Annuity Commentary Archives

Understanding Immediate Annuities

March 22, 2012 By Annuity Guys®

Today, people are living longer than ever before. While the idea of living a longer (and hopefully healthier) life is appealing to most of us, the tradeoff for many people is the fear of outliving their retirement savings.

On top of that, the immense costs of healthcare today––along with constantly rising inflation––continue to compound an already stressful situation for many. However, there is an option available to retirees that can help ease the stress of outliving their savings while providing them with an income stream almost immediately upon funding it. That financial vehicle is an immediate annuity.

While many annuities are created to build up the account value for retirement, an immediate annuity is actually designed to provide income immediately to its holder.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Immediate annuities are insurance products that pay their owners a regular income––monthly, quarterly, or over another desired time frame––for as long as the annuity holder lives.

These products are essentially a contract between the annuity owner and an insurance company. They are typically purchased with a large cash lump sum by retirees in order to pay living expenses in a reliable pension style INCOME over a long period of time. In exchange for this lump sum deposit, the insurance company will provide them with a regular income for a specified time OR long as they live, regardless of how long that may be.

Plus, if it is a lifetime annuity, this benefit will continue for as long as the single or joint annuitant is living. Therefore, an immediate annuity actually pays for living a long life instead of the emphasis being on heirs receiving a large payout when the immediate annuity owner dies. It is possible for the immediate annuity owner’s heirs to receive some of the deceased owners intended income if he or she should die prematurely.

Immediate Annuity Features

Throughout the years, there have been some modifications to the original immediate annuity design. Many of these annuity features, which may or may not be available on all immediate annuities, or offered by all insurance companies, are discussed below:

Inflation protection: With this option, the immediate annuity income payments offer some form of a hedge against inflation. Here, the annuity owner may choose to have his or her income payments increase by a certain percentage each year, typically around 3 percent. Another choice may be to have the annuity income payments actually tied to an inflation rate by the use of a consumer price index. When this option is chosen the initial payout of the annuity starts lower.

Refund, liquidity, and withdrawal options: The traditional refund feature on immediate annuities has typically been either a cash refund or an installment refund that ensures after the annuity holder’s death that the beneficiary will receive an amount of money that represents the difference between the initial deposit amount and the amount of the income payments that the annuitant received during his or her life. This, however, reduces the amount of the systematic payout when comparing to life only with no beneficiary benefit.

There are several different ways to structure an immediate annuity with regard to the income payment options. These options include:

Life only: A life-only immediate annuity can also be referred to as a straight life annuity. This means that the annuitant will receive annuity income payments for the rest of his or her life, regardless of how long that duration may be. The payments will cease and all of the unused initial premium will be to the insurance company’s benefit or detriment based upon the annuitant’s actual death and life expectancy underwriting calculations.

Certain period: This structure is not considered to be a life annuity. Rather, the annuity payments will only go on for a fixed period of time, such as for ten years. Even if the annuitant is still living at the end of the stated time period, the annuity payments will cease at that time. However, should the annuitant pass away within that time period, the beneficiary will continue to receive the payments until the period of time has expired.

Life with period certain (or certain and life): This type of immediate annuity payment structure is a combination of both the life and the certain period structures, meaning the annuity will pay income benefits to the annuitant for as long as he or she lives. However, if the annuitant passes away during a specified period of time, say ten years, then the beneficiary will continue to receive income payments from the annuity until the end of that ten-year time period.

Life with cash refund: This can be considered a money-back **guarantee annuity. The income benefit payout is for life. However, if the annuitant passes away before the payments that total at least the amount of premium paid, then a lump sum payment is made to the annuitant’s beneficiary.

Life with installment refund: This, too, can be considered a money-back **guarantee annuity. This immediate annuity payout option is similar to the life with cash refund option, except the annuitant’s beneficiary will continue to receive the monthly annuity income instead of a lump sum until the full amount of the premium has been paid out.

Joint and survivor: This annuity income payout option will **guarantee that the income payments will continue for the lives of both annuitants. Along with this, period certain options can also be added. This particular payout option is typically used with married couples in order to provide income as long as either one of them is still alive. In some instances, the income benefit may drop when the first spouse passes away.

COLA SPIA: This annuity income payout structure has payments that increase or decrease by a floating percentage which fluctuates when tied to a consumer price index, each year. In this case, however, the initial income benefit will likely be lower than those that are non-COLA (cost of living adjustment) annuities.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about immediate annuities and do a little comparison with immediate annuities and why you might consider an immediate annuity.

Eric: One of the things we often hear, in today’s world, where you have this hybrid annuity, which gives you lifetime income as well as some other bonuses/extras, why would you ever want to actually look at using an immediate annuity, where you’re going to give up your assets?

Dick: Right. That is the difference, Eric. When we think about the hybrid annuity, it’s kind of your cake and eat it too annuity, where you can get your lifetime income, but you don’t have to give up your asset. Yet, there is a place for an immediate annuity.

In fact, let’s do a little history lesson. How about some trivia here? When we think about an immediate annuity, it literally goes back to the early Roman Empire. They called it the “annua,” and that’s where the word annuity comes from. So it is a very early form of an annuity, and it has really gone through the test of time, spanned the centuries.

Eric: So next time you have your toga on, you’ll know to get your annua language out. Exactly. It’s an old standard. It was the first kind of annuity out there, the standard lifetime annuity. You gave up a lump sum, and you got a lifetime income stream.

Dick: It is probably the truest pension-style income. In fact, immediate annuities, a lot of companies will offer a choice of a lump some or an immediate annuity.

Eric: I talked about immediate annuities with a lot of clients, when they were saying, “Hey, I’ve got a 401(k). I want a lifetime income. What can I do to get my own personal pension?” That’s kind of how we think of it. The thing is you’re usually giving up that 401(k) in exchange for that lifetime income stream. Now, the big thing here is you realize that none of those dollars are going on to heirs.

Dick: Yes. Well, in a true pension, there’s no money in a pension, as a rule. When you have a pension, when you pass, the money ends, or if you’ve chosen a survivorship option, you’ve probably taken a little bit lower payment on your pension, and then some of those payments will go on to perhaps a spouse.

Eric: Exactly. When I grew up, my parents were educators. So they had a traditional kind of benefit program, where they have a retirement that’s there as long as they live. The bad thing is, once they’re gone, nothing goes on to me. Being a little self-serving here now. The 401(k) plan . . .

Dick: Why didn’t they get a hybrid annuity?

Eric: Exactly. Why can’t they get a hybrid annuity? So when they’re looking at it, that’s the old style. The hybrid, on the other hand, allows you to pass some of those dollars on to heirs typically.

Dick: Right. So, really, where the immediate annuity fits, let’s just give some examples. Someone who really wants to start income right now.

Eric: With an traditional immediate annuity, typically you’re going to get a higher payout than you would with a hybrid. You’re going to start with a little bit higher. . .

Dick: Typically. But we have seen a few instances where . . . you’ve got to run some illustrations to know.

