Can You Count On Dividend Income?

One of the challenges many older investors face when managing their cash flow pertains to income from dividends. Unfortunately, common stock dividends come with no guarantees. Companies are not required to pay them, and those that do can suspend their dividends at any time as their business needs dictate. Since there are no guarantees for dividends, should you rely on them for planning even a portion of your retirement income? Possibly, but first consider the following points.

First, create a diversified portfolio of different dividend-paying stocks. If your dividends are coming from a single source, you run the risk losing what could be a significant portion of your income should the company decide to discontinue their dividend payments. With a diversified portfolio, your regular dividend income stream could continue, buffered by the on-going payments of the other stocks in your portfolio. Although diversification does not guarantee against the risk of loss in a declining market, it can help to reduce the market volatility risk of your overall portfolio.

Second, when building your dividend-income portfolio, look for high-quality companies in sectors that have historically paid out a steady stream of dividends to shareholders. Finding these stocks can be tricky, but there are a few good places to start. Companies in stable industries or in highly-regulated markets such as electric utilities are typically good candidates for a dividend-income portfolio. These companies usually face fewer threats to their business and fewer interruptions of their cash flow, making it less likely that they would have to discontinue dividend payments.

New and Existing Annuity Owners

People are confused about annuities because the same word is applied to many different types of financial instruments. In this month’s newsletter I’ve put together some information that will end the confusion.

End the Confusion About Annuities

Deferred Annuities are term deposits with insurance companies. They are similar to certificates of deposits at the bank. (Note: Bank deposits are DPSDesposit Protection Scheme (Cap. 581) protected while annuities are guaranteed by the issuing insurance company.)

There are two types of deferred annuities: fixed and variable. Fixed annuities have these features:

Your principal is guaranteed. It will never decline. It could, however, be eroded by surrender charges which could also be called early withdrawal penalties and, of course, by withdrawals you make.
• The insurance company adds interest to your deposit each year (depending on the formula, the interest added could be zero).
• The annuity is for a specific term that you select –generally, the longer the term, the higher the interest.
• You may withdraw percentage of your balance annually without a surrender charge. This is a common feature, and the withdrawal privilege will vary from company to company.

Most deferred fixed annuities offer an initial one-year rate with the rate changing each year. A few companies offer a locked-in rate for the entire period.

Another type of annuity is called a variable annuity. With this type of annuity, rather than receiving interest from the insurance company, your money is invested into stock or bond accounts.

With a variable annuity, you can earn more than a fixed annuity, or you could lose principal, depending on the accounts you select; and if the stock and bond markets rise or fall. Variable annuities are therefore riskier than fixed annuities.

There has been significant growth in purchases of index annuities, a type of deferred fixed annuity. In this type of annuity, your principal is guaranteed like the fixed annuity, but your interest each year is based on increases in a financial index (for example, the S&P 500 index). So, your interest is tied to performance in the index, but you can never lose principal because of the index performance. (You can lose principal due to surrender charges incurred if you make withdrawals prior to the end of the term). Index annuities are generally subject to a lengthy surrender charge period.

In addition, purchasers of an equity index annuity do not get the full rate of return from the corresponding index, as there may be a cap or limited participation for each annuity on the index-linked rate of return.

Further, such annuities generally guarantee that an investor will receive 90% of the premiums paid, plus at least a specified interest rate; thus, if interest is not earned, it is possible to lose money.

Everything discussed up until this point describes the growth phase (called the accumulation phase) of the annuity. The accumulation phase typically interests people saving for retirement or putting money away for the future.

When and how do you get your money out? At the end of the term, you have a few options:
• You can leave the annuity alone and continue to let it grow. Many companies may force you to take withdrawals or annuitize at a specific age.
• You can exchange the annuity to another company that may pay you a higher rate, or offer you a preferable structure. Note that a exchange into another insurance product may result in new or increased surrender charges or higher charges, such as annual fees associated with the new product.

Features and benefits of the new product may have higher costs associated with them, and may not be necessary.
• You can make withdrawals.
• You can annuitize the annuity – trade in your accumulated balance for periodic payments for a specified term of years or life.

The withdrawal phase is called the distribution phase. This phase is of interest to retirees.

What is an immediate annuity?

An immediate annuity has no accumulation phase. You make a deposit with the insurance company and immediately begin receiving payments. These annuities are generally suited for senior investors (age 70 plus) who desire to increase their monthly income.
Has this helped?

Annuities have significant flexibility because of the many types of available, and the various ways that they can be used. If you would like further clarification or greater details, email or call us.

Remember always ask for and carefully read a plan’s program description for complete information, including risks, fees and expenses.
Can An Equity-indexed Annuity Guarantee What You Want?

You can choose from a variety of fixed immediate annuities. Each offers its own advantages. Fixed immediate annuities present a steady income commonly used by people who are not fully participating in the workforce, are about to retire, or have retired.

The money that is invested in a fixed immediate annuity is guaranteed to earn a fixed rate per period during the entire annuitization phase – i.e. during the series of payouts.

For the annuitization period, the two main types of fixed immediate annuities are life annuities and term certain annuities. Life annuities pay a predetermined amount each period until the death of the annuitant. Term certain annuities, on the other hand, pay a predetermined amount each period (usually monthly) until the annuity term ends.

