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Sell in May and Go Away or Buy Annuities?

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Life is full of profound statements and sayings that stick in our minds. For investors and brokers, the saying “sell in May and go away” has held some degree of truth for those who are looking to avoid the volatility and declines of the equity markets from May through October.

This topic seems to have some momentum among the popular investment media advisors where we have seen no less than a dozen Wall Street insiders telling everyone who will listen…[continued below video]

Video: Watch as Annuity Guys, Dick and Eric, discuss as to whether the best way is to sell in May.

**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.

[continued]…that this is not the year to sell in May. The question is… who do you believe the historical adage or the so called experts of our day? Or, is there a third option for those looking to avoid the volatile days and declines of summer by positioning some of their assets into a holding where they can take the risk of loss due to negative investment performance off the table? Using fixed or fixed index annuities as an alternative asset class is becoming more popular with people looking to mitigate the risk of potentially decreasing bond valuations based on rising interest rates and also to seek stock market protections from the current bull market possibly screeching to a halt.

Annuities may not be the right choice for everyone; but for those in or nearing retirement, they are certainly worthy of consideration. Annuities are the cornerstone of safe income options for many retirees but also offer some safe market upside growth potential to consider when evaluating whether to sell stocks in May and go away or buy annuities in May and go play!

[continued]

For stocks, the best time to sell and go away starts today

CHAPEL HILL, N.C. (MarketWatch) — Should you sell in April and go away?

It’s an odd question, I admit. Widespread talk of selling usually doesn’t begin until late April, when investors each year are reminded of the famous seasonal pattern “sell in May and go away.”

But it’s precisely because it is so well-known that some followers of this seasonal tendency wonder if they should act sooner rather than later. Waiting until May Day runs the risk of selling at the same time that a large number of other investors are doing the same.

Fortunately, we have real-world data on two attempts to get a jump start on the “sell in May and go away” pattern. The first is the “Almanac Investor Newsletter,” edited by Jeffrey Hirsch, and the other is Sy Harding’s “Street Smart Report.”

Both pursue surprisingly similar modifications to this basic seasonal pattern. Each relies on a technical indicator known as MACD to pinpoint the precise day on which they enter and exit the market. (MACD is a short-term momentum indicator, standing for moving average convergence divergence.)

The Hulbert Financial Digest has track records for both market timers’ modifications of this seasonal pattern dating to mid-2002, nearly 13 years ago. The HFD calculates their returns on the assumption that, when they are invested in stocks, they earn the return of the Wilshire 5000 Index; otherwise they are assumed to be invested in 90-day Treasury bills.

As you can see from the accompanying table, a buy-and-hold strategy since mid-2002 has produced a 7.7% annualized return. Automatically going to cash every May Day and re-entering the market on Halloween would have done slightly better with a lot less risk — which is why it comes out well ahead of buying and holding on a risk-adjusted basis (as indicated by a higher Sharpe Ratio). [Read More at MarketWatch…]


 

 

Can Annuities Help You Avoid the 2016 Crash!

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Can Annuities Help You Avoid the 2016 Crash?… Absolutely!

If you think like many Americans and some economic experts that a crash is coming in 2016 to the equities market and you would like to move some of your assets to a safer place, fixed and fixed index annuities (FIA) could be a viable option for those investment dollars. Fixed annuities and FIAs have the ability to offer **guaranteed rates of growth that typically exceed…[continued below video]

Video: The Annuity Guys, Dick and Eric, discuss how annuities can protect you in a market downturn.

**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.

[continued]… what you can find from any banking institution presently by two to six times their interest rate growth. Fixed index annuities allow for a participation in the upside of many equity indices without having investment risk from those indices should the equity market correct or even crash.

Many FIAs allow you to choose from a variety of growth options that allow you the flexibility of choosing a fixed interest growth rate in one year and the option of choosing index based growth for greater growth potential in another year. So, the majority of fixed index annuities provide for re-allocation annually based upon your individual preference or with some guidance from your advisor.

Should you take all of your money out of the equities market? For most people the answer is no. Historically the stock market has produced higher positive returns over the long haul… So as long as you have the time to recover from losses in a protracted downturn that will not impact your lifestyle or health, you may elect to keep money in the market and hopefully ride out the downturns. We are not fans of trying to time the market since repeated studies and most active management results have shown that it is virtually impossible to do so. However, we know that with fixed and fixed index annuities you no longer have to even try.  Since, you can get interest growth from a portion of a market index that is rising with NO market index downside risk.

Article from Seeking Alpha, January 7, 2016

Could This Be 2008 Again?

Summary

  • Investors are very nervous again, especially as they see another huge crash happening in China.
  • The current economic problems can be best observed in the energy and commodities markets, which have crashed.
  • However, the situation is very different from 2008, and this time central bankers will have no choice but to intervene before things get out of control.

People are starting to get nervous, especially when they are looking at another 7% crash in China. George Soros said it sounds like 2008 again. Of course, one day it will be the end of the world, at least financially, and many times there will be deep crises which will panic people so badly that they will feel like it is the end of the world. It is inevitable to have such episodes once in a while.