Eric: Exactly. So that’s one of the things that when people are going that direction, that’s usually the reason.

Dick: General assumption is you’re going to get more income.

Eric: A little bit more. A higher percentage to start with.

Dick: Right. Then the other key factor would be that, perhaps, if you’re going to use an immediate, you really aren’t as concerned about giving money over to heirs.

Eric: Right. Are there ways to get money on to either survivors or heirs? That’s one of the things we . . .

Dick: With an immediate?

Eric: An immediate annuity. You can structure it so that it’s a joint lifetime payout. So if you and a spouse purchase an immediate annuity, you can set it up so that it is the lifetime of both of you or either of you. Whoever lives the longest, those payments will continue. There are little tweaks that you can even do there, where you can set it up so that once one passes, it sometimes reduces by a percentage.

Dick: A percentage, so they only get three-quarters or one half of the annuity.

Eric: Right. The other way that you can somewhat pass on dollars to heirs is there are a couple of things. You can do a period certain, where it’s lifetime with a certain number of years **guaranteed. A lot of times you’ll see somebody do a lifetime annuity with 20 years **guaranteed. So that 20 years of payments is **guaranteed.

Dick: So if I pass in 5 years, somebody is going to get another 15 years of payments. But what does that do to my income?

Eric: It’s going to reduce your payments. You have to realize going in, if your goal is the highest payout possible, you don’t want to add any of these other pieces. But if you’re wanting to try to pass on money to somebody, that’s a way of **guaranteeing basically that some of that comes back. One of the things I always look at is either the installment refund or the cash refund, which says once you purchase the immediate annuity, if you haven’t gotten back at least what you paid in principal wise, that amount will be refunded either to your heirs or to your estate.

Dick: Well, isn’t that the installment refund?

Eric: The installment refund keeps the payments coming back to your return of principal.

Dick: Okay. So you’re talking about the full lump sum.

Eric: Yes, just a refund of whatever you’ve put in, so it’s either a lump sum or installment refund.

Dick: One of the biggest vulnerabilities that Eric and I look at with our clients, and what we think you should be concerned about, is inflation. That is probably one of the biggest vulnerabilities we face. We have had historic inflation the last 4 decades of over 4%. We believe that the stage is really set for some higher inflation over the next two or three decades, which is going to cover most retirees. So if we would happen to go through a stretch of 4% or 5% – I’m not talking about runaway hyper third world country inflation – but if we’re talking 4%, 4.5%, 5%, 6% inflation, that makes that immediate annuity, if you have no inflation cost of living adjustment, a COLA on it, it really puts you at a disadvantage.

Eric: Yes, especially if you’ve got longevity in what you’re looking at. You realize you’re taking a level payment and you’re stretching it over your lifetime. So your purchasing power is going to diminish with inflation.

Dick: Right. So one of the things that we do suggest, very strongly, is that whatever type of annuity, whether it’s an immediate annuity, a hybrid annuity, a deferred annuity where you’re deferring it for a long time, that you’re really taking inflation into account. There are different ways to structure for inflation, but if you’re not taking it into account, you’re really setting yourself up for a bad situation.

Eric: Right. That’s another aspect that you can add to an immediate annuity. Some of them you can add a cost of living adjustment. Others have a fixed percentage.

Dick: Tied to a consumer price index or a fixed percentage.

Eric: So those are things you can add, but you realize you’re going to start lower.

Dick: Your payments are going to start lower. Right.

Eric: So it’s all about the tradeoffs.

Dick: I love the idea of a real cost of living adjustment. So if things get carried away and we start seeing 5% or 6% inflation, we’ve covered a major vulnerability in a retirement plan.

Eric: Yes. That’s what we’re looking at here. When we’re looking at immediate annuities, we’re looking at you creating your own personal pension.

Dick: Yes, that’s right.

Eric: If you’re into this marketplace, where you’re going to create a personal pension, and you have that magic number you know that you need to hit and you can anticipate the growth, that’s where this product really comes in.

Dick: So if we’re to kind of wind up this discussion on immediate annuities, being a true pension-style income, where would we summarize that this is going to fit? What type of person should buy an immediate annuity, should really consider it for their retirement portfolio?

Eric: I always say it’s someone with no heirs, that doesn’t have to worry about passing on dollars to somebody in the future. They’re not worried about that. They want the highest payout now, and that’s really the person that I start with.

Dick: Right. I think that, in winding this up, we just want to say, do a fair comparison. You may be the ideal person for an immediate annuity, but get with a professional advisor, run some illustrations, compare it. We have actually seen situations where a hybrid annuity can right off the bat outperform an immediate annuity. It’s not often, but it does happen.

Eric: Yes. Very good.

Dick: Thank you.

How Much Income Can You Withdraw Safely in Retirement?

March 16, 2012 By Annuity Guys®

A Reuter’s article hit our desk recently. It’s based on a “safe withdrawal rate” during retirement (safe being relative since we’re talking about the stock market) and how that percentage is trending down.

Here’s a direct quote from the article:

“Some financial firms have considered lowering their recommended withdrawal rate to 3 percent but have found it hard to gain traction. That’s a safer rate, concedes T Rowe Price spokeswoman Heather McDonold, but it may be difficult and unrealistic for some folks.”

We might even agree with T Rowe Price’s statement for those individuals who are fully invested in the market. However, some of the other statements have us really “steaming,” not because they are lies necessarily, but they could be disastrous advice for some retirees.

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The article quotes a “pioneer of the safe withdrawal methodology,” William Bengen who goes on to state that retirees can increase their withdrawal percentage to 4.5 percent if they include small stocks in their portfolio. He does not discuss volatility or the increased risk associated with this strategy. Failure to address risk or proper allocation could lead consumers and readers down an unrealistic and tumultuous path.

One of the biggest oversights of the article is the failure to mention the use of annuity allocations to **guarantee a larger withdrawal percentage than what can typically be done safely with a portfolio consisting of stocks and bonds.

Annuities typically offer withdrawal rates in the range of 4 to 8 percent depending on age; and the income from these products are the result of contractual **guarantees on lifetime income.

By utilizing annuities to secure the foundational income amount needed individuals and couples can then afford to take more risk with their discretionary dollars to capture higher potential returns. Retirement planning to accomplish goals and secure a safe secure income should be done with the assistance of a financial professional who can help you examine your assets and guide you in the process.

Failure to Plan is most likely a Plan to Fail!

Annuity Guys® Video Transcript:

Dick: Well, Eric, we’ve got a fun topic today.

Eric: Fun for some. If you’re that close to retirement and you’re starting to think about, “Gee, how much can I pull out?”

Dick: Right. Well and that’s really one of the jobs that we have as financial people to help our clients know what they can spend, and so that you don’t feel guilty about it and you know what you’re secure spending.

Eric: What’s the magic number? There are the old standards and when you start talking about withdrawal rates in retirement the old standard is 4.0%. I should say that’s been the standard since I’ve been in the business. At one point in time, I know it was 5.0%. Now it’s down to 4.0%

Dick: We’ve recently been backing it down to about 3.50%.