For a life annuity, the amount of the monthly payments depends on the annuitant’s life expectancy. The lower the life expectancy, the higher the payouts will be because more of the annuity investment must be paid out over a shorter period.

For example, if two people, age 60 and 80 respectively, both pay the same premium for an immediate annuity, the 80-year-old will get a larger monthly check as she has a shorter life expectancy.

Straight life annuities are simple. Once the annuitization phase begins, this annuity pays a set amount per period to the annuitant until she dies.
A substandard health annuity is a straight life annuity that may be purchased by someone with a serious health problem. Based on ill health and the lower life expectancy implied, the insurance company will make a larger monthly payment. Strangely, with this type of annuity, ill health is financially beneficial.

Life annuities with a guaranteed term (or term certain) offer a beneficiary option. If the annuitant dies before the guaranteed term has expired, the beneficiary will receive the sum of the money not paid out. Of course, this advantage comes at an additional cost.

A joint life with last survivor annuity continues payments to the annuitant's spouse after the annuitant's death. Longer payouts here may imply higher costs.

Term Certain Annuities pay a given amount per period up to a specified date. If the annuitant dies before then, the insurance company continues payment for the specific term to the beneficiaries.

Your Health Impacts Life Insurance and Life Annuities Differently

Both life annuities and life insurance serve as important tools in retirement planning. When considering either, recognize how insurance companies view the relevance of your health to the risk of offering these two products product types.

In a way, an annuity is the reverse of a life insurance policy. Life insurance insures you against the risk of dying too soon with the benefit of supplying money to replace your income needed by your dependents. An annuity protects you against the risk of living too long with the benefit of supplying income to you as long as you live so you will not run out of money while you are still alive.

The risk that the insurance companies take to supply benefits is whether or not the premiums (i.e. contributions) you pay them will cover those benefits. These risks are based on the projected life expectancies of their clients–i.e. those they insure.

In a life insurance contract, the insurance company risks that the insured person will die earlier than expected, thereby requiring the company to pay out benefit money to you before it receives from you sufficient premiums with earnings to pay that benefit. For an annuity, the company’s risk is that the annuitant lives beyond his life expectancy–requiring it to pay out more than it received from your contributions and their earnings.

Insurance companies handle the life expectancy risk of clients by spreading this risk over many clients with reliable statistics on when those clients will die. Life insurance companies need to know something about their clients’ health, so the life expectancy statistics they use are appropriate to those clients. If only sickly people signed up for life insurance, the company would go broke if it expected these people to die at a normal age.

So expect health questions when you apply for life insurance. If you do have some health problems, you may have to pay higher premiums to account for the higher than average risk of early death you pose for the company.

Annuity companies, on the other hand, are generally not concerned with clients’ health since they are not a risk if you die early. That’s profitable for them. Your health is not critical here as it is for life insurance.

There is a risk also that these companies will not get the return on its investment earnings from your premiums and contributions that they planned. In that case, they may not have the money to pay out benefits when they come due. This may be due to mismanagement, lack of reserves, and lack of a strong client base.

So, buy an annuity or life insurance only from a financially strong insurance company.

Give us a call 27331213 or email andrew@yourseniorfinances.com so we can show you annuity and life insurance options suitable for your situation.

Note: Note that annuities once annualized cannot be surrendered for value. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. The purchase of life insurance involves costs, fees, expenses and potential surrender charges and depends on the health of the applicant. Not all applicants are insurable.

When is Permanent Insurance Really Necessary?

For millions of Hong Kong people, the choice between term and permanent insurance can be a confusing one. A number of variables factor in to whether one is more appropriate than the other for most consumers, such as debt level, health and longevity, and the size of one’s estate.

There are a number of arguments on both sides stating why one is better than the other, but in virtually all cases, there are a couple of situations where permanent insurance is usually the best choice.

One situation where permanent, or cash value, insurance may be best is when there is a real chance that the insured or potential insured may become uninsurable in his or her later years due to health conditions. This is particularly true for those with estate tax issues that generally require life insurance to rectify.

For example, high net-worth individuals or couples may need to establish life insurance trusts in order to provide needed liquidity and relief from estate taxes. But this strategy is, of course, predicated on the ability of the insured(s) to pass initial underwriting requirements.

And this ability can diminish with age for many consumers, who may have family histories of health problems that have surfaced for other members in their later years. Because term insurance requires the insured party to submit to new underwriting requirements at the end of each term, those in this category may no longer qualify for adequate (or even any) protection that may be vitally necessary to preserve the estate.

Another somewhat similar situation involves business buy-sell agreements. These agreements generally require that each partner in a business to purchase life insurance coverage on each of the other partners, so that when one partner dies, the death benefit from the insurance will be sufficient to buy out the deceased partner’s share of the business for the surviving owners.

But again, it is absolutely necessary that the coverage be in force upon death, which may not be possible with term insurance. Therefore, some form of permanent coverage is generally used for this purpose.

If you fall into either of these categories, or else have other needs that can only be met with life insurance, contact us for appropriate recommendations.
The purchase of life insurance involves costs, fees, expenses and potential surrender charges and depends on the health of the applicant. Not all applicants are insurable.