But can this time things get so bad that would be another end-of-world scenario like 2008? 2008 didn’t start well. 2016 hasn’t started well at all. If at least the start, or the first quarter, is to resemble 2008 then 2016 can have further to go, downwards (as can be seen in the chart of the S&P 500).

There are several worrying real issues out there to which we do not know what may be the outcome a few months from now. One is the economic and financial unraveling that seems to be going on in China. Another is the energy and commodities crash that seems to continue, at least for now. And what is actually most important is that asset valuations in some parts of the rich world are quite high, compared to historical levels, and can therefore easily fall to lower levels. […Read More at Seeking Alpha]


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Is Strong Growth from Annuities Likely in The Looming Bear Market?

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Strong growth is a matter of perspective, and when your basis of comparison is a decrease of 20 to 30 percent, even zero growth is strong by a matter of comparison.

Many economist and market watchers have been proclaiming an end to the bull market for months and the recent drops have sent many investors scrambling for safety. Now that we have seen many indexes drop into “correction level” (a polite way of saying they have lost 10%) the big question is … [continued below video]

Video: Watch as Annuity Guys, Dick and Eric, discuss the growth potential of annuities in a declining stock market…

 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.

[continued below]…are we poised for a new bull run or are we in for a more serious drop of another 10 to 20 percent or even far more?

Can you get strong growth from an annuity during a bear market? Certainly! You can even utilize a fixed annuity and typically **guarantee a fixed return of 2 to 3 percent at present rates. However, a fixed index annuity (hybrid style) can benefit from resetting during a bear market, which typically creates more growth potential because fixed index annuities can reset to a new lower indexing point during a bear market – they do not have to grow back to their high point to begin accumulating gains. According to various studies of past performance, index annuities have the realistic potential to earn from 4 to 6% interest annually while protecting principal!

Trying to time the market can be extremely difficult for professionals, especially for individual investors. Riding out a bear market for some is “un-bearable” – they cannot handle the emotional roller coaster. Annuities can be an answer for those people hoping to move a portion of their portfolio into a safer financial growth alternative – safer option that offers a far greater upside potential than just sitting in cash or riding a market down.


 

Read more on this subject in this article:

 Shiller: Average CAPE Ratio Puts S&P at 1,300, Dow at 11,000

Nobel laureate economist Robert Shiller of Yale University says his indicator shows that the current stock market values are overinflated and will only crash even lower.

Shiller invented the cyclically adjusted price to earnings ratio (CAPE), a key indicator for stock market crashes.

“It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly,” Shiller wrote in the New York Times.

According to Shiller’s CAPE ratio, the stock market is significantly overvalued. The metric modifies historical price-earnings ratios to account for business cycles. Between 1881 and 2015, CAPE averaged a ratio of 17, well below today’s reading of 27.

“Levels higher than that have occurred very few times, including the years surrounding the stock market peaks of 1929, 2000 and 2007. In all three of these instances, the stock market eventually collapsed,” he said.

Shiller said his indicator would put the S&P closer to 1,300 from around 1,988 on Friday, and the Dow at 11,000 from around 16,643.

“We are in a rare and anxious “just don’t know” situation, where the stock market is inherently risky because of unstable investor psychology,” he said.

“There are reasons to question whether this was a quick, effective slap on the wrist, or if the market is still too overactive, and thus asking for a more extended punishment,” he said.

“Ten percent drops in the S&P 500 in just five trading days — such as what we just experienced — have not been common. Out of the 29 corrections since 1950, only nine happened in five days or less,” he said.

“Most of those happened since 2000, possibly because of the Internet and faster communications. Such rare sharp drops are psychologically significant; an extreme one-day collapse seems to create anxiety that imprints on people’s memories and could contribute to a downward momentum.”

The CAPE is a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (Moving average), adjusted for inflation. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns.

All of the recent market volatility could help drive investors away from stocks for years, says ace hedge fund manager Doug Kass, president of Seabreeze Partners Management. [Read More at NewsMax]

 

Are Annuity Complaints on the Rise?

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Mom always said; “If you don’t have anything good to say, don’t say anything at all.”

Well, we want you to know that this rule does not apply to annuities. As Annuity Guys®, we may be a tad-bit more sensitive to reading the negativity spewed by some writers when it comes to annuities; however, it does appear that any increase in complaints by investors or consumers just comes down to one particular type of annuity – the variable annuity#.

Watch as Dick and Eric discuss complaints on annuities and other financial products.

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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.

Overall, annuity complaints actually decreased in 2013, but for the popular media it appears to be a lot more fun to talk about the high commissions, high fees, and bad advisors that offer theses products. You really have to dig to find an article that compares the number of complaints from mutual fund^s and stock transactions — which far outpace those from annuity sales.

As Annuity Guys®, we are on record as stating that an annuity is not where you should put all your money, but it can be a great location to place dollars that will used to fund retirement income. Annuities are a financial tool and when used properly can alleviate risk to your portfolio.

