If you’ve been reading Retirement Income Visions™ and my RetireMentors MarketWatch column, you know that I’ve written extensively about the use of fixed income annuities as a retirement income planning strategy.
Fixed income annuities are a natural fit as part of a retirement income plan. They provide a predictable sustainable income stream that can be customized to meet current and projected financial needs.
An important, although unpublicized, benefit of fixed income annuities is protection against elder fraud. Earlier this year, the FBI brought charges against 250 subjects who collectively victimized more than one million mostly elderly Americans. The criminals who were charged caused losses exceeding $600 million.
Two of the three types of fixed income annuities – single premium immediate annuities (SPIAs) and deferred income annuities (DIAs) – offer the greatest protection against elder fraud. Fixed index annuities (FIAs) with income riders aren’t as effective for this purpose due to their accumulation value.
SPIA and DIA Basics
When you purchase a SPIA or DIA from a life insurance company, you receive a contract that includes confirmation of your initial, and, in the case of a SPIA, only premium. The contract also includes your income start date and payment frequency, amount, and duration.
Income payments from SPIAs generally begin one month after purchase and continue for life. The income start date for DIAs is at least 12 months after the purchase date, with term certain or lifetime payments, depending upon the terms of the contract. For both SPIAs and DIAs, there are various lifetime payment options available to provide for either an extension of income payments or payment of a lump sum to named beneficiaries in the event of premature death.
No Investment Account to Raid
With SPIAs and DIAs, there’s no investment account that can be raided by a fraudster. Premiums are held in the life insurance company’s general account. Aside from confirmations of premiums and associated income amounts, there are no investment statements.
Although the present value of the future income stream of SPIAs and DIAs can be calculated, it’s generally excluded from a personal net worth statement.
Secure but Illiquid
SPIAs and DIAs are a promise by a life insurance company to make periodic income payments to an annuitant, who is usually the contract owner, for a specified length of time in exchange for receipt of one or more premiums. Since the life insurance industry is heavily regulated, payments are secure subject to each company’s claims paying ability.
Other than periodic income, which is generally paid monthly, annuitants are unable to request withdrawals from SPIAs and DIAs. As such, their investment is illiquid. This is a highly attractive feature when it comes to elder fraud protection.
Payment Amounts Minimize Risk of Elder Fraud
Since income from SPIAs and DIAs is generally paid monthly over one’s lifetime, individual payments are typically small relative to premiums and are further reduced by income tax withholding. Consequently, the risk of elder fraud is minimized.
Assuming that payments are deposited into a checking account, frequent comparison of transactions and reconciliation of checking account balances to online transactions and statements, respectively, will reduce the possibility of theft.
Electronic Payments Enhance Protection
The option to have fixed income annuity payments electronically deposited into one’s checking account should be chosen whenever possible. Paper checks present opportunities for fraud from the moment they’re mailed by an insurance company until they’re deposited in one’s checking account.
Electronic payments have a high degree of security. Timing is predictable since fixed income annuity payments are made on a specified day of each month, quarter, or year in accordance with the contract terms.
Peace of Mind
Assuming that there’s no fraudulent activity related to premium payments, SPIAs and DIAs are well-suited for providing ongoing protection against elder fraud. Absence of an investment account, payment security, illiquidity, relatively small payment amounts, and electronic payments provide this safety.