exist in 20 years).

    Are you asking if you get a one time settlement of $2,000,000 and opt to receive that as an annuity rather than a lump sum how much would you get yearly?
    No. I would receive $2,000,000 cash. Then I would buy an annuity that would pay me X amount yearly.

  6. #6
    You could probably do better with investing the money wisely.

    (KLD)
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  7. #7
    Quote Originally Posted by SCI-Nurse View Post
    You could probably do better with investing the money wisely.

    (KLD)
    I agree, interest rates are at historic lows (though they have been low for an equally historic amount of time). I'd gamble on the probability that interest rates will rise in the relatively near future (you seem to be banking on 20 years). Take the lump sum.

    Unless you have a reason to believe you won't be able to control your spending for some reason.

  8. #8
    Talk to someone who knows the current tax law. Long ago it was that damage awards were tax free at the time of receiving them. That meant if you delayed receiving them such as in an annuity (forget interest rates for now) the capital gains accrued were also not taxable even when eventually taken. I know someone who did this, not me.
    You might be able to set up some similar investment vehicle with a good chunk of your proceeds. Incidentally my friend took one third cash, and the other two thirds in separate annuities maturing about ten years apart.
    I have had periodic paralysis all my life. I lost my ability to walk in 2011 beginning with a spinal block, which was used for a hip fracture caused by periodic paralysis.

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    Quote Originally Posted by nonoise View Post
    Talk to someone who knows the current tax law. Long ago it was that damage awards were tax free at the time of receiving them. That meant if you delayed receiving them such as in an annuity (forget interest rates for now) the capital gains accrued were also not taxable even when eventually taken. I know someone who did this, not me.
    You might be able to set up some similar investment vehicle with a good chunk of your proceeds. Incidentally my friend took one third cash, and the other two thirds in separate annuities maturing about ten years apart.
    I would not have to pay taxes on the $2,000,000.

  10. #10
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    Quote Originally Posted by funklab View Post
    I agree, interest rates are at historic lows (though they have been low for an equally historic amount of time). I'd gamble on the probability that interest rates will rise in the relatively near future (you seem to be banking on 20 years). Take the lump sum.

    Unless you have a reason to believe you won't be able to control your spending for some reason.
    20 years is my life expectancy. That is why I would get an annuity with life so if I live past 20 years I'm covered.

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