The annuity industry has somewhat earned its bad reputation with over-hyped product presentations and too good to be true sales pitches. It’s impossible for the carriers to regulate what every agent says to get the sale, so you need to make any annuity buying decision based solely on the contractual guarantees of the policy. Annuities are contracts, so own them for what they “Will Do”…not what they might do.
I’ve come up with an easy to understand acronym to determine if you even need an annuity transfer of risk strategy in your porfolio. The acronym is P.I.L.L.
P = Principal Protection
I always laugh when I hear people say that they “hate all annuities” when at the same time they love CDs, bonds, and other principal protection products. MYGAs (Multi-Year Guarantee Annuities) are the annuity industry’s version of a CD. No annual fees. No moving parts. Just a guaranteed annual % for a specific period of time.
FIAs (Fixed Index Annuities) also provide full principal protection. FIAs have no annual fees as well if riders are not attached to the policy.
I = Income For Life
Annuities were developed in the Roman Times to reward the dutiful Roman soldiers with a lifetime income stream for them and their families. The Latin word “annua” means payment, and is the origin of the word annuity.
Annuities are the only financial product that guarantees a lifetime income stream. That’s the unique benefit proposition that set annuities apart from all other financial products, and the primary reason people own annuities is for this transfer of risk lifetime income guarantee. Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Income Riders all guarantee a lifetime income stream that is primarily based on your life expectancy at the time the payments start.
L = Legacy
Life insurance is still the best legacy product on the planet, and that’s coming from a person that doesn’t sell the product. It's the best return on investment that you will never see because you will dead when the ROI is finally calculated. With that being said, many people can’t qualify for life insurance or get through the underwriting process.
Some deferred annuities offer attached riders that guarantee a death benefit payout to your listed beneficiaries. No underwriting needed, the coverage is guaranteed issue. Unlike life insurance proceeds, annuity rider death benefits are taxable.
L = Long Term Care/Confinement Care
We are all living longer, and end of life care is the current “gorilla in the room” for the 10,000+ baby boomers retiring every single day. Traditional long term care is still the best coverage available, but annuity alternatives are gaining in popularity because you retain full control of the money if coverage isn’t needed.
Long term care annuities are typically simplified issue and require a phone interview for approval. Income riders with confinement care benefits can be attached to variable or fixed index annuities at the time of application and are guaranteed issue with no underwriting.
In a perfect world, these types of annuities should be used as secondary coverage in support of traditional long term care…but is a good alternative for people that can’t qualify for that product.
Only 2 Questions Matter
In a world of over-hyped annuity sales pitches, there are only 2 questions that you need to ask and answer to see if you even need an annuity…and if so, what type.
· What do you want your money to CONTRACTUALLY do?
· When do you want those CONTRACTUAL guarantees to start?
It’s that simple. From those 2 answers, then the specific annuity type and transfer of risk solution is easy to choose. In combination with the P.I.L.L. acronym, your next step should be to quote all carriers for the best contractual guarantee for your specific situation.
Buy the Steak…not the sizzle
The phrase “Will Do. Not might do.” is my trademarked phrase that you will see on my hats and t-shirts that I wear every day. You always own an annuity for what it “Will Do” (i.e. contractual guarantees), not what it “might do” (non-guaranteed proposal #’s).
Too many sales presentations focus on hypothetical, theoretical, projected, back-tested, and hopeful agent return scenarios. Never buy an annuity based on those “unicorns chasing the butterfly” dreams. You are going to own the contractual realities of that annuity policy, so it makes sense to start and finish there with your decision.