Annuities: Will Do. Not might do.
The Annuity Man
There is a demographic tidal wave happening in this country. Over 10,000 baby boomers are reaching retirement age every single day. The majority of those hard working retirees and pre-retirees have gone without, saved, and spent decades planning for the time they can enjoy the spoils of their dedicated efforts.
Annuities are currently the curse word in the financial industry for a lot of reasons. Many financial pundits have no depth of knowledge on the annuity subject. Too many financial advisors don’t like annuities because they don’t understand the category, or they feel annuities are a detriment to their business model. In addition, some annuity agents push the limits from a sales pitch standpoint...which has earned the industry a bad reputation.
I have coined a phrase that should define the annuity industry, in my opinion. It’s pretty basic, easy to understand, and brutally factual.
“You should always own an annuity for what it WILL DO, not what it might do.”
Annuities, regardless of type, are contracts issued by life insurance companies. Most of the annuity types offered are classified as fixed annuities. Fixed annuities are regulated at the state level. Variable annuities are securities, and are regulated like stock, bonds, ETFs, mutual funds, etc.
Because annuities are contracts, they should be owned solely for their contractual guarantees. Any buying decision should be based on the contractual guarantee of the policy. The worst case scenario. Fortunately, most fixed annuities are contractual guarantees only contracts. Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Multi-Year Guarantee Annuities (MYGAs) are all simplistic transfer of risk strategies. They have no moving parts and no annual fees. What you are going to get is the contractual guarantee.
Unfortunately, these simplistic products represent a very small percentage of the annuities sold in the United States. Their low commissions play a large role in their lack of popularity. Annuity agents can sell whatever annuity type they choose to promote. Too many of them focus their recommendation on high commission product types like Variable Annuities (VAs) and Fixed Index Annuities (FIAs).
In a perfect world, all agent “built-in” commissions would be exactly the same regardless of the type of annuity sold. In my opinion, that would solve everything. Annuities would then be recommended for the type of annuity that would best solve the problem, and for the highest contractual guarantee.
“Will Do” means the contractual guarantees of the annuity policy.
Not Might Do
There are only 2 annuity types where the returns are not contractually guaranteed. Ironically, those are the top selling annuity types in the United States...and have been for a very long time. For the record, I have nothing against these 2 annuity product types at all. In fact, both of them can be purchased for attached contractual guarantees at the time of application…but that’s not how they are typically sold. The dream of market returns is the hook that attracts buyers to these strategies.
The 2 types are Variable Annuities (VAs) and Fixed Index Annuities (FIAs).
Variable Annuities were first introduced in the 1950’s as a vehicle for tax-deferred growth. The potential return of VAs is linked to internal mutual funds (aka: separate accounts). That’s where the dream is sold. Each VA offers their own mutual fund choices, and the average annual fee of a Variable Annuity is between 2% and 3%. There are no-load Variable Annuities available as well, but those have limited fund choices just like the load VA versions.
Fixed Index Annuities (FIAs) were introduced in 1995 to compete with CD returns, and that’s exactly what they have done since inception. Unfortunately, that’s not how they are typically sold. “Market upside with no downside” is the usual sales pitch you will hear with FIAs. Fixed Index Annuities are life insurance products, not securities. They are regulated at the state level, and it takes a state life insurance license to sell them.
Because FIAs are fixed annuities, you will not lose any money. The contractual realities are that you will not get market returns with a long term FIA policy. Some years might be better than others, but the blended return will be CD levels (or a tad better) over time. In my opinion, that’s a good thing.
“Not Might Do” are the hypothetical, theoretical, projected, back-tested, hopeful return proposal scenarios that are pitched and over-hyped. Never buy the dream because you will always end up owning the contractual realities.
Turning Non-Guaranteed Into Guaranteed
There is a way to turn non-guaranteed policies into guaranteed policies. If income is needed in the future, you can attach an Income Rider at the time of application. An Income Rider is a contractual guarantee for a future pension income stream that you can turn on whenever you choose. These Income Riders can be attached to most Variable and Indexed annuities.
Once that Income Rider is attached to the policy, then you should be solely focused on that contractual payment guarantee. Income Rider’s allow you to have lifetime income guarantees in place while still controlling the overall asset.
This is how to take “Might Do” and turn it into “Will Do.”
The Change Virus
This moment in time is going to be a turning point for this country. That’s an understatement. It’s going to make all of us reevaluate our lives and what is really important to us. This virus chaos will change how people look at their investment options and what type of retirement plan will actually enhance their lives.
My prediction is that people will shy away from stock market risk and transition to more guaranteed income to enhance their lifestyles. In addition to the best inflation annuity on the planet that every U.S. Citizen owns (aka: Social Security), people will want to increase their retirement income and use their retirement savings toward these types of income guarantees.
Before you decide to buy an annuity, you need to make sure that you only consider that purchase based on the contractual guarantees of the policy. Regardless of the annuity type, always own that policy for what it “Will Do,” not what it “might do.”