Eric: Now the chatter is, “Oh, maybe 3.50%.” There’s an interesting Reuters article that highlights it. In fact, they even mention here that there’s somebody that says maybe 1.50% in this low interest rate. How do you pick what’s that magic number, so that you can make sure you don’t outlive your income?

Dick: I think Eric, one of the things that we want to establish is that there are really two– there are probably more than two ways, but there are two, kind of obvious, different ways. Let’s call one the Wall Street way.

Eric: The “oops” method.

Dick: Yeah, “oops.”

Eric: And I kid, but there’s nothing better than your broker calling you up and saying, “Oops, we ran out of money.” I’m not saying that’s likely, but when you’re invested in it…

Dick: Or it’s dropped so much that you better back off on income for we don’t know how long.

Eric: The annuity method is more of a foundational plan. That is not to say that it’s the, be all and end all, but it’s a great way to protect the base line of what your income is.

Dick: So incorporating annuities, we look at in our planning, as more of a foundational part of the overall income plan, and yet when I read this Reuters article, I think we should spend a little more time on that and talk about it. I think, folks you want to look at that article and read it, because it does have some enlightening aspects to it. But they’re taking the Wall Street way and there is no mention at all of the possibility of using annuities for the foundational portion of your portfolio. It’s all in on securities and the right mix of securities and different strategies for pulling money out.

Eric: I find there are certain things in this article that I’ll be honest, actually frustrate me a little bit, because when it comes to, when people read something they tend to believe it, because it’s in print. There’s a guy here and I don’t know William Bengen, pioneer of safe withdrawal rate methodology. And one of the things he talks about is utilizing smaller stocks, small cap stocks to increase return, so that you can withdraw more of your money. Now my understanding of the market and small cap stocks, they tend to be a bit more volatile. There’s definitely the potential for that growth, but there’s also that potential for that drop.

Dick: Right. So you’ve got a corresponding risk and we would tend to think, when a client is in that type of an investment, that they’re taking on more risk. So when I look at, in all fairness what he’s suggesting in this article is that you pull back when your stocks are down and you increase what you take out when your stocks are up. But that doesn’t seem to work for our clients I mean as a whole. We might have a couple of clients that are in that discretionary where they could just be that flexible, but most people have a budget.

Eric: Yes. They have a minimum living standard, that they have that meet their basic necessities and if you can’t beat/meet those basic necessities, this doesn’t work. That choice doesn’t work. I think the best bet is truly a blending of the two methods, using a foundation building piece, whether it be an annuity or Social Security. Something that **guarantees that coverage across, and usually it’s a combination of multiple pieces that gets you there, and then you can use an equities based model, to increase and use that for a hedge for inflation, perhaps.

Dick: That would be your discretionary money. You know when I look at AARP, they put some information out on this but they also, in what I’ve read, they’re taking more of a Wall Street methodology in terms of without looking at annuities, saying take out a 4.0% rate of withdrawal. When you start looking at that, if you’re pulling that out at the wrong time, you’re going to have what’s called an unfavorable sequence of returns and you can really get into trouble.

Eric: We always talked about dollar cost averaging, when you’re buying in. You’re more likely to hit buying in at more low times over the course of a period of time, than you are high times. So it’s advantageous to keep doing it in regular intervals. Well, guess what? When you start making withdrawals, the same is true. You’re more likely to hit those consistent low periods, so you’re actually hurting yourself when you start pulling money out during those low periods.

Dick: Right. You have to be very, very careful. I know I’ve run some scenarios, and some modeling of you know, if you were pulling money out during certain years and sometimes just missing it by a couple of years. Like, if you started your withdrawals back in 1975, and you were pulling out a certain amount over a certain period of time, your portfolio would tend to look pretty good over an extended period of time. But if you just started in 1973, when there were a couple of bad years unexpectedly, you would have wiped your portfolio out in a much shorter time, 15-20 years.

Eric: Especially early on, when this unfavorable order of sequences or returns rather, is early on in your retirement those things can be devastating. I think what we’re looking at here as well we’re saying, guidance. Its take some of the guesswork out. Know that you’ve got a piece there that takes care of it. The standard bearers here for the market methodology, they’re giving you guidance, but you have to decide if you need to be more conservative or more aggressive or if you need a blend of the two to make yourself feel comfortable.

Dick: Eric, when we go into annuities it’s a completely different world, because we’re looking at contractual **guarantees. There’s no market fluctuation in the income side with contractual **guarantees. So we can help a client not only know what they’re going to have. But we can typically get a much higher withdrawal rate than what AARP and Reuters and certain financial advisers out there are recommending, and people are somewhat surprised by that. When we initially show them what they can pull out of their account, and pull out safely with contractual **guarantees.

Eric: That’s all about preserving your lifestyle, your standard of living. Knowing that you’re going to do it regardless of how long you live. I think those are the pieces that for me, I take solace when I’m working with somebody, knowing that we’ve protected a lifetime of foundation. I love working with people in the market, but we realized that they were going after potential gains, you know?

We’re not getting **guarantees, those are not contractual **guarantees. There are things that we’re doing, typically to combat inflation, get some of those consistent gains. We’re talking about asset allocation, not just being in the equities market, so obviously when we see somebody advocating for small cap stocks, it gets my blood a little boiling, because it can be a piece of it but you don’t…

Dick: It sounds good just to read it, but when you actually look at that and look at the possible negative side of that, it’s not very pretty. So again one of the things, I think that we want to stress Eric, and just for you folks to give a little better understanding of what’s possible with contractual **guarantees. Typically when you’re around 60-years-old, we can get out kind of on a minimal basis for joint income, for a husband and a wife, somewhere around 4.50%, if it’s a single person, maybe closer to 5.0%. Then add to that, there are some ways to structure annuities so that you can get an inflation hedge, and if that is done properly we’ve been able to show illustrations right from the company, where after 20 years they’d be pulling out what, Eric?

Eric: We’ve actually seen withdrawals as high as 9.0%.

Dick: Right, in that range.

Eric: Obviously caps have changed, and things are a little bit more– not quite as the participation rates and those things have pulled things back, so we don’t anticipate if things stay where they are today you would necessarily get that, but…

Dick: But it could still be up in the 7.0-7.50-8.0-8.50%. So again, what we’re talking about here is that you start off with, say half a million dollars, and you start off by pulling out, say $25,000 a year and within 20 years to maybe, within 30 years-time, you’re pulling out almost double that, so instead of $25,000, you’re pulling out nearly $50,000.

Eric: Each year.

Dick: Right and so you may have used all your money. You may have spent it.

Eric: It’s not a plan that is designed for giving money to the heirs.

Dick: Giving a lot of money back to the kids, unless it’s the early years. The early years you could die unexpectedly, the kids could get a lot of money.

Eric: Right, so it is that. But we like this a lot for hedging against inflation, and basically taking care of your standard of living, that gets those bumps each year.