You would never guess this article cites the fact that nine out of ten annuity owners are at least somewhat satisfied…

 Angry Annuity Clients Seek Damages

By Matthew Heimer

When stock markets are humming along nicely, customers are less likely to complain about their brokers and financial advisers: 2013 was on pace to be the fourth year in a row of sharp declines in the number of arbitration cases filed with the Financial Industry Regulatory Authority (Finra), the brokerage industry’s self-regulatory body. But as Matthias Rieker reports this week in The Wall Street Journal, complaints about one kind of investment remain stubbornly high. The outlier: Variable annuities.

Variable annuities usually offer a retirement saver a **guaranteed future payout, along with a chance of increasing the value of the saver’s initial investment depending on how markets perform; investments in many of these annuities can be tax-deferred. But they’ve long exasperated consumer advocates because of their relatively high commissions and fees, along with their often-impenetrable rules about what, exactly, an investor’s account is worth at any given time.

As Rieker reports, “In 2012, the variable annuity# was the only class of security for which arbitration claims increased”; last year, the total number of annuity complaints dropped about 20%, but complaints in other asset categories dropped far faster. […Read More at MarketWatch]

Video Transcription:

Dick: And I’m Dick.
Eric: Hello, I’m Eric and we’re the annuity guys.
Dick: Well, Eric, are annuity complaints on the rise.
Eric: No… Yes.. No… Ours? no!
Dick: Depends on which annuity complaints you want to talk about.                                                                       Eric: And that’s exactly the case. And then we see the black eye of the industry coming out in the open ever again with the old variable annuity#.
Dick: Well, and that’s something that has been on the rise are variable annuity# complaints and it runs the gammon from the fees and the surrender charges and loosing money when stocks go the wrong way.
Eric: You can loose money.
Dick: But what’s very interesting is the fixed annuities which would take in that hybrid annuity and everything. We’ve seen those complaints go down steadily. They kinda of hit the peak somewhere around 2006 – 2007; roughly around 200 complaints. And folks, when you think about this, 200 complaints over ten of thousands of folks that buy annuities in a given year; that’s not a lot of complaints. But now, they’ve actually  tapered down. Fixed indexed annuities sales have been way up and their complaints have tapered down to – last year – i think around 54 complaints for the entire year.
Eric: Even when we look at the variable annuity# complaints – one hundred sixty-five complaints on variable annuity#.
Dick: That is not a huge number.
Eric: And we should very clearly clarify here that when somebody complains about annuity, it’s typically not because of the annuity design, it’s  not the insurance company; unfortunately, it’s guys like us.                       Dick: Annuity guys.
Eric: Annuity guys or people that want to be annuity guys…
Dick: I beg your pardon.
Eric: -Who don’t fully understand the product. They don’t explain it very well, so they have consumers confused and they don’t know which direction they’re going; and their inability to articulate what product….
Dick: And Eric, this does not show up later when the person has the policy ans they have some need. They need to get additional money or they need to turn their income on or whatever; and it does not work the way they were told that was supposed to work.
Eric: They get caught with the sizzle side perhaps; the 5 percent **guaranteed roll up for income and deferral.
Dick: Or they though they’re going to earn 5 percent every year, **guaranteed. They see their account dropped a couple of years in a raw and they’re like “hey, this is not what I bought?”
Eric: That’s right! “That’s not what you’re told me”… and that’s where the complaints come from. And I guess, really to be fair to the annuity industry, we should say the number of complaints in comparison to the mutual fund^s…
Dick: Or the securities industry… and that literally, looking at the reports that we’ve been looking at I think the SEC last year had over ten thousand total complaints. Now, that’s a lot of complaints. And we tend to not see that. What’s interesting about this is that we don’t see that in this financial articles a lot; we don’t a lot who talked about that.
Eric: I think we don’t want to talk about the thing we don’t want to know.
Dick: But we see a lot of talk about “ohh, this annuity this, this annuity that.” And I’ve seen now that the populous has become a little more educated about annuities; a little more understanding us out there; I’m seeing less of these negative articles showing up.
Eric: Well, I wish I could say I see less of that. Maybe I’m drawn to… it’s like everybody has a newspaper article or blog like to pick on it. The topic of this one, “Angry annuity client seek damages.” Now, that does not say “you know, really…” If you look at proportion, it’s not nearly as bad as the people with stocks that are three, four or five times as many complaints. It’s people…. the highlights….
Dick: It crabs attention and it sells advertising; and this is part of the industry. And folks, really, when you get down to why annuities are so popular and why they have so few complaints? It is because they actually do the opposite of what the market does; they make your money safe.
Eric: Right. Safety first.
Dick: It’s right.
Eric: And that’s why i always qrench when I see people that have newspaper articles – I’m not going to mention their names because they don’t deserve the heck. They’re like ohh, I like the brokers advice until they recommended an index annuity.
Dick: You would not be thinking about Malcolm Berko.
Eric: Yes, I would. I’m thinking of him too. It gives us bad names because we are in the index annuity world; we understand how they work, we understand where the benefits are and unfortunately, people that don’t live in our world…
Dick: And if you’re just, as Bill O’Reilly says “fair and balance”, there are ways that annuities can be used wrong, ways that are used correctly; they’re just simply a financial tool.
Eric: That’s exactly right. Annuities are great way to make sure you don’t live too long. It’s longevity, it’s guarding against outliving your money and we talked about that being the strength in the cornerstone.
Dick: The principle of protection; protecting what you’ve put into an annuity in terms of premium and you know that you’ll never go backwards – we’re talking about fixed annuity – and obviously, the variable is.
Eric: And we have some issues of the variable annuities# ourselves because we don’t like to loose money and we don’t like for our clients to loose money.
Dick: Yes, we don’t like for our clients to loose money. So, are they on the rise or it depends on rather you’re talking about which type of annuity?
Eric: It depends if you’re in our office because in our office, not so much.
Dick: The complaints are under control.
Eric: That’s right.
Dick: Thank you.

