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 3.3 percent rather than 2.52 percent over 20 years generates an additional $134,310 at the end of that period ($957,142 vs. $822,832). The table below illustrates the dramatic superiority in the rates of return of tax-free annuities over all time periods.


Bond yields as of 11/21/2016
Gross
Return
from Bonds
Net Return from
Bonds*
Comparable Annuity Return
US Treasury
5 year 1.80% 0.69% 1.1%
10 year 2.34% 1.12% 2.2%
Municipal
5 year AA rated 1.46% 0.71% 1.1%
10 year AA rated 2.40% 1.65% 2.2%
20+ year AA rated 3.30% 2.55% 3.3%
Corporate
5 year AA rated 2.11% 0.94% 1.1%
10 year AA rated 2.90% 1.57% 2.2%
20+ year AA rated 4.09% 2.52% 3.3%

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

 

The assumptions made in computing the after-tax and fee returns for alternative fixed income investment 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 and occasionally even their attorneys feel that interest rates might rise in the future allowing them to earn a higher return than offered by an annuity at the time of settlement. For the 24 years we have been in the business there has never a swing in the fixed income markets for that strategy to succeed. Claimants who may have made that choice 5, 10, 15 or 20 years ago are still waiting, and they have forfeited a great deal of money. Indeed, it is doubtful they have any money left from their settlement.