These annuities make sense only in two mutually inclusive situations:
1. The annuitant has good reason to believe (s)he will outlive the mortality rate used by the insurer in figuring the annuity’s income streams. Good reasons would include having a family longevity history in excess of average. As well as being in a state of good health at the inception date of annuitization.
2. The individual needs the income stream to supplement existing guaranteed income streams during retirement (such as Social Security benefits) to fund the essential costs of living (food, housing and healthcare).
In addition, if the annuity is purchased in one of a small minority of states, a state annuity tax is imposed on the total purchase cost of the annuity stream. The tax comes off the single premium paid to purchase the annuity, which effectively reduces the monthly income stream because fewer dollars are left to fund them. One of the worst cases is California which imposes an up-front “premium tax” of 2.35% on ‘non-qualified” annuities, meaning funded with taxable dollars, or 0.50% on “qualified” annuities, which are funded by tax-sheltered dollars such as those from IRA plans or from Section 401(k) or Section 403(b) plans.
