One of my favorite sayings is “There are NO perfect annuity answers...just bad sales pitches.”
In times like these of stock market panic and volatility that none of us old timers have ever seen in our career, I think it’s important to explain what annuities actually do. There are many different types of annuities available, so it’s a good time to take a rational look at how these contracts work.
Recently, I have seen the Attorney General’s office clamping down on fictitious and misleading Coronavirus “cures” being pitched over the internet. Fear has always been a good sales tool, so get ready for the annuity ads and your local agents and advisors pushing their version of an “annuity cure all” for your market woes.
To be fully transparent, I sell fixed annuities in all 50 states, represent pretty much every carrier out there, and am known as “America’s Annuity Agent.” However, I’m the first to scream from the mountain tops that annuities are not for everyone...and am worried that annuity sales people will prey upon current investor fears.
If It Sounds Too Good To Be True…
As the old saying goes, “if it sounds too good to be true, then it is.” I actually add some verbiage to that by saying, “it is...every single time with annuities...no exceptions.”
Most people have their own “internal BS radar” that goes off in the back of your head when a salesperson is in full pitch mode. Whether you are buying a car, a mattress, or an annuity...you know when it doesn’t sound right.
If some eager agent or advertisement is pitching “market upside with no downside,” “7% guaranteed growth,” and an “upfront bonus,” you have to be smart enough not to fall for that. If such a product existed, then the FED would just buy that. Those 3 quoted lines are from too many Fixed Index Annuity (FIA) pitches.
FIAs are good CD return products with full principal protection. The 7% shiny thing is an income rider and “monopoly” money that you can’t access or cash in. You can only use it to calculate your first income payment. No...Jimmy Carter is not in office and neither are his high CD rates. As for the bonus, you know better than that. There are no philanthropists running annuity companies. The bonus is just part of the overall contractual guarantee. It’s not free money, and nothing special.
Own The Contractual Realities
Another little catch phrase I use is, “don’t buy the dream because you will own the contractual realities.” Annuities are contracts issued by life insurance companies. The key word is contract. Always own an annuity for what it WILL DO (i.e. contractual guarantees), not what it might do.
By the way, fixed annuity products like Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Multi-Year Guarantee Annuities (MYGAs) are contractual guarantees only strategies. That’s your only choice, which is a good thing. There are no moving parts and no annual fees. What you see is what you are going to get.
Never be swayed by a non-guaranteed annuity proposal. In a world where toilet paper is scarce, that proposal might come in real handy. Hypotheticals, theoreticals, projected, or hopeful agent return numbers are what I call “unicorns chasing the butterflies.” In my decades in the business and arguably the top independent agent in the country, I’ve never see a non-guaranteed proposal come true. That's why you should only be looking at the contractual guarantees of the product.
The newest trick in the indexed annuity space is for carriers to create an index out of thin air after running back-tested return scenarios for a desired annual growth range. Then the pitch is if you would have owned that newly created index (that is now offered in their indexed annuity) 10 years ago, you would have gotten fantastic market type returns. Huh? Talk about hindsight being 20/20 nonsense. Some states are currently trying to outlaw this sale practice of back-testing a new index within an annuity presentation.
The bottom line is indexed annuities fully protect your principal and historically produced CD type (or a little better) returns. That’s fantastic, and anyone in their right mind would be thrilled with 100% principal protection during very volatile times. In my opinion, the principal protection is the contractual reality that you should own...and the primary reason to consider a FIA.
Annuity Statement of Understanding
The only protection you have in the wild wild west of annuity sales is to create your own statement of understanding. Here’s how it works. Whatever annuity sales pitch you hear, write it down word for word exactly how you hear and understand it. Be as detailed as possible.
Once you have written down everything about that product, how it was pitched, and how you understand it will work...sign and date the bottom of the page.
Now here’s the fun part. Turn the paper around and have that eager annuity agent sign and date it as well. If they sign it, they own that sales pitch. If the pen weighs 1,000 pounds or they have to do some last minute clarifications, then you know who you are dealing with. Get up, get out, leave, game over.
Fall In Love With the Number
Regardless of what type of annuity you are considering, buy the contractual guarantee. Fall in love with the number, not the carrier or the pitch. Annuities are commodity products and should be shopped with all carriers for the highest contractual guarantee for your specific situation. Think of buying an annuity like you buy a plane ticket. Shop for the best deal to exactly where you want to go. Or in the case with annuities, shop for exactly what you want the money to contractually do.
Buy worst case scenario. Buy the contract. Don’t buy the dream. In these volatile, scary, and unpredictable times, it’s important to not let fear override your common sense.
Remember that there is never an urgency to buy an annuity contract. The only urgency is to fully understand the specific type of annuity, both benefits and limitations. Then make your buying decision on your terms, and on your time frame.