Do Fixed Annuities Beat Bank Interest Rates?

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Ever since my days of playing the board game of Monopoly, I have wanted to beat the bank. Remember drawing the card that said “Bank Error in Your Favor”? Collect $10…. 10 bucks – sweet and no jail time either.

Nowadays, it seems nearly impossible to beat the bank — unless you are talking about their interest rates paid to a saver!

Retirees have been pummeled by an artificially depressed rate environment which filters down to interest offered by banks. Good thing, there are alternatives to traditional bank rates paying next to nothing. Insurance companies and the payments on annuities have also dropped off, although they still manage to consistently offer substantially better yields than their bank counterparts.

So, do fixed annuities beat bank interest rates? Simply compare and you will see that they do quite handily!

Is now a good time to place money into an annuity? Watch as the Annuity Guys® -Dick and Eric, discuss how the political and economic decisions of today impact annuities and retirees.

**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.

The Annuity Guys® believe a lot of the future economic impact will be based upon the decisions of Janet Yellen, read more about her in this Washington Post Ariticle.

Nine amazing facts about Janet Yellen, our next Fed chair

By Dylan Matthews

Janet Yellen will be appointed Fed chair tomorrow. Neil and Ylan already wrote the definitive profile of her, but here are the main things you ought to know going into her confirmation hearings.

1. She is perhaps the most qualified Fed chair in history.

Paul Volcker is the only Fed chair who even comes close to Janet Yellen’s level of experience.

Just look at the competition. When he was appointed chairman, Ben Bernanke’s only prior government service was three years on the Fed board and six months as chair of the Council of Economic Advisers (CEA). Alan Greenspan had three years as CEA chair.

Yellen, by contrast, has served for three years as vice chair, headed up the San Francisco Fed for six years, ran the CEA for two years, and before that did a three year stint on the Fed Board of Governors. She also did a stint as an economist at the board in the late 1970s, for good measure.

Only Paul Volcker — who had a multi-decade career at the New York Fed and the Treasury — even comes close to that, and he had nowhere near as much exposure to the highest echelons of the Fed system as Yellen has. If experience is your main criterion, Yellen is hard to beat.

2. She’s been a powerful voice for the unemployment hawks on the Fed.

In various speeches — perhaps most notably at the AFL-CIO — and in Fed deliberations, Yellen has been clear that she thinks subpar growth and too high unemployment are the biggest problems facing the Federal Reserve. “Maximum employment,” she has emphasized, is the main goal of the Fed at this point in time. In her words, “With employment so far from its maximum level and with inflation currently running, and expected to continue to run, at or below the [Federal Open Markets] Committee’s 2 percent longer-term objective, it is entirely appropriate for progress in attaining maximum employment to take center stage in determining the Committee’s policy stance.”

3. But she’s more than willing to crack down on inflation when the situation requires it.

As Evan Soltas and Matt O’Brien have noted, Yellen is plenty hawkish when the situation requires it. In the mid-1990s, when she served on the Fed Board of Governors, she made it clear that she thought unemployment was dangerously low, low enough that employers have to hike wages, which in turn leads to higher prices, i.e. inflation. “We have an economy operating at a level where we need to be nervous about rising inflation,” she said at one meeting. “We can’t dismiss the possibility that compensation growth will drift upward, raising core inflation and in turn inflationary expectations. This is a major risk. Obviously, we need to be vigilant in scrutinizing the data for signs of rising wages and salaries.”

So inflation hawks, take heart — if and when it’s actually worth worrying about inflation, Yellen will be ready to handle it.

4. She’s pretty darn good at predicting where the economy’s headed.

Yellen’s predictive record is the envy of the Fed. As Ezra noted, she was one of the few voices at the Fed in December 2007 warning that recession could be around the corner. At a time when most thought the worst of the subprime crisis was over, she was skeptical. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned.

