Understand income pensions and how they can benefit you


By David Hanzlik

401 (k) s, Roth IRAs, and Annuities are all great strategies to help families plan their future in retirement, and each has different benefits. While the current low interest rate environment may make some of these strategies less attractive, income pensions remain a notable option.

David Hanzlik

David Hanzlik

Income annuities deliver payments at regular intervals that are determined when the contract is signed and cannot be reduced even in times of economic volatility. For many people, just knowing that their income will remain stable even during the most catastrophic market crash is a reason to invest in an income pension.

That kind of peace of mind and financial security could be even more valuable in the face of the COVID-19 crisis – a recent CUNA Mutual Group Survey of Pandemic Financial Stability, conducted on 1,000 U.S. adults ages 18 and older with an annual income between $ 35,000 and $ 99,999, found 30% of respondents said the pandemic had reduced their financial stability. Other potential benefits of income annuities include helping clients manage longevity risk – the risk of outliving one’s fortune – and providing death benefits that create a legacy for loved ones.

But there is not just one type of income pension …

  1. The simplest form is a “lifelong” income pension that has no death benefit. Income payments are made for as long as the retiree lives and end when the retiree dies.
  2. A “lifelong cash back” income pension makes payments in the same way, but if the pensioner dies before the sum of the payments made equals the capital invested in the contract, the difference is paid to a beneficiary. This option ensures that the award is always returned.
  3. A third option, Lifetime Warranted, means that if a person dies a certain number of years ago, their beneficiary will receive payment by the end of the period.
  4. Finally, a fourth option, “Installment,” makes payments for a number of years, but there is no lifetime income guarantee.

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Pensions that offer lifelong income guarantees – all types except “installments” – are paid in part through death benefits. Since some people will live longer than their life expectancy based on life tables while others will live shorter, those who live shorter than their life expectancy are helping to fund those who live longer. This funding – or profits paid to those who live longer – is known as a mortality loan. Mortality loans are a way of pooling risk among participants for a higher guaranteed income. Mortality loans provide a guaranteed source of income that is much cheaper in the current low interest rate environment.

A compromise is made here – the more guaranteed payments, the lower the mortality credits, and hence the lower the income payment. The advantage of the “lifetime only” option is to receive the highest possible income, but the disadvantage is that the beneficiaries do not receive any financial legacies. Conversely, the Cash Refunded and Guaranteed Life options have lower income payments, but could leave beneficiaries a financial legacy if the retiree dies earlier than expected.

By using an income annuity to manage longevity risk and to cover basic income, remaining assets can be used for other purposes – such as “wishes” or unforeseen expenses – without jeopardizing those basic needs. Ultimately, each individual and their financial advisor must evaluate how well various portfolios are performing in meeting basic income needs, generating liquidity for other needs or desires, and creating financial inheritance for loved ones.

About the author: David Hanzlik

Dave Hanzlik is Vice President of Annuity & Retirement Solutions at CUNA Mutual Group, a leading insurance, financial services and technology company focused on helping people achieve financial security at all stages of life.

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Email Jeffrey Levine, CPA / PFS, Chief Planning Officer at Buckingham Wealth Partners to:

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