Fixed Indexed Annuity Versus Immediate Income for a 68-Year-Old Widow
A 68-year-old widow has $350,000 in a maturing CD, $40,000 in savings, Social Security of $2,100 per month, and a pension of $900 per month. Her monthly expenses are $4,300. An agent recommends a fixed indexed annuity with a 10-year surrender charge schedule, an 8% premium bonus, a 6% cap, a 60% participation rate, 10% annual free withdrawals, and a market value adjustment. She wants $1,800 per month of additional income beginning now and asks whether she can get her money back in an emergency. She has no long-term care insurance.
1. Calculate her income gap and assess the suitability of the recommended fixed indexed annuity.
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Income gap: $4,300 expenses - $2,100 Social Security - $900 pension = $1,300 per month. She wants $1,800 to have a cushion, so the larger figure is a preference, not a strict need.
The FIA does not produce guaranteed income beginning now. Its 10% free withdrawal is $35,000 per year, or about $2,916 per month, but taking that much would reduce the contract value and could trigger bonus recapture. The 10-year surrender schedule lasts until age 78, which conflicts with her question about emergency access. The 8% bonus is not free money if surrender charges or recapture apply. The 6% cap and 60% participation rate limit growth, and a 0% floor means a weak index year may credit nothing. For a client who needs current income and liquidity, the FIA is a poor fit as the sole solution.
2. Compare the FIA with an immediate annuity or a split strategy, and quantify the alternatives.
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An immediate annuity converts principal into lifetime income. At an illustrative 6.2% payout for a 68-year-old female, $350,000 would produce about $21,700 per year, or $1,808 per month, which covers her stated $1,800 target but is irrevocable and leaves no emergency fund.
A split strategy is more defensible. For example, place $200,000 in an immediate annuity at 6.2%, producing about $12,400 per year, or $1,033 per month, and keep $150,000 in a liquid ladder of CDs or Treasuries for emergencies and long-term care risk. That leaves a monthly shortfall of about $767 against her $1,800 target, which could be met partly from savings or a smaller additional annuity. Alternatively, a $250,000 immediate annuity produces about $1,292 per month and preserves $100,000 of liquidity. The recommendation should match her actual $1,300 gap first, preserve an emergency reserve, and consider inflation and long-term care exposure.
3. What disclosures and documentation should support the recommendation?
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The agent must document the client's income need, liquidity need, risk tolerance, time horizon, and alternatives considered under the best-interest or suitability standard. Disclosures should distinguish guaranteed values from non-guaranteed illustrations, explain the surrender charge schedule, market value adjustment, bonus recapture, index crediting method, cap, participation rate, and 0% floor, and state that the annuity is not FDIC insured. The client should receive the free-look right and a clear explanation of agent compensation. The file should show why a 10-year surrender product was or was not appropriate for a 68-year-old who asked about emergency access.