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By Christine Benz | 12-11-2012 12:00 PM

How to Survey the Changing Annuity Landscape

Market trends have altered the benefits of several annuity products, and Morningstar's Kevin Loffredi examines what retirees should know before investing in these vehicles.

Christine Benz: Hi, I'm Christine Benz for Morningstar. When it comes to income, many investors naturally think of annuities, but they may be put off by the huge range of products and features. Joining me to discuss the annuity landscape is Kevin Loffredi. He is vice president of insurance solutions for Morningstar's software group.

Thank you, Kevin, for joining me.

Kevin Loffredi: You're welcome.

Benz: Kevin, let's start with the most basic type of annuity product, the single premium annuity. Let's discuss how that works.

Loffredi: Sure. So a single premium immediate annuity is the most simple annuity you can possibly come out with. In fact it goes back and dates back to the Roman times when you forfeit some money, you give money to an insurance company in this day and age, and they promise to pay you money every month or every year for the rest of your life. That's the most, simple explanation of what a single premium immediate annuity is.

Benz: So it's a simple and transparent product type?

Loffredi: Very simple. You know what you're going to get from the insurance company before you write that check to them. So there's no surprises. It's a single premium, so you're only writing one check to them. That's what that means, so it's very simple.

Benz: When you compare payouts on that type of product today versus what you would get with say, an intermediate-term Treasury bond or some sort of bond product, how do the two stack up, roughly? And I know it depends on your age and so forth, but [can you give] just a ballpark [explanation]?

Loffredi: Christine, as you say the age factors into it, so the older you are, the higher the guaranteed payment will be each and every year. So if you were to take someone who might be in their income year, somebody who is 70 years old, male or female, if they were to invest $100,000, they would receive about $500 a month for the rest of their life. That equates to about 6% per year. So that equates to something much more significant than you can get with the 10-year Treasury for example, which [has a yield] around 1.5% right now.

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