It was far from the only time she got it right when her colleagues didn’t. Indeed, an analysis by the Wall Street Journal revealed that Yellen had the best predictions of any Fed policymaker in recent years. [… Read More at the Washington Post]

Transcription:

Eric: Hi, I’m Eric.

Dick: And I’m Dick. We’re the annuity guys.

Eric: And we’re going to examine today whether or not fixed annuity rates, will they’ve really beat bank interest rates?

Dick: You know Eric, to set the stage for that a little bit, we’ve got a nomination coming up here of Janet Yellen…

Eric: Ohh, so Uncle Ben, we’re throwing out Uncle Ben way and bringing her in?

Dick: New Federal Reserve Chairman and I think that we have to talk about where interest rates have been and where I think that they’re going to go, and then answer that question.

Eric: My general belief and I’ll start with – typically you see annuities are paying a higher return than banks are.

Dick: Well, historically.

Eric: Historically. So you’re fees are here and traditionally annuities are going to pay somewhat higher

Dick: But right now; the savers, the retirees, the folks that have been diligent in putting their money away – preparing for this time in their life…

Eric: welcome to the penalty mess… you no longer being treated like royalty.

Dick: So, we got this upside down world now where you’ve done everything right and now you get penalized with very, very low interest rates; and it would appear appearances that we’re building a nice bubble up into the stock market and just a very securities where that money is flowing instead of into savings nationally. Who would want to put money in a bank account that’s getting…

Eric: That’s getting zero…

Dick: Half of percent, a percent…

Eric: And people don’t really think about these terms but when put money into a CD or a money market account, you’re actually losing money because the effect of inflation is actually eroding what’s there. Your spending power is decreasing every year.

Dick: And folks who would maybe otherwise not put money in the market? They have no place to put their money that can earn anything. So, they’ll maybe take more chances and go a securities route. And that’s where we do find a lot of folks will turn to annuities and again looking for “hey, what’s got at least some comparison in terms of safety but gets a better interest rate?”

Eric: There’s a misnomer a little bit about fixed annuity rates because a lot of times; it’s going back to the term fixed; they tend to think the annuity rate is the same every year when they start out. It’s not necessarily always that case. Your first year rate is fixed and then the insurance company goes back to the next year with another year fixed-rate. Now, those rates can change already at all-time lows, would not be advantageous to say select an annuity where the rates could actually…

Dick: where you get a good initial rate. We call it a teaser rate or introduction rate. But they ask the idea that your rates could increase that does have an attraction to some; and then to others, they want that concrete, that absolute **guarantee that if I put my money in here I’m going to at least get XYZ. And, it would be the CD style or the multi-year **guaranteed annuity.

Eric: The nice thing is annuities have that flexibility in saying “hey, if you want that same rate **guarantee over a period of time, that’s an option.” If you think that interest rates are going to come up and you just don’t have another place to go, well, here’s a place where you can park money and get a market return each year based on what the companies willing to offer based on the market condition.

Dick: Yes. So, it can go up, but conversely, it can also go down. Well and back to that we’ve started with originally discussing where rates are going; with Janet Yellen, being the nominee for the Federal Reserve Chairman to replace Ben Bernanke; the concern is that she has a lot of the same strategies and thoughts, she’s going to follow that same line to pumping a lot of money into the economy, artificially holding rates down trying to pump up employment; and this is the biggest experiment we’ve ever done with monetary policy on this level that could really backfire on us in a big way. It does appear it’s going to hold rates down for a long time.

Eric: Well and I think the statement that’s been made by the Fed that says “until we get to an unemployment level of 6.5, below that level we’re going to keep rates where they’re at.

Dick: That could be a long, long time.

Eric: And we’ve talked to people consistently. They’re on the sideline; they’re park in cash, they’re park in zero percent basically returns because they expect rates to go up. They just can’t foresee this poor rate environment lasting but we’ve got people that are basically in charge of all rates telling us they’re going to keep them here until we get to this.

Dick: And Eric, this is why it does make sense, I believe, just financially – just doing this simple math; that if you keep money parked at a half of a percent and you got the opportunity to earn 3 percent or three and a half percent or something of that nature; by putting it in a shorter term type of an annuity and you made all those gains for the next year or two to three years before that rates tend to go back up; so, now if they do go up a little bit higher than your three, three and a half percent; at least you didn’t lose anything during those years. You had your money working and there’s just that nice offset to getting your money working today and then knowing that you can still do something later.

Eric: Well and I’m a big fan of laddering. I talked about laddering. In fact, I talk about laddering MYGA’S in the terms multi-year **guarantee annuities. We’ve got decent rates at five, six, seven percent. Well, five, six, seven years…

Dick: I was waiting where you’re going on that one.

Eric: But looking at those, by staggering those terms, you have money becoming available. It may take some shorter terms now but always having kind of that circular nature. Rates when they change are not just like flipping a switch and all of a sudden it’s going to be 5 percent tomorrow…

Dick: Right.

Eric: You’re going to see gradual changes. It’s best to get money in a place right now where you’re getting at least a competitive return to combat inflation and having that ability to kind of just keep recycling those ladders as they come available.