Dick: Right and that protects other assets, if you’ve got that foundational income, so those assets can grow and go on to the kids. So yeah, there are a lot of things that you can do. You don’t have to look at the annuity way, as the only way. You don’t have to look at the Wall Street way, as the only way. The best is to blend those into a very balanced allocation strategy and balanced portfolio.

Eric: Yes, it’s all about planning. You know you have to plan to succeed. What’s the saying?

Dick: If you don’t, if you plan to, I can’t even say it now. Plan to fail or fail to plan.

Eric: If you fail to plan, you plan to fail and I guess that’s the summary statement for today.

Dick: Yeah.

Are Annuities a Good Choice in a Low Interest Rate Environment?

March 9, 2012 By Annuity Guys®

One of the questions we have heard asked quite a bit lately, “Is it the right time to buy an annuity?”

A prolonged low interest rate environment does impact returns and interest crediting on annuities. Payouts, **guarantees and riders have all been impacted in the annuity marketplace during the last five years. In fact, one recent example showed that immediate annuity payouts were down about five percent from just eight months ago.

So, if you are considering an annuity — is this the right time or should you wait?

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Firstly, proper financial planning would indicate that a balance of assets and asset classes should be utilized in constructing a quality retirement plan. Many financial planners now utilize annuities as part of the fixed income allocation adding additional layers of security by eliminating longevity and credit risk. When it comes to providing income, annuities offer unparalleled combinations of safety and security when navigating through 20 to 40 years of retirement.

Secondly, if you are trying to time the market you may just end up guessing wrong. How can we guess wrong when the Federal Reserve has indicated they plan to keep interest rates at near zero levels until 2014? Only hindsight will be certain, but what are the costs to your portfolio when you park money in an account earning zero or stuff it in your mattress. While you may not lose principle you most likely will lose buying power. Inflation, which has averaged somewhere around four percent for about the last 30 to 40 years is sure to erode your future spending power.

However, nothing could be worse than losing principal and depleting your retirement savings just because you choose to stay invested in riskier asset classes due to a perceived lack of choice.

What is the best plan for when I prepare for retirement – NOW?

Protect the Basics – If you are in or near retirement protect your income by selecting safe money options that provide reliable and steady income. Consider CD’s or annuities for this portion. Annuities are superior for providing income, while CD’s are federally insured.
Spread out your assets – Look at all assets classes, not just stocks and bonds to provide diversification. You can spread out your risk by choosing assets classes than are not as heavily correlated to each other. Consider MLPs, REITs, preferred stock, commodities, currencies, options, carry trades and annuities.
Take reasonable risks – Once you have protected your foundational level of income you can be more comfortable in engaging traditional more aggressive asset classes that can provide additional returns to combat inflation.
Get a second opinion – Ideas and philosophies about financial planning are plentiful. Seek out professional advice and don’t be afraid to get a second opinion. When it comes to retirement planning some advisor are definitely better than others.

Lastly remember you are in charge, too often we hear from clients who say “I did not want to do that but my advisor said I should”… if you don’t like their advice or service. Get a new advisor. It’s your money and more importantly it is your retirement.

Annuity Guys® Video Transcript:

Dick: Today we have with us the new and improved Eric. He’s done a little shaving and he’s got that youthful appearance. Hey, we’re going to talk about annuity timing today and what is the best time to buy an annuity?

Eric: Yeah, it’s really we’re looking at today’s low interest rate environment. One of the questions we constantly get asked is “Is it the right time, or am I better off waiting?”

Dick: That’s the big question and I think that is the good thing about an annuity is that they are structured for income, and they’re not really structured just for the aspect, of treating them like a CD. So they’re more of a potentially, foundational place in your portfolio that can get you the higher income that you’re desiring even in a low rate environment. So I think that that’s just part of structuring an overall portfolio. What would you say, Eric?

Eric: Yeah, it’s about asset allocation, so when it comes down to it, you start with a plan. You can’t hit a target, you can’t see. So what’s your retirement financial plan? And then you start building from that, all right? We always talk about the foundation, taking care of the foundation and if income is part of the foundation, that’s really where annuity makes sense.

Eric: An annuity makes sense for fitting that income foundation portion, securing it so you don’t have to worry about running out of money.

Eric: One of the biggest concerns a lot of people we talk to have is with the rates being as low, you know…

Dick: Yeah, right, when is the right timing? And we do know, Eric. I mean it is a fact, if we keep money in a low-rate environment and we do nothing, put it in our mattress or put it…

Eric: Put it in a savings account.

Dick: When you put it in the bank it’s about like putting it in the mattress. It’s going to earn about the same amount of money, so we know that we’re not going to keep up with inflation.

Eric: Right, we know that zero is what we’re getting…

Dick: We know that our spending power is dropping, dramatically.

Eric: So if inflation’s averaging 4.0%, over the last 30 to 40 years, what are you getting when you put it in a zero-earning environment? You’re losing money. You don’t like to think of it as losing money, but you are.

Dick: Well by contrast, let’s just talk about for a minute, because we hear a lot about it. The hybrid annuity and what makes the hybrid annuity unique in this low-rate environment when it comes to income?

Eric: Well, it’s the income riders. You’ve got that **guaranteed return, sometimes as high as 8.0%, 7.0-8.0%, that those dollars can be used to **guarantee income in the future and that’s a way of securing income.

Dick: Right, it’s another layer of security that we’re really asking the insurance company to take that risk, instead of us taking the risk by going into riskier investments, we’re saying, “Hey, if I can grow my income base in a similar way, if I just put it in the stock market and tried to earn 8.0%, I mean I realize it’s not going into my cash accumulation account.” But if I can draw income off of it on a similar level that I could, if my stock account grew then that’s a way of transferring some of that risk.

Eric: Right and it’s about putting the right pieces or filling the right buckets. You want to have that secure portion taken care of, so then you can add those other allocations that can help you combat inflation, help you earn a little bit higher, because you’re taking care of your foundation.

Eric: So it allows you to take more risk in other areas.

Dick: Exactly, folks. I think that you can kind of understand that. That if you’ve got your income foundation very secure, you feel a lot more comfortable taking risk, or being more aggressive with that portion of your assets that’s more discretionary.

Eric: That’s really what we’re going after, so if you have somebody that you’re working with and, you have to be comfortable with your advisor.

Dick: Yes, you do.

Eric: First of all, get professional advice. It never hurts to get a second opinion.

Dick: No, no.

Eric: No matter, if you’re at the first stage or you’ve been investing and are ready for retirement, for a long time, you’re getting to that stage, ask for a second opinion.

Dick: Well, one of our slogans that we use quite a bit is, “Your Retirement Deserves a Second Opinion,” and it’s true. It’s really true.

Eric: We work with a lot of folks who had a very good accumulation specialist to get them to retirement.

Dick: Good strategy. They’ve earned well.

Eric: But when you get to retirement, you need to work with a retirement planning specialist and that’s where we would encourage people, to get that comfort level with your retirement plan.

