Physician Beware: Delayed Annuities with Guarantees

March 9, 2015

Why physicians may want to proceed cautiously when considering delayed annuities with guaranteed withdrawal benefits.

Forgive me for the somewhat arcane topic, but I see a constant stream of delayed annuities with guaranteed withdrawal benefits sold and advertised, and I think this needs to be addressed.

Here are some of the key things physicians should know about annuities, and why they may want to proceed cautiously when considering delayed annuities with guaranteed withdrawal benefits:

The two types of annuities:

Annuities are instruments that involve giving an insurance company your money and then hopefully getting some or more of it back in the future.  The two broad types of annuities are immediate annuities and delayed annuities. 

Immediate annuities occur when you give the insurance company money and it immediately begins giving you regular (usually monthly) income for a period time or for your lifetime (or even for a joint lifetime with your spouse).  You receive a return of your principal, some interest on the principal, and a small "mortality benefit" of money that comes from people who buy such an annuity and then die earlier than expected.

A delayed annuity occurs when the insurance company keeps your money for a while before you are allowed to take your investment back. 

Delayed annuities with guaranteed withdrawal benefits:

Currently popular are delayed annuities with guaranteed withdrawal benefits.  You will hear them advertised as a product in which you cannot lose money no matter what the stock market does. You may even hear that such an annuity allows you to make gains in a good market.

Those selling these products may promise that you can take withdrawals after 10 years on twice the amount of money you initially deposited, guaranteed.

So, you give the insurance company $100,000, and are guaranteed a given withdrawal rate (usually 4 percent to 5 percent at age 65) on $200,000 after 10 years. 

If you are considering one of these products, just assume this is the absolute best you will do.  Realize that you may not withdraw the $200,000, but only get the guaranteed withdrawal amount. 

Although it appears that you are receiving up to a 10 percent return on your initial investment as an annual withdrawal, the financial math actually reveals a low single-digit return (remember the insurance company has the use of your money in full for 10 full years, then is paying you back completely with your own funds over the next 10 years of withdrawals while still having the majority of your funds to invest for itself).

These products have such high internal costs (especially including very fat commissions up front for the salesmen that push them) that any promise to participate in stock market gains is a very iffy promise indeed.

If you are contemplating buying such a product, I'd recommend you get some fiduciary and impartial advice. 

Ignore the selling points and assume that you are giving an insurance company money that will be paid back many years later with a very small return (assuming the insurance company remains solvent).

There remains no "free lunch."