Poor Health Can Be a Factor in Producing More Retirement Income

4 Jan

There’s a type of annuity that pays you more if your health profile is not good.  This may sound strange, but here’s how it works:

SPIA, which stands for Single Premium Immediate Annuity (also referred to as health adjusted immediate annuity), has long been a popular investment for obtaining a fixed income which cannot be outlived (income for life).  With the income for life option, the issuing insurance company calculates the size of your monthly payment based on standard life expectancy tables, based on an analysis of your health.  Once calculated at the beginning, you continue to receive the same monthly amount, regardless of how long you live.  It’s almost like getting a second social security check.

companies take into account your individual health condition and use that information to calculate your life expectancy.  If your health records indicate conditions that could lower your life expectancy, this is factored into the monthly payment you receive and increases the monthly payment.  You then receive this fixed monthly amount no matter how long you live.|

Take this hypothetical example.  A man age 70 decides to obtain a SPIA.  He deposits a $100,000 premium and based on his standard life expectancy of 16 years, his monthly payment is $871.05 (a 10.4% annual payout rate).  He will receive this fixed monthly amount regardless of how long he lives.  However, if he has a negative health profile and the insurance companies calculate his life expectancy at only 10 years, his monthly payment will jump to $1393.68.  Because of the negative health history, this annuitant receives more income for life.

SPIAs have been most popular with single individuals who are not concerned with leaving an inheritance.  That’s because, once the initial premium is paid, the SPIA cannot be surrendered for value.  Rather, you receive a fixed monthly income for life.  For those people who like the idea of increasing their monthly income and do want to leave funds to heirs, remember that you would use only a part of your assets for a SPIA and other assets can be designated for heirs.

If you’ve been relying on other sources for tax-sheltered income such as municipal bonds, you may find that an SPIA will increase your monthly tax sheltered income.

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