Dick: If you do not feel comfortable with what is being proposed or the plan just doesn’t seem to make sense, get that second opinion. Don’t just go along, because how many times have we heard someone come in to us new and say, “Well, my advisor told me to do this.” Well, this is a reciprocating two-way street when you work with an advisor. We want our clients to tell us…

Eric: There has to be a comfort. There’s a relationship that you have to have with your advisor. If you cannot tell your advisor no, you’re working with the wrong guy or gal. Don’t want to be gender specific. But it’s about that relationship and letting them know where you feel comfortable and how you’re going to work to achieve, they’re going to work to achieve your goals, and you have to feel comfortable with that client.

Dick: And yet, Eric, there is that balance that we do know things that, because of our training, because of the way that we forecast, project and look at the way that these things interrelate, that there has to be a mutual level of trust and comfort between us and the client. That’s why they have us. We’re the professional. We know what we’re doing. We have the expertise. But they should never feel forced. You should never feel in some way that you’re being coerced into something.

Eric: Right, and if you don’t agree with the advisor’s assessment get a second opinion. That’s what it’s about. It’s about your retirement.

Dick: Have we fairly answered the question of annuity timing? Is it a good time to buy an annuity?

Eric: Well, I would tell you that it’s always the right time, if it fits the situation. You don’t wait until it’s too late.

Dick: Right, I do agree. I could say a lot more, but why don’t we…?

Eric: That’s a great gag line. Don’t wait until it’s too late.

Dick: That’s right. That’s right. Thank you.

Fixed Index Annuity Returns Reviewed

February 29, 2012 By Annuity Guys®

Dick and Eric take a look at the Wharton study and what it means for anyone considering a fixed index annuity as the chassis for the hybrid annuity.

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In 2010 the Wharton Financial Institutions Center updated their published study on the empirical performance of fixed index annuities based upon the products offered and the actual interest credited. What Jack Marrion, Geoffrey VanderPal and David Babbel found was ground breaking and eye opening for many in the financial world.

Their findings dismissed most of the previous studies concerning fixed index annuities due to erroneous findings based upon hypothetical data and non-valid assumptions. What the Wharton Study found was that during specific time periods fixed index annuities actually performed competitively with alternative portfolios of stocks and bonds.

Index annuities were originally introduced in the United States approximately twenty years ago as an alternative to mutual fund^{^}s. These annuities allow their holders to participate in growth from stock market indexes, yet prevent the risk of loss to the annuity owner’s principal in years when these popular indices produce a loss. This type of annuity has produced much higher annuity rates or interest crediting than traditional fixed annuities.

Due to this feature, money flowed very quickly into these types of annuities during the Great Recession of 2008-2009. In fact, according to LIMRA over 30 billion dollars flowed into fixed index annuities during both 2010 & 2011 and now represent 41 percent of fixed annuities sold annually (LIMRA, 2-16-12).

Why would money flow into financial instruments in such a volatile environment? Fixed index annuities during their history have actually performed competitively and even outperformed popular market indexes during period of high volatility.

To quote the Wharton study, “How will index annuities perform in the future? We do not know but the concept has proven to work in the past and any articles should reflect this. FIAs were not designed to be direct competitors of index investing nor have FIAs been promoted to provide returns to compete with equity mutual fund^{^}s or ETFs. The FIA is designed for safety of principal with returns linked to upside market performance.”

Annuity Guys® Video Transcript:

DICK: You know we’re here today to talk about the Wharton Study and Eric, before we get into the Wharton Study here and I know this kind of ties into it, but let’s just talk about fixed index annuities, which is what the Wharton Study is about. Let’s talk about the popularity of fixed index annuities in recent years.

ERIC: Well, it comes into why did we decide on this topic today? Just recently LIMRA came out and gave us some of the tallies from 2011 about what the most popular annuities and the flavors of annuities that were out there, were and of the fixed annuity chassis, so to speak, of that flavor indexed annuities amounted for 44% of the sales in the fixed annuity chassis world, which was over $30 billion, about $32 billion in sales of fixed index annuities.

DICK: And that’s been going on for the last couple of years.

ERIC: Yes, they’ve been increasing popular ever since they kind of came into existence in 1995. They’ve kind of gradually built, built, built and now they’re pretty consistent at being over $30 million in sales.

DICK: Yep, which is very good, and one thing I’d like to do is maybe tie that back into the Wharton Study, which we were talking about. We’ve got up on the board and he’s sitting in front of us. The Wharton Study folks, if you haven’t read it yet, it’s available in our annuity reviews blog, so you can get the link there.

But you might find it to be good reading, because it actually takes what was just assumptions that were maybe based on erroneous types of assumptions and actually brings it down to real data, so that we can actually look at fixed annuities and compare it even to the popular indexes like the S&P 500, and just see how it really performed.

ERIC: Well, and I like some of the fascinating statistics they toss in there. They look at indexed annuities being part of an index and one of the things they analyze and they break down is the Russell 3000, and I just find that index comparison fascinating, because they say the Russell 3000 takes into account 98% of the stocks that are out there. They said that when they looked at their analysis between 1983 and 2006, that has 98%t of the stocks, publicly held in that index.

DICK: Yes.

ERIC: Of that and this is the fascinating statistics for me, 40% of those stocks had a negative return during that time period, 20% lost all their value, while about 10% gained over about 500%. So and what their determination was, when they said you’re better off picking the index because you’re going to cover all those bases. You’re either going to get those big returns, and if you’re picking individual stocks…

DICK: Well, you could be on either side. And the chances are much more likely to be on the downside.

ERIC: You can hit the home run or you can hit the strikeout, and you’re back on the bench.

DICK: Right, let’s talk about the last decade or so, 10-12 years. What we call the lost decade, and how did fixed indexed annuities; I’m asking a rhetorical question here; but how did fixed indexed annuities compare to let’s say, the S&P 500 during that let’s say the first decade of the 21st century?

ERIC: If you take the decade as a whole, you know, everyone kind of looks at the 2000 to 2010, you know the S&P was basically flat.

DICK: Right, we call it the lost decade.

ERIC: There was nothing there, but if you were in the indexed world you got good returns.

DICK: And when we’re saying the indexed world, we’re talking about fixed indexed annuity world.

ERIC: Right, in this case we’re talking about it from an indexing standpoint, because of how indexing works, you get the gains and then you lock them in. Get the gains. Lock them in. Now when the losses come, you’re locked in so you don’t take that that bad.

That’s what we call zero is your hero. We’ve kind of talked about that a couple times and that’s where this comes in and it points out, the Wharton Study points out that, because you’re not having those big drops, you’re returns over a period of time, were actually pretty good. Are we predicting future performance with this kind of study?

DICK: It’s going to outperform the market in a good market? I would say no. But on the other hand, I’ve had a lot of folks that have actually sat down and we’ve talked about that difficult time like with the S&P and the major indexes. When we look at the fixed indexed annuity and we look at several of the different annuities that have performed during that time and it’s more now in the Wharton Study, is that they also outperformed those indexes.

