Split Annuity Strategy
- By Verlin Taylor
- Published 10/24/2009
- Economics
- Unrated
Verlin Taylor
Results-driven professional with a solid background in positions requiring the utilization of various investigative methods and the ability to write business requirements. Possess a thorough knowledge of life, property, and liability insurance, personal injury, and the intricacies associated with producers. Familiar with generally accepted court proceedings. Experienced in business/financial analysis. Skilled in the areas of technical reporting and marketing research.
View all articles by Verlin Taylor“Split-Annuity Strategy: Extending payouts for life”
by: Verlin Taylor
The combination of a deferred and an immediate annuity creates a strategy called a split-annuity. This strategy involves placing a portion of one’s funds in a deferred annuity while receiving a monthly payment from an immediate annuity. The ultimate goal is to have the annuitant’s original premium payment returned once the payout from the immediate annuity ceases. Income and principal retention are two key benefits for individuals who purchase split annuities.
An example of a split annuity strategy is illustrated in the table below. This illustration assumes using a $100,000 premium payment and the Rule of 72. 72 divided by the interest rate determines how long it takes money to double. In the example, we will use a modest 6% return for the deferred annuity, which at 72/6 is 12 years to return the original 100K premium payment.
|
$100,000 premium payment |
Deferred Annuity |
Immediate Monthly Annuity |
|
Money split between annuity products |
$50,000 |
$50,000 |
|
Accumulation/Payout |
$100,000 (future value after 12 years of accumulation) |
$420.00 monthly for 12 years |
In the table, the accumulation relates to the time period that ½ of the $100,000 premium payment ($50K) is increasing in a deferred annuity. The 50K premium payment in a deferred annuity can grow to a 100K by investing in an indexed deferred annuity with bonus interest credits. And, the product has a history of returning at least 6% over several years. Monthly payouts of the immediate annuity are fixed and last for the duration of the contract, 12 years. Regardless if the interest rates drop, the insurance carrier will pay $420 per month once payout begins. In this illustration, $60,480 is paid out in monthly payments from an original premium payment of $50,000.
Split annuities are ideal for pre and post retirees who want to receive income and retain their money for future uses. The strategy should not be used with an individual’s emergency funds to address unexpected circumstances. Consumers should consider this strategy as a long term plan to generate income while preserving money for one’s spouse, children, grandchildren or favorite charitable organization.