ELM® Income Annuity —
Frequently Asked Questions
- » What is an income annuity (or immediate annuity)?
- » I worry about inflation. What can I do?
- » How much should I buy?
- » Why are ELM lifetime income annuity contracts non-cancelable after the Free Look Period?
- » Explain the difference between an "owner" of the annuity contract and the "annuitant" named in the contract.
- » Can I buy the ELM Income Annuity with money from my 401(k) plan? Would this purchase trigger any income tax?
What is an income annuity (or immediate annuity)?
An income annuity (also known as an immediate annuity) is a contract between an insurance company and the contract owner in which:
- the owner pays a premium to the insurance company, and
- the insurance company promises to pay income payments from a fixed date for a specific period of time or until death.
I worry about inflation. What can I do?
As far as the ELM Income Annuity is concerned, consider the inflation protection features available, which are described in the Key Features section. One may fit your needs.
How much should I buy?
It depends on your personal circumstances and objectives. In the beginning years of your retirement, we think it makes sense to spend about 1/3 of the assets you plan to use for retirement income on a fixed annuity. That still leaves 2/3 of those assets for investment in stocks and bonds. In later years, if your assets are not producing enough income to support your lifestyle, a further fixed annuity purchase may increase lifetime income.
Some research organizations are now examining offering calculators to help individuals optimize their annuity purchases. ELM will alert its website readers when these become available.
Why are ELM lifetime income annuity contracts non-cancelable after the Free Look Period?
Like all lifetime fixed annuity contracts, the ELM Income Annuity is designed to maximize lifetime income payments by pooling mortality experience. In other words, the annuity income payments to those who live longer are, in part, supported by those who did not survive as long. This kind of support is called a mortality credit.
If annuity contracts could be cancelled by those who become ill and unlikely to survive, there would be far fewer mortality credits available. Similarly, if the cancellation rights were limited to a few years or to only part of the annuity, there still would be less mortality credits available and this would reduce the income payments under the annuity. Without the benefit of full mortality credits, the contractual income payments under the ELM Income Annuity would be less attractive.
Finally, having an extended right of cancellation poses some risk to the issuing insurance company since contract owners may choose to cancel in the event of a change in interest rates, and the cost of bearing this risk would also reduce income payments.
Explain the difference between an "owner" of the annuity contract and the "annuitant" named in the contract.
In the ELM Income Annuity, the owner receives the income payments and the annuitant is the person whose life measures how long the life income payments will last. For the majority of cases, the owner and the annuitant are one in the same person (or persons).
But, the owner and the annuitant can be different people (except for qualified annuities). For example, consider a daughter who wishes to purchase an annuity for her mother. Their tax advisor suggests a plan: the daughter should own the annuity contract and should receive the annuity income for as long as the mother lives. The daughter would then make a gift of the annuity payments each month to her mother. In this case, the mother would be the annuitant (her life measures how long the payments last) and the daughter would be the owner and receive the income payments.
Can I buy the ELM Income Annuity with money from my 401(k) plan? Would this purchase trigger any income tax?
Yes, the ELM Income Annuity may be purchased with qualified funds, such as from your 401(k) plan or from your IRA or with all or part of the lump sum distribution from your defined benefit plan.
The purchase with your qualified funds can usually be made by a direct rollover with no income tax consequences, if you wish. Consult with your tax advisor on whether this makes sense for you and how to do it. Also consult with your qualified plan administrator on how to withdraw the funds to make the annuity purchase. Call an ELM Income Annuity specialist at the Principal for more information at 1-877-210-5565 ext. 356.
Note, tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement, to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, guaranteed minimum interest rates, and death benefits without surrender charges. |
The ELM Income Annuity is issued by Principal Life Insurance Company, a member of the Principal Financial Group®, Des Moines, IA 50392. ELM Income Group® is not affiliated with any member of the Principal Financial Group.
Principal Life Insurance Company,
Des Moines, Iowa 50392-0002