The reason they could do it is, just what you were explaining and that is because when the index drops dramatically with a fixed indexed annuity that actually locks in all the gains that it’s had. It might just have a zero; no increase in that particular year, but now it’s locked in at a new low. So what happens the next year? The market goes up. Maybe the market doesn’t go up enough to make up all that it lost, but any gain that it has a portion of that goes to the fixed indexed annuity.

ERIC: Right, so you’re interest in crediting, coming off of a bad year is a good thing.

DICK: Is a good thing, right. So that in essence that allows it in extreme volatility or flat or down to actually produce a real return, where the market can’t produce a return, but the fixed indexed annuity can. Let’s talk a little bit about the way that a fixed indexed annuity actually is able to accomplish this. I mean a little bit of the inner workings, the mechanics of it.

ERIC: I’m not a brain surgeon, but I can tell you that they utilize options, put options, and call options.

DICK: Well, call options is what they’re using.

ERIC: Primarily, to basically buy pennies on the dollar. You’re buying the indexed, the strategies of the indexing, so you’re buying pennies on the dollar and if you get the gains, you get big returns and if you get losses, they expire or basically become worthless.

DICK: Right, exactly. They allow the options to expire for pennies on the dollar and these large companies are in a position to have the type of financial management, to continue to manage money in this way. And let me also take this in the other sense of the safety of the annuity.

The actual premium that’s put into the annuity is fully **guaranteed, in the sense that it’s invested in treasuries, investment grade bonds, very high-quality investment instruments, so that it can **guarantee that the principal will be safe, and that there’ll be a minimum return. It’s **guaranteed by fixed indexed annuity company, even if the market doesn’t perform or the call options don’t perform.

ERIC: They’re using the power of leverage. I mean it really is that way, that’s how they’re making those dollars and bringing those returns, those interest crediting back to you.

DICK: And now we do know that the fixed indexed annuity performed very well during what we call the lost decade, and actually outperformed many of the indexes that it was being used to measure against. I can see why that drove a lot of business into the fixed indexed annuity market. Now as of late, of the last couple of years what we’ve experienced has been lower caps, and yet fixed indexed annuities have continued to sell like crazy. People have continued to pour money into these, to the tune of $30 billion, last year $32 billion.

ERIC: And I will tell you it’s just another safe money alternative, when you compare it to money market accounts, CD account, but your opportunity for growth, we never thought 3.0% sounded like a slam dunk, but 3.0% is a great return, when your CDs are paying a .50%, your money markets are paying a .75%. Three percent, all you need is one good year to get you a 3.0% return, and it kicks the butt of anything that you had from the bank.

DICK: Well, and then we come into this whole hybrid annuity concept, where it uses the fixed indexed annuity chassis and then it has this innovative income rider on it that **guarantees 8.0% compounding. Because what we find, Eric in our practice, is that many of our clients actually need income.

ERIC: Right. We should say that the 8.0% is not on every annuity rider.

DICK: Yeah, well, 7.0-8.0%, some of them the lowest are 6.0% on some of them.

ERIC: The riders out there in deferral are what you can use to **guarantee income and that is a huge predictability for retirement income, and so when people are looking at a fixed indexed annuity and then taking in that additional rider option, it becomes a very powerful thing and even compounds what they found in the Wharton Study.

DICK: Right, right and I do believe from everything that I read and see and hear that, as we have more and more baby boomers they’re coming into retirement and they have to have answers for secure income. What we would call a pension style foundation to the portfolio that annuities are going to continue to be a viable answer in that area.

ERIC: We’re seeing more and more endorsements. We’re seeing them endorsed by the government, endorsed by people like ourselves, who are retirement planners, and basically becoming a large portion of what you should utilize, perhaps as part of your retirement.

DICK: As a portion of your portfolio. Well, I think that we’ve covered the Wharton Study in the sense of the general idea of what it’s about and really want to encourage you to check it out.

ERIC: Check it out. Yeah, check it out online. We’re more than happy to put a link out there on our site, so take a look.

DICK: Thank you.

Annuity Fees – The Nasty Truth

February 27, 2012 By Annuity Guys®

The conventional press has maligned annuities for years due to high fees and surrender charges, as well they should… when they exist. Confused yet? You should be. We have all heard the saying about throwing out the baby with the bath water and the same can be said about annuities. If we group all annuities into the “high fee” category we will be throwing out the baby.

Before we continue our thoughts we must express what we feel is obvious. All financial products have a cost of doing business whether it is a reduction of dividends returned, a fee or a charge. Financial professionals, investment and insurance companies are all compensated for their efforts in assisting you. So as we proceed we are not seeking to find the “free lunch” financial product – we are trying to make sure that you understand what you are paying so that you can make the determination as an informed consumer.

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Dick and Eric discuss annuity fees and some of the hazards and misconceptions of with differing types of annuities.

Annuities come in many “Flavors”

A trip to your local financial professional to select an annuity can seem a lot like a visit to Baskin Robbins… you may end up wishing there were only 31 flavors.

Let start on the most basic level (the chocolate, vanilla & strawberry if you will), here we have variable, immediate and fixed annuities. Variable annuities have fees… lots of them typically. Fixed and immediate annuities typically do not have any fees or charges.

Variable Annuities

Variable annuities all have at the very least mortality and/or expense charges (M&E). This fee pays for the insurance **guarantee, commissions, selling, and administrative expenses of the contract.

Variable Annuity Fee Guide
Annual fee (as % of account value) for:	Number	Typical
The insurance (M&E)	_____%	1.35%
The investments within the annuity	_____%	0.95%
Riders and options	_____%	0.65%
Total annual fee:	_____%	2.95%

What you pay to get out
Surrender charge (as % of withdrawal)	_____%	7%
Years before surrender charge expires	_____	8

Your next questions should be, “What do I get for paying this fee?” You usually get an added death benefit that basically **guarantees that your account will hold a certain value if you die before the annuity payments begin. This typically means that your beneficiary will at least receive the total amount invested even if the account has lost money.

The other expenses in the M&E are just truly that – expenses.

In addition to M&E expenses variable annuities^# (VA) also have management fees on subaccounts. The subaccounts are the mutual fund^{^} choices available within a VA. The management fees are the same as an investment manager’s fees within a mutual fund^{^}. These fees will vary depending on the subaccount options within the annuity. Typically, they will be less than those charged by a managed mutual fund^{^} within the same investment category — though not always.

The fees associated with a VA’s riders and options can increase the cost of the VA significantly, but these are optional. However, I would hazard to say that most of today’s variable annuities^# are sold because of the riders and **guarantees associated with them.

Why would anyone consider a VA with the amount of fees attached, two primary reasons; tax deferral and unlimited market upside potential.

Immediate and Fixed Annuities– the NO Fee Option

For the purpose of our fee discussion when we look at these annuities in their basics forms there are no fees are charges associated with these products. How do the agents and insurance company make money then you ask… similarly to the same way banks make money when you obtain a certificate of deposit. The expenses and cost are figured into the price of doing business by limiting or “managing” what they will return to you in the form of interest or dividends.

