Annuity Policy Design Considerations

The key factors in selecting a deferred FIA as part of a tax optimized retirement plan.

We will here review the key considerations in putting together a deferred FIA (Fixed Index Annuity) targeted at providing tax-free inflation-adjusted lifetime retirement income.

A variety of high-performing index strategies exist: S&P 500 is probably oversubscribed and hence carries low caps that limit growth. It may be better to seek growth from other aggressive indices with a favorable cap, spread or participation rate.

The retirement plan should guide the income phase: The length of deferral period and the age when annuitization begins can have a profound effect on the payout rate. These factors may increase the payout rate by approximately +0.2% and +0.1% per year respectively.

Joint Life policies have some downsides: Even though Joint Life policies bring a level of comfort and security to couples, their payout rate is ≈0.5% lower than that of Single Life and the younger spouse’s age is used for determining the payout.

Strongly consider riders for lifetime income & inflation adjustment: Rider fees are calculated using the Income Value (IV), but taken out of Cash Value (CV). Hence, fees do not affect income. Please refer to “Mechanics of an Annuity” for a more in-depth look at how IV/CV accounts operate.

Be aware of tax consequences when using qualified money: Ensure that income payments are less than 72(t) distribution limit to avoid the 10% tax penalty if you are younger than 59.5. A detailed account of annuity related taxes can be found in “Annuity Tax Implications.”

Review annually the index allocation options: Our market outlook and risk tolerance changes with time. Additionally, the selected company could change index choices and non-guaranteed rates. Hence, it is best to review where to allocate your investment when an index segment matures.

Here are my priorities for picking an Annuity:

  1. IV growth factors
    Aggressive index choices and strong bonus elements including premium and index credits to accelerate growth during the Accumulation Phase. The other variable is the time factor. An Annuity investment made in your 40s would allow for a nice 10-20 year runway for the money to grow before taking retirement income.
  2. Income payout rates
    Income focused FIA should provide a high payout rate and deferral credit for a longer accumulation period.
  3. Stability of non-guaranteed rates
    It is important to review the revision history of non-guaranteed rates such as index cap, spread, participation rates, etc.
  4. Inflation-adjusted income
    This feature makes FIAs comparable to Social Security benefits or a pension plan. Inflation adjustment is achieved when the income stream receives market index credits.
  5. Lifetime rider cost
    Competitive products include this important feature at no cost. Lifetime income beats longevity risk (see “Longevity Risk” for more information), which is the risk of outliving your savings. Our blog “Annuity Benefits” explains these and other benefits of FIA.
  6. Other benefits – living, death, free withdrawals, etc.
    These are more peripheral features which are nice to have just in case one needs them. Death and living benefits for critical, chronic and terminal illness are paid out from IV. These benefits make annuities a valuable investment even when life expectancy is curtailed.
  7. Company reputation
    The Insurance industry is one of the most stable in the country. Still, it is best to ensure that your carrier is in good financial standing through A.M.Best, which is solely focused on the Insurance industry.
  8. Last but not least: a consultative agent!
    It takes considerable market research and numerical analysis to pick a top-performing FIA. We have illustrated the different phases of a deferred FIA investment in our blog “How An Annuity Works.”

We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at

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