You’d like to insure at least part of your client’s income for life. But do you choose a variable annuity with a guaranteed lifetime withdrawal benefit? Or an immediate annuity?

Both are contracts with life insurance companies, so regardless of which variety your client chooses, you need to evaluate the financial strength of the company behind the deals. Also, remember withdrawals before age 59 ½ can trigger a 10 percent IRS penalty. Plus, your client may owe taxes on withdrawals.

One of the most attractive benefits of a variable annuity with guaranteed lifetime withdrawal benefits is your client generally can have access to his or her money at any time. But early withdrawals can cut monthly payouts later on. Immediate annuities, which pay periodic income for life often based on a lump-sum investment, may not permit withdrawals. Those that do will have later monthly payouts cut accordingly.

Be sure in either case that both you and your client understand what you’re getting into.

A variable annuity lets your client invest in mutual funds and/or exchange traded funds tax-deferred. Not only are the types of investments limited, but your client also is limited as to how much can be invested in stocks.

The guaranteed lifetime withdrawal benefit is a rider the policyholder gets upon buying this tax-deferred annuity. However, average annual expenses for these types of annuities run greater than three percent—more than your client can earn on a bank CD today. Depending on your client’s age, he or she can get as much as five percent or so annual income from the investment for life--no matter how the underlying investment performs. For example, a $100,000 investment might pay your client $5,000 a year from systematic withdrawals. Once the value of the investment hits zero, the insurance kicks in to continue those payments.

What if your client wants to leave a few bucks to his or her spouse? Better understand how long the accumulated annuity value will last. Unless the policyholder sets up a joint and survivor guaranteed lifetime withdrawal benefit on the variable annuity, the spouse may get nothing.

How long the investment lasts is a function of fees deducted from the account, investment performance and the annual systematic withdrawal percentage deducted annually, Scott Stolz, president of the Raymond James Insurance Group, said at a Fort Lauderdale, Fla. retirement planning conference in May.

His hypothetical study gives you an idea of when the account value goes to zero and the guaranteed lifetime withdrawal benefit kicks in.

Take the following scenario:

  • A 60-year-old male invests in a variable annuity, but takes income at age 70.
  • Seventy percent is invested in stocks and the rest in bonds.
  • The income benefit base grows at 6 percent simple interest in years no income is taken.
  • The income benefit base doubles on the 10th anniversary of the contract.
  • The annual allowable income withdrawal is five percent annually at age 70.
  • The cost of the policy, mutual fund management fees and the guaranteed living benefit rider totals 3 percent annually.

In this case, the policyholder’s account value would last until about age 85. Then the insurance would kick in and the retiree would still get five percent in annual income. So this retiree would need to live well beyond age 85 to realize a benefit—despite all the annuity’s bells and whistles.

Bennett Kleinberg, senior actuary in MetLife’s retirement division, suggests putting 10 percent to 20 percent of a 50 year-old’s asset in the insurer’s “Longevity Income Guarantee” annuity. This annuity pays a fixed amount of monthly income later in life at age 85 or earlier, depending on the terms of the contract. Because the future income is guaranteed via the annuity, your client can invest more of his or her other money in stocks or more freely spend income from other accounts.

For example, a 65 year-old retiree could put $425,000 in investments and $75,000 in the deferred immediate annuity. The retiree would get $21,500 a year from a 5 percent systematic withdrawal plan from other investments starting at age 65. At age 85, the immediate annuity income would kick in, replacing that investment income. The annuity would provide $22,300 annually.

Joint and survivor or period certain payout options can insure the income continues to the surviving spouse or other beneficiary if the policyholder dies. But expect income payments to be lower with those riders.