What about Equity Index or Fixed Index Annuities

Let me state this emphatically. A fixed index annuity is still a fixed annuity! So there are still no fees. All the index does is offer a choice to tie interest crediting to a gain in an index rather than a fixed number stated by the annuity provider.

Ready for the Chocolate Sprinkles – of Fixed Annuities

Due to the popularity of the income riders on variable annuities^#, fixed annuities have begun to add their own riders – typically for a fee. Some of these annuities are referred to as “Hybrid Annuities” because the riders let you construct an annuity that can combine pieces from the fixed, immediate and variable worlds.

The Ever Popular Hybrid Annuity – Fees can be Tricky

Hybrid annuities typically charge fees for income riders. The income riders typically have fees of less than one percent. However, you need to be sure you know which account the fee is based from. Hybrids with income riders have an account or ledger that tracks the value of the income rider account growth – this account typically grows at a higher percentage than the cash accumulation account.

A key for understanding hybrid account fees is to determine which accumulation total the fee is based upon. Some companies use the number to determine the amount of fee, even though you cannot use this account for a lump sum withdrawal. Other companies use the actual cash accumulation amount to determine the fee. However, the fee is always deducted from the case accumulation account and never from the account.

Why would you pay a hybrid rider fee? Much like the variable income rider, the hybrid rider fee allow for predictability of accumulation for an account geared toward retirement income. The main difference is that the insurance company is assuming the investment risk with a hybrid annuity.

Conclusion

The fees and expenses imposed by some annuities can be costly to own. You have to understand what you are getting for those dollars you are giving up. Annuities of all varieties are basically tools to give you insurance on you income. They are vehicles that are designed to provide a . When utilized correctly they can provide a level of comfort and security for anyone wanting a **guaranteed lifetime income.

Annuities are multifaceted devices that can be key pieces of a savings or retirement plan. Do not let the popular media discourage you from choosing the best decision for your future! Understanding what each annuity fee does empowers you to the best decision for you.

Annuity Guys® Video Transcript:

Dick: We want to clear up some misconceptions maybe about annuities and fees, because you see that in the press a lot don’t you, Eric?

Eric: Oh, the conventional wisdom, everything you read, headlines, “Oh, annuities fees, don’t use them. They’re so bad, nasty, nasty, nasty.”

Dick: Now there is some truth to high fees in annuities. We don’t want to say that there isn’t any aspect of that that needs to be brought out.

Eric: Well, the analogy is throwing the baby out with the bathwater.

Dick: Yeah, we don’t want to do that.

Eric: If you’re going to cast all annuities as being bad, then you’re going to lose some good opportunities, because not all annuities if your fee driven, are bad.

Dick: Well, even the annuities that have the higher fees, in the right situation, if they’re presented properly, they may fit certain situations.

Eric: Exactly, usually you’re exchanging a fee for some kind of service or some kind of piece that you’re given.

Dick: Right, so you’re either going to pay a higher fee or perhaps you may earn a little less.

Eric: Let’s deal with the first flavor of what the highest, the typical highest fee annuity, which is the one that is most castigated about and written about, which is the variable annuity^#. Variable annuities typically have higher fees.

Dick: Much higher fees.

Eric: And the reason is…

Dick: They have more upside potential. That’s one aspect of a variable annuity^#, yet the fee structure has to do with mortality, because they have a death benefit.

Eric: A lot of them have a death benefit. Then they also have mutual fund^{^} options, their investment options. So what you’re doing is taking out an annuity wrapper, so to speak and wrapping it around a mutual fund^{^} option.

Dick: And typically Eric, when we have a mutual fund^{^} just an average fee structure for a mutual fund^{^}, is approximately what?

Eric: Oh, you’re getting at least a.50%.

Dick: A half is minimal, pretty much.

Eric: Now I’m not talking about the load expense that you’re going to pay up front, your ongoing expenses could be .50% and usually 1.50%, so those fees exist in either world.

Dick: And I believe according to some data on Morning Star that they kind of look at the average and the average mutual fund^{^}, is somewhere around 1.15% now. It used to be 1.5% not very long ago, but it is right around 1.15%. So you take 1.15% and say on a variable annuity^# your mortality expense, your mortality and your expense ratio, M&E charges, you’re looking at an average of somewhere around maybe 1.50% or so. You put that with 1.15%, now you’re pushing you’re pushing 3.0%.

Eric: And then you start adding on the riders and that’s where the variable annuities^# get really expensive, but that’s the…

Dick: That’s the **guarantee part of a variable annuity^#.

Eric: Exactly, those are usually what most people are sold on, when they buy a variable annuity^#. You want that insurance on your investment.

Dick: Right. So if the investments are not performing very well, obviously those fees are going to eat in pretty quick to the principal. In addition if you’re taking money out, so the principal may be at a little more risk, but the income is not or the potential for your heirs with a death benefit, because of the rider on the variable annuity^#.

Eric: Right, but that’s typically the one thing we see out there when people are looking at fees, they’re looking at that variable annuity^# and so you can have variable annuities^# as low as .25% and as high as over 5.0%, if you start adding on all those riders.

Dick: It really adds up fast.

Eric: So there’s your high fee option. If you’re fee adverse knowing that your principal’s at risk and some other things with the variable knowing how they work, you have to make the educated choice.

Dick: Right, right and then a lot of times all annuities as we started out saying, in the press you tend to see annuity, high fee, but there are a lot of annuities that have no fees.

Eric: Exactly and when you look at fixed annuities and immediate annuities there are no fees.

Dick: There is no fee. It’s kind of known that you’re not, maybe going to earn as much—when I say you’re not going to earn as much; you’re don’t have as much earning potential, as you would have maybe in a variable annuity^#, where it can earn as high as the market goes. You may have a declared interest rate in a fixed annuity or you may have an index option, which indexes to a popular S&P or Dow Jones or something of that nature.

Eric: And those are your low fee/no fee options. People say, “How do you get paid? How do those places make money if there are no fees?” Well, it’s the same way a CD at a bank. The bank doesn’t say, “Oh, I’m going to charge you a fee. I have to pay the salary of the guy that sold it to you.” It’s all factored in as a part of the price of doing business. It’s all built-in to that expense. So what you’re earning on that annuity is truly all, basically earnings. There are no fees that are taken out of those products.

Dick: So I think that’s one thing that we just want to clarify, is that when you are buying an annuity that there are some annuities that really virtually have no fees. They protect your principal. They maybe don’t have as much upside potential. They’re purchased for other reasons than just the potential of a high return. They are purchased for safety, for a more secure retirement vehicle, and those are the ones that do not have fees.

Eric: Now when we talk about fixed annuities and we say there are no fees there is of course the mystical hybrid annuity, which is built off of a fixed annuity chassis, in the sense of your principal is not at risk. However, there are fees associated typically through the riders.

Dick: Yes, there are.

Eric: That is one of the things, when you look at a fixed annuity you can’t just throw the blanket over the fixed annuity and say none of them have fees.

Dick: There are some fees.

