Annuity Leveraged Income Doubler Strategy

You Can Celebrate Compounding Interest by Using the Leveraged Income Doubler Strategy
You Can Celebrate Compounding Interest by Using the Leveraged Income Doubler Strategy. By Flying Colors Ltd.-Getty Images

In the unregulated world of annuity sales, too many annuity products are sold as one size fits all solutions. That’s unfortunate because annuities should be customized to fit a specific situation and solve for a specific goal. In my role as “Official Annuity Ambassador” and “The Annuity Consumer Advocate”, I stand by my saying that you should own an annuity for what it will do, not what it might do.

What that means is to make your buying decision on the contractual guarantees only, and not on some agent hypothetical, theoretical, or non-guaranteed return scenario. Don’t ever buy annuity dreams. Own the contractual realities of the policy.

With that foundation in place, and because of my math and finance background, I am constantly searching for ways to maximize annuity benefits and returns by just using the contractual guarantees within the policy. That’s how the “Leveraged Income Doubler” strategy was created.

The Genesis of the Strategy

A very nice man from Ohio read one of my annuity columns and gave me a call because he had answered my one required question, “What do you want the money to do?”. By the way, that’s how every single consultation starts with me. It sounds basic but makes sense if you think about it. Because I only consider the contractual guarantees of an annuity policy, I tell people that we are going to start at the finish line and then go backward to see if an annuity can contractually answer the question.

The bottom line is that he really needed a lifetime income stream starting in 8 years, but had a limited amount of money and needed to maximize every penny for both himself and his wife. His wife was an important part of the plan because he wanted to make sure that the guaranteed income stream was set up joint with her, and for as long as either one of them lived.

Annuities Used to Open the LID

The Leveraged Income Doubler strategy involved 2 separate annuity strategies but leveraging off each other. The first annuity was a very unique Fixed Index Annuity (FIA). I am not a huge fan of most indexed annuities, and especially how they are over-hyped and oversold by most cool aide drinking agents.  However, this one specifically fit and solved for this strategy. This indexed annuity has a provision that if you turned the income stream on immediately, (which is not recommended for the vast majority of FIAs), the income stream had the ability to increase and lock in every year by an index option growth. With the understanding that FIAs were designed and introduced in 1995 to compete with CDs, I told the client to expect 0% to 3% increases to the income stream. That is what is called realistic return expectations!

This first annuity started the income immediately and fully funded the second annuity for 7 consecutive years. The minimum amount ($5,000) was placed in the second annuity, but the rest of the money came from the income derived from the first annuity. The second annuity was a fixed annuity with an income rider (i.e. attached benefit) that contractually grew and compounded at 7% until year 8 when the income stream was targeted to begin.

As a side note, income rider growth amounts and perceived interest earned can only be used for income, and not accessed in any other way. 

In addition to the 7% income rider growth amount which was contractually guaranteed during the deferral years (and stopped when the income was turned on), the second annuity also provided an 8% upfront bonus to any money added to the contract during the first 7 years. I specifically found this annuity to exactly fit his scenario. So for every dollar that was deposited from annuity #1 to annuity #2, he received an 8% bonus and which then grew by the 7% compounded income rider annual amount.

Someone very smart once said that the 8th wonder of the world is the magic of compounding interest. The Leveraged Income Doubler is a prime example of this statement.

Benefits and Limitations

At the end of year 7, the income stream from annuity #2 was turned on to provide a lifetime income stream for both husband and wife.

 Annuity #1, which had been funding annuity #2 for 7 years and growing annually with any index increase, continues for both lives as well. So instead of just one annuity providing a lifetime income stream, there are now 2, and the second annuity was fully funded by the first.

That’s the Leveraged Income Doubler strategy. The limitations on this is the deferral time period, but you could set it up to defer longer or shorter depending on your situation. In addition, the income from annuity #1 might have a small tax liability, but it would be minimal.

So as I always say, ask yourself the question “What do I want the money to do, and when do I need it to happen?” From that answer, maybe the Leveraged Income Doubler is the strategy for you, or maybe there is a different strategy which fits your specific situation. It all depends on how you answer the question. It all depends on how you answer the question.