Dick: I agree and a lot of folks who have done that for many years have CDs and other types of banking instruments; and so, using them with annuities should not be anything unusual. And right now, it is a fact that annuities are considerably higher than bank rates, and there are some shorter-term annuities that give you a little more flexibility in the event that the rates do eventually take off.

Eric: I look at the average 5-year CD before we started. We are at one point three is the average.

Dick: And we’ve seen recently three, three and a half percent from five year annuity.

Eric: MYGA style. So, there are better options available…

Dick: Than the banks.

Eric: In my opinion.

Dick: Thank you.

Should You Choose a Variable Annuity?

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Occasionally, we get requests from our site visitors and viewers to help them review a particular annuity – like that from Larry below.

Dear Annuity Guys®,

I asked my broker about annuities and he is recommending a variable annuity# from @%#^#. What is your opinion of this annuity?

Larry T.

Watch as the Annuity Guys® discuss who should choose or even consider a variable annuity#?

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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.

Typically, we try and provide an answer that highlights the pros and cons about the specific annuity in question. However, there are some aspects regarding variable annuities# in particular that need to be made clear prior to even considering variable annuity#.

Here are fourteen questions to consider prior to selecting a variable annuity#.

  1. Is any annuity really the right choice for you?
  2. Are you comfortable with your principal being at risk?
  3. Is your reason for buying a variable annuity# for growth and/or tax-deferral?
  4. Are you planning on using this annuity for lifetime income?
  5. Is your advisor/broker an annuity specialist? (Did they offer and discuss various types of annuities?)
  6. What are the fees – including the hidden fees, that do not appear on the statements?
  7. Do you understand the pros and cons associated with living benefit riders?
  8. Will you have adequate liquidity?
  9. How many ways and how soon can you access your money?
  10. What is the surrender period and the associated charges?
  11. What are the costs associated with the investment accounts?
  12. Who is responsible for selecting the investment accounts?
  13. What is the minimum **guarantee?
  14. What is the death benefit?

These are a few of the topics we would recommend discussing prior to finalizing a variable annuity#. Due to the popularity of these annuities, they are frequently highlighted in the media – for both their positives and mostly negatives, for the way in which they are abused. If you are in the market for or have been proposed a variable annuity#, please be sure to read this article from the Securities and Exchange Commission on variable annuities#.

Variable Annuities: What You Should Know

Variable annuities have become a part of the retirement and investment plans of many Americans. Before you buy a variable annuity#, you should know some of the basics – and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity# is right for you.

This is a general description of variable annuities# – what they are, how they work, and the charges you will pay. Before buying any variable annuity#, however, you should find out about the particular annuity you are considering. Request a prospectus from the insurance company or from your financial professional, and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits, and annuity payout options. You should compare the benefits and costs of the annuity to other variable annuities# and to other types of investments, such as mutual fund^s.

What Is a Variable Annuity?

A variable annuity# is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity# contract by making either a single purchase payment or a series of purchase payments.

A variable annuity# offers a range of investment options. The value of your investment as a variable annuity# owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity# are typically mutual fund^s that invest in stocks, bonds, money market instruments, or some combination of the three.

Although variable annuities# are typically invested in mutual fund^s, variable annuities# differ from mutual fund^s in several important ways:

First, variable annuities# let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Second, variable annuities# have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is **guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the **guaranteed amount.

Third, variable annuities# are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity# without paying tax at the time of the transfer. When you take your money out of a variable annuity#, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity# only if you hold it as a long-term investment to meet retirement and other long-range goals.[…Read the rest of the article from the SEC]

How do you Choose the Best in Class Annuity?

By

The latest issue of Barron’s proclaims to know and list the Top 50 Annuities. Being the Annuity Guys® that we are, we quickly located the article and tables to find out if they were right. What criteria would they use to choose the very best. Finally we would have the answer that all of our readers and callers need so desperately.

Unfortunately, their best in class annuities may do more harm than help.

Annuity Guys® – Dick and Eric, evaluate Barron’s Top 50 annuity article and their best in class annuity selections.

**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.

Don’t get us wrong, we are grateful that this publication largely dedicated to investing in stocks and bonds or other securities has dedicated some time to cover a financial instrument that should be considered for at least a portion of most retirement portfolios that need safety, income and modest growth. However, consumers hoping to find answers about the top annuities will only know a small part of the story. Their hypothetical examples only apply to a very tiny segment of the annuity buying population.

While we hate sounding like a broken record, you should know that with annuities there is not a “one-size fits all” model. Sure you can use a list like the one found in Barron’s to ask for a comparison, but an expert advisor who specializes in income and retirement planning will be more likely to come up with better annuity choices when your specific scenario is fairly considered.

Here is an excerpt from the Barron’s article that made us shake our heads sideways.

Top 50 Annuities By Karen Hube

The once-dominant variable annuity# is getting a bit of competition from cheaper iterations. These stripped-down products offer some surprising advantages, though.