Eric: Because if you’re going for that hybrid option, which has basically, an income rider or a long-term care rider, if you’re adding a rider on, that’s where you are going to potentially see fees.

Dick: Right. I do think that we have to add the caveat that the fees typically are very low on the indexed annuity, under 1.0% as a rule, and sometimes some of those riders come with no fee involved. We do want to make that clear.

Eric: Exactly, so it’s understanding, if the rider that you’re buying gets you further to what you’re trying to accomplish with either your savings plan or your retirement cash flow plan, those are the times you’re willing to give up some of that upside or you’re willing to pay for that **guarantee. It’s insurance on your money. It’s insurance on your retirement plan.

Dick: Well, you know that you can potentially by buying a rider, by paying a fee, say it’s a .50% or .75% something of that nature, you know that you can **guarantee that your income potential could double in 10-years of what you would have today, just by buying that rider. That could be money very well spent.

Eric: Well, you’re putting a **guarantee of your future income in the bank. You’re banking on that retirement dollar being there, you’re buying an income stream. That’s what those riders are designed for. They’re designed for income, not for accumulation. If you’re designing them for accumulation, you’re being sold a bag goods, because that’s not what they’re for. They’re income riders, for your future income.

Dick: Exactly. Well Eric, I don’t know that if we’ve cleared up everything on fees, today.

Eric: Well, not necessarily everything. I guess the one thing we should in closing with the hybrid annuity. There is one caveat that you always have to be careful, when you’re working with your adviser you want to ask, “Is the fee based off of the cash account or the accumulation account?” Now we’re not going to explain that in this video, because it would take us another 30 minutes.

Dick: But there’s another part of that I want to give a little clarity to and that is that the fee never comes out of the income account, so even though we haven’t gotten into the detail of the income account and the cash accumulation account, we’ve done that in some other videos. That the fee always comes out of the cash account, so it reduces your cash value, but the income account has whatever the compounding amount is in there, say if it’s 8.0%, it’s not deducted. There is nothing deducted. So now we’ve really confused you.

Eric: I was going to say, “Now we’ve confused you.”

Dick: You have to watch our next video.

Eric: Perfect time to call your financial adviser or to give us a call.

Dick: Or give us a call.

Eric: Thanks very much for watching.

Dick: Thank you.

What are Hybrid Annuities?

December 16, 2011 By Annuity Guys®

Hybrid annuities, also referred to as hybrid income annuities, are essentially a type of annuity contract that allows the account owner to tie the growth of his or her assets into market benchmark (i.e. Dow Jones IA, S&P 500, NASDAQ 100), with an income rider or riders.

On the most basic level, a hybrid annuity is a fixed index annuity with an income rider attached to it.

Hybrid annuities can help to resolve the concerns of retirement income by offering **guaranteed annuity rates for growth on annuity income accounts. They also such as long-term care funding––while still providing one with a regular income. These annuities have the potential to solve several types of needs in retirement.

A hybrid annuity essentially works the same way that a regular annuity does, in that making an allocation begins by choosing the hybrid annuity that meets key retirement objectives and then funding the hybrid annuity contract with a licensed agent is the final step.

Dick and Eric look at the Hybrid Annuity in this short video explanation.

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Annuity Guys® Video Transcript:

Dick: And folks as you can see at this point, we’re going to go into one more type of annuity here, which is really no annuity at all. It’s a combination of all the above, but as you can see, every annuity has so many different aspects and there are good aspects to each annuity that you really want to think this through.

You want to put some real thought into it. You want to work with an expert that can help you think through all of the variables, and the possibilities and really zero in on, what really is going to work best for you, what’s going to be most suitable. And maybe, as Eric said earlier, it’s no annuity at all.

However, annuities do answer some important questions to secure retirement, securing retirement income and one of the things that we want to talk about here, to just kind of wind it up is something that you’ll find terms over the internet and different ones that are talking about it, and that is a hybrid annuity, and what is different about a hybrid annuity? Eric, I’ve been talking here again. I’m getting you starting on everything. Go ahead let’s start off on a hybrid.

Eric: The hybrid annuity and again, we’re building here so you’ve got your fixed index chassis. Now when you start adding income riders onto a fixed annuity. . .

Dick: Right. And I think that’s, I just want to kind of zero in on that point you made, and that is that it is a fixed annuity. So first of all, we’ve got safety. It’s a fixed annuity then it’s indexed, so we add the indexing option.

Eric: That’s one of the options. You can also take that **guaranteed number. . .

Dick: Just a fixed…

Eric: … is just a fixed return. So those are all pieces, it’s that fixed annuity chassis, and then you’re going to add on top of it, usually the key component is the income rider. So we’re adding an income rider which gives us some of that immediate annuity flavor.

Dick: An income rider **guarantees.

Eric: Right, so what’s the one thing we love about an immediate annuity? It’s that income **guaranteed for life. Now wouldn’t we like to get that for life, without having to give up the lump sum?

Dick: Yes.

Eric: And that’s where the hybrid comes in. It’s that contractual income for life **guarantee, but without having to give up access to the whole.

Dick: Eric, and in our experience and I’m just going to throw the question to you. I could answer it, but in our experience how close can we come with the hybrid annuity, to matching the income of an immediate annuity, where we’re **guaranteeing it for life.

Eric: We come very close typically. There’s usually a couple percentage points difference. Where that fudge factor comes in per se is how long is it going to be in deferral? How long are you going to live?

Dick: What’s the age of the person?

Eric: Right, there are unknown variables that come into play, but the nice thing is we are able to **guarantee, typically a lifetime income higher than you would get, if you just left your money in liquid assets…

Dick: Oh, absolutely

Eric: … that you pulled out, because with a degree of certainty with an annuity you’re going to get that lifetime income. With the liquid assets you have to kind of take the ups and downs of the market and have that little bit more uncertainty. So this income rider…

Dick: You don’t have the contractual **guarantees that the annuity will give.

Eric: … will still give you access to the cash, the majority of your cash. I would say is probably the best way to think of it, with also using those life terms.

Dick: And that’s what I kind of say, is having your cake and eating it too, because with the hybrid style of annuity you can not only **guarantee income for life, but you can pass a lot of money on to the next generation to your heirs, if you haven’t used the money all for your income. And that depends on how long you live, and how much money that you actually take out of the annuity, where with an immediate annuity you’re going to leave very little, if any to the next generation. With the hybrid annuity you could leave the majority of it depending on life expectancy and that type of thing and you can still **guarantee your income for life. So if you happen to live a long life, now it is true if you use all of that money up, because you live a long time, then you really aren’t going to have—your income is going to continue as long as you live.

Eric: It’s an annuity, long time income.

Dick: But you won’t pass money on, because you’ve used it up.

Eric: If you spend all your money, if you drained all your savings accounts, in this case if you drained the annuity of the cash they will still pay you that income for life or whatever that contractual **guarantee amount was. Now you will not have anything to pass on to heirs, if you live long enough.

Dick: And you spend it, but they’re income will continue.

Eric: And that’s the best **guarantee you could have. You won’t out

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