The Annuity Man

I was recently speaking with one of the top financial journalists in the country about annuities, and the current environment with the COVID-19 situation.  This person writes a syndicated column, appears on TV regularly, and is the author of many best selling books on personal finance.  With decades of experience, you would think that they would be well versed in the annuity subject so that their readers would be able to rely on their insight on all things annuity.

Unfortunately, they asked me a common misinformed question that is utterly ridiculous and unanswerable if you know anything about annuities.

“What are annuities paying?”

I almost came through the phone with disbelief and amazement that this nonsense came out of their mouth.  What kind of “financial expert” could ask such a dumb question?  Sorry to say, they weren’t the first.

The answer to “What are annuities paying?” is to ask a better question, “What type of annuity are you talking about?”

Multi-Year Guarantee Annuities (MYGAs)?  Single Premium Immediate Annuities (SPIAs)? Qualified Longevity Annuity Contracts (QLACs)?  Deferred Income Annuities (DIAs)?  Fixed Index Annuities (FIAs)?  Variable Annuities (VAs)?  Income Riders attached to deferred annuities?  Which one of those are you referring to so I can provide a brutally factual answer?

Spoiler alert...and as I listed the names above, people should know that there is not just one type of annuity.  When people say “I Hate Annuities”....do you hate all types or do you think there is just one?  Do you hate Social Security (which is an annuity)?  Do you hate pensions (which is an annuity)?  Every single type of annuity has its own unique benefits and limitations.  That’s a fact that too many people (even some agents) aren’t aware of.

So let’s break down and properly answer the ludicrous question, “What are annuities paying?”...and provide a factual answer for each type of annuity.

When The Goal is LIFETIME INCOME

If you are asking the “What are annuities paying?” question concerning a guaranteed income stream where you receive annuity payments that you can’t outlive, the answer revolves around life expectancy.  Most annuities that provide a lifetime income stream are categorized as fixed annuities.  All annuities are contracts and are issued by a life insurance company, and fixed annuities (regardless of type) are approved and regulated at the state level.

When you buy an annuity for income, you can structure that contract to pay for a specific period of time or for life...or a combination of the two.  You can also structure the contractual guarantee for one life (“Single Life”) or two lives (“Joint Life”).  Your life expectancy(s) at the time you start the payments is the primary pricing mechanism, with interest rates playing a secondary role.  You are transferring that longevity risk (i.e. fear of outliving your money) to the annuity company to pay regardless of how long you live.

In addition to life expectancy driving the pricing train, any lifetime income (regardless of annuity type) is a combination of return of principal plus interest.  The transfer of risk benefit proposition that only annuities can offer is if you outlive your projected life expectancy and draw your account down to zero, the annuity company is still on the hook to pay.  In essence, there’s no ROI (Return on Investment) calculation until you die.

There are numerous ways to contractually structure your lifetime income stream, and annuity quotes are commodities and should be shopped with all carriers in order to find the highest contractual guarantees available for your specific situation.  If guaranteed income is part of your retirement plan, then annuities will have to be included.

Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Income Riders (attached to some deferred annuities) all provide a contractually guaranteed lifetime income stream.

So back to the question of “What are annuities paying?”  Provide your date of birth(s), state of residence, lump sum dollar amount, type of account, and when you want the income to start….and I will tell you (after I quote all carriers) the highest contractual number for your specific situation.

That’s the real answer when you are referring to lifetime income.

When The Goal is PRINCIPAL PROTECTION

When the “What are annuities paying?” question involves principal protection, then it all comes down to interest rates.  Because lifetime income isn’t the goal, life expectancy and lifetime income has nothing to do with the question..

There are only 2 annuity types that fully protect your principal and allows you to peel off earned interest.  Multi-Year Guarantee Annuities (MYGAs) and Fixed Index Annuities (FIAs) are both CD return type products and both fall under the fixed annuity category.  Both are issued by life insurance companies and are regulated at the state level.  Neither are securities, and neither provide market type returns...even though FIAs are horribly over-hyped as market strategies.  They are not.

Multi-Year Guarantee Annuities (MYGAs) are the annuity industry’s version of a CD (Certificate of Deposit).  The only difference between the two is that in a non-IRA (i.e. non-qualified) account, MYGA interest grows tax-deferred.  With CDs in a non-IRA account, you have to pay taxes on that annual interest earned.  That doesn’t make MYGAs better than CDs, I’m just pointing out the primary difference between the two strategies.

Fixed Index Annuities (FIAs) were designed and introduced in 1995 to compete with CD returns, and that’s exactly what they have done since inception.  Index call options on an index like the S&P 500 (not including dividends) provide a potential return that can be locked in on the contract anniversary date.  However, in my opinion, the true value of a FIA is the principal protection guarantee.

So once again, if you ask “What are annuities paying?”  With FIAs, I have no idea because the index call options have no guaranteed return.  The only guarantee is that you won’t lose any money.  With MYGAs, you would need to let me know how long you want to lock in the money...and then I could tell you the annual percentage (i.e. yield) that is being paid.

That’s the real answer when you are referring to principal protection.

TWO BETTER QUESTIONS

When it comes to finding out the best annuity type for your situation, you only need to ask and answer 2 simple questions.

  1. What do you want the money to CONTRACTUALLY do?
  2. When do you want those CONTRACTUAL guarantees to start?

From those two answers, you can then use an objective annuity calculator to shop all carriers for the highest contractual guarantee available for your specific situation.

You can also legitimately and factually answer that ridiculous question, “What are annuities paying?” 

But do me a favor, and don’t ask me that.  Much appreciated.

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