Armand Baughman, 71, a retired Continental Airlines pilot of Valley View, Texas, has always viewed annuities as too complex, illiquid, and expensive to warrant his consideration. But last year, he socked $200,000 into a tax-deferred variable annuity#, calling it “the best thing since Cracker Jacks.”

What changed? As part of an effort to lift sagging profits after years of challenging market conditions, firms are giving the oft-maligned annuity a makeover: an ultralow-cost, variable annuity# that offers a broad array of alternative investments, including hedge funds, currency funds, managed futures, and other strategies.

Annuity companies are trying to make a comeback after years of struggling to remain financially sound under the cloud of low interest rates and high stock-market volatility. With annuity sales down 8.4% last year, to $211.8 billion, the lowest level since 2005, annuity providers are aggressively designing and marketing annuities that — like the low-cost variable annuities# — appeal to very specific investor goals or needs.

“For years, companies offered products that tried to do everything at once — give the highest rates, best liquidity, best income **guarantees, and benefits,” says Ken Nuss, founder of AnnuityAdvantage.com, which has free listings of fixed index and income annuities. “But that’s over. They’re getting better at fulfilling a specific goal more effectively.”

To help sort through a breadth of products, Barron’s surveyed annuity companies and industry experts to come up with the 50 most competitive contracts in popular annuity categories. The results, based on common investor assumptions and goals, are detailed in the table, right.

Low-cost variable annuities# with alternative investments earned a new category entry in the top-50 survey this year, thanks to the growing number of these contracts and their potential benefits to investors.

ANNUITIES, WHICH ARE TAX-DEFERRED INVESTMENT vehicles that allow you to turn on an income stream either immediately or years from now, come in two basic categories: Variable annuities have payouts that fluctuate along with their underlying investments; fixed annuities offer a **guaranteed interest rate for a specified number of years. [Read the full article at Barron’s]

Transcription:

Dick: Hello, I’m Dick.

Eric: And I’m Eric and we’re the annuity guys. Today Dick, we’re going to look at best in class annuities. Now, that sounds awfully high pollutant there. What’s best in class mean? Sounds like a horse racing term.

Dick: Well, Eric, one of the problems that we’ve had in our videos and we’ve been criticized at times; we had folks say…

Eric: No.

Dick: Why don’t you guys tell us what a company; which annuity and that type of thing? Well, let’s just give some disclosure here. Folks were in the most tightly regulated, most highly compliant industry; and if we start mentioning company’s names, we actually have to go out to get their approval first.

Eric: We need a lot more leave time to be able to tell you what the company name is.

Dick: Before we can do a video.

Eric: We have to get approved by the company and then they take about six weeks to banter back and forth; and then they come back, they usually say, no.

Dick: And then there’s another problem, if we start mentioning companies Eric…

Eric: Because it’s wrong as soon as we say it.

Dick: After we’ve said it, it’s wrong the next day. And that’s because the best in class annuities; Eric and I have certain annuities that we tend to favor or better than others, and certain companies…

Eric: It’s based off of historical performance that typically is better than others

Dick: But we may have a client one week that’s pretty similar to a client two or three weeks later; and we have to use a different product because some things either change with that annuity or that person’s situation is just a little bit different.

Eric: That’s right. It can be as simple as one is male, one is female. You would think there would not be that much difference?

Dick: So, what got us going on this subject today?

Eric: Well, It varies. I love them, but I hate them right now. You know it’s nice of an investment kind of publication that we typically think up to feature annuities in the top fifty annuities on the cover of that…

Dick: Well, they’re so biased. A lot of times they won’t even talk about annuities.

Eric: That’s right. So, we love the fact that they’ve decided talking about you which are the top fifty annuities. Now, I’ll have you know, they’re wrong.

Dick: Take it with a grain of salt and read it with a critical eye.

Eric: That’s right because as soon as I look at their list, I said “oh no!” Now, they had to make assumptions. They assume within their first section here that everybody two hundred thousand dollars exactly.

Dick: They’re all sixty years old.

Eric: Six-years-old and male. So, this list is probably very good for the time the article was written if you’re sixty and had two hundred thousand dollars. Now, if you’re 63 and female, the list is wrong.

Dick: Or all you have is two hundred thousand in your name; or what if you had a million to your name? All those variables change. Suddenly, that isn’t the right annuity because there’s other reasons you’d be doing this.

Eric: So, it did address some of the issues in the different pieces but we would tell you that when you first look at this, don’t assume everything here is going to apply to your situation. There’s typically not just one best annuity.

Dick: No! And then when you start talking about working with an advisor that really gets it, they’re going to take a much more sophisticated approach and it’s good not going to be one best in class annuity; it’s going to be three or four or five; and they’re going to have to all work together.

Eric: Right. It’s a balancing act of usually giving you an option. Maybe this one is lower rated but has a slightly better pay out for what your intention is.

Dick: Yes, yes.

