Certain Annuity Returns

compared with
Investment Alternatives

In general, the tax-free rates of return on annuities issued by top-rated life insurance companies are 1% - 1 ½% better than similar fixed income investments. One and a half percent may not sound like much. But, for example, $500,000 earning 5 percent rather than 3.5 percent over 20 years results in a total amount $332,000, or one-third, higher at the end of that period ($$1,327,000 vs. $995,000). The table below illustrates the dramatic superiority in the rates of return of tax-free annuities over all time periods.


Bond yields as of 10/10/06		Gross
Return
from Bonds 		Net Return from
Bonds*		Comparable Annuity Return
US Treasury
5 year4.70%3.26%4.0%
10 year 4.74%3.29%4.9%
Municipal
5 year AA rated3.54%3.04%4.0%
10 year AA rated3.70%3.20%4.9%
20+ year AA rated4.12%3.62%5.3%
Corporate
5 year AA rated5.29%3.73%4.0%
10 year AA rated5.53%3.92%4.9%
20+ year AA rated6.08%4.36%5.3%

*Assuming 0.75% fees and 20% income tax rate.

 

The assumptions made in computing the after-tax and fee returns for alternative fixed income investments in the above table are conservative. Money management fees as well as tax rates could well be higher than those assumed here, increasing the advantages of tax-free annuities.

Some claimants or their advisors sometimes think that interest rates might rise, allowing them to earn a higher return than offered by an annuity at the time of settlement. For the 15 years we have been in the business, there has never been a swing in the fixed income markets for that strategy to succeed. Claimants who may have made that choice 5, 10 or 15 years ago are still waiting, and they have forfeited a great deal of money. Indeed, it is doubtful they have any money left.