Eric: This one has a higher rating but maybe slightly lower or may have to hold it a little bit longer…

Dick: This piece over here works well in a tax-free environment for growth and there’s the maybe starting a portfolio out of a good immediate annuity might make sense out there. So, again, being able to structure this properly, I would say to get best in class annuities, there’s no substitute for working with an expert.

Eric: And that’s where you rely on somebody in their expertise to define for you, what fits your situation. I know I sat down and run numbers and I’ve had what I thought was going to be the best one going in. And all of a sudden I said I run numbers and for this particular unique situation it had to be somebody that was exactly this year old and got to hold it for this long, one specific annuity all of a sudden jumps out of package you never expect. Nothing pay’s to go back and look at the analysis and…

Dick: Exactly. And it doesn’t hurt folks; never, never think that Eric and I are saying “don’t do your own research.” Look at the company’s ratings; get in our rate vault and look at all of the different annuities and the different features, and ratings, that type of thing; and do some comparison. But then, there comes a point where you do get involved with a an expert, an agent that works with these on a regular basis; and they’ll be able to look at the subtleties, the real differences and that’s where you really can find the best in class annuities.

Eric: And as we’ve spoken, there’s no reason why you can’t pull out a list like this and say “hey, what about company X here? I see that they were best in class on variance. What’s that look like?” The advisor can then run the numbers give you the idea of why what they’re proposing may be better or you know…

Dick: Eric, even with our expertise, we’ve had situations where somebody’s come to us and said “you know I was reading about this or that or whatever”; and maybe we haven’t even opened our eyes to something that they brought to us. And then we started utilizing it for other clients because it looks like they were right. You know, I’d like to think that we have a lock on all the knowledge but it’s working with people on a regular basis that keeps us on our toes and keeps us at the top of our game.

Eric: So if I’m looking for best in class annuity, where do I go?

Dick: You go first of all to our website…

Eric: Which you are here for a long time…

Dick: And you begin your research; and then you work with an expert advisor.

Eric: Yes and that’s the key; it’s getting the facts from somebody that works in this area all the time.

Dick: That’s right!

Hybrid Annuities as an Inflation Hedge

By

Inflation – this one word strikes terror in the hearts of many retirees on a fixed income.

Never to fear, we have a cost of living adjustment (COLA) in Social Security to help save us — maybe not the more generous COLA that we have come to expect if the President and Congress decide they should balance a portion of the budget by restructuring the consumer price index (CPI) formula used to calculate increases in social security income.

Can annuities be used to hedge against depleted spending power in retirement? Certainly! Today’s hybrid annuities are bringing forth solutions for just that concern. Annuities developed by multiple insurance companies are now offering options to tie annuity income to inflation tracking indexes such as the CPI-U. This creates an additional option to other strategies used by advisors in the past such as laddering annuities.

Watch as Dick and Eric discuss the potential change in the CPI and what annuity strategies you might consider if inflation is a concern for you in retirement.

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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.

Check out this article from Walter Hickey on what the change in the CPI  might mean for Social Security.

How Obama’s Plan For Chained CPI Is Both A Stealth Tax On The Middle Class And A Cut In Benefits For Grandma

Last week it was revealed that the President’s budget proposal will include a revision to the way the government calculates the impact of the rate of inflation as a concession to House Republicans.

Still, a switch to chained CPI from the current rate demonstrably cuts benefits to seniors and could be a stealth tax on primarily the middle class.

The Consumer Price Index (CPI) is used as a proxy for the annual cost of living adjustment used to keep federal benefits in line with inflation.

There are several different ways that economists calculate the Consumer Price Index, according to the AARP Public Policy Institute.

  • CPI-W is the current cost of living adjustment index for Social Security. It reflects the spending habits of households where the income comes from a wage earner.
  • CPI-U expands CPI-W to reflect the spending habits of the retired, professionals, the unemployed and self-employed as well as wage earners.
  • A new, experimental CPI-E looks exclusively at how the elderly spend their money.

“Chained CPI” refers to another adjustment, particularly to CPI-U.

As an example, CPI-U and CPI-W already incorporate people switching from Starbucks coffee to homemade when prices increase.

Chained CPI-U takes that a step further — the idea that when coffee gets more expensive, people switch to orange juice. It incorporates more switching.

When it comes down to it, Chained CPI-U spits out a lower rate of inflation than regular CPI-U, which already spits out a lower rate of inflation than the current CPI-W. As a result, were the government to switch the way they index cost of living adjustments to chained CPI-U from CPI-W, payouts to seniors would increase at a much slower rate.

This means that over time, seniors receiving Social Security see their benefits cut. [Read More at BusinessInsider.com]

 

Will a Collapsed Dollar Harm Annuities?

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Jack in CA asks; If the dollar goes into a nose-dive,  how safe will it be to own an immediate, fixed or hybrid annuity?

In figuring out how to best answer Jack, we have to speculate on the level or severity of the collapse – if we have total anarchy or a Zimbabwean type of inflation, the paper dollar would be worthless and so would most investments. Do we feel that is likely to happen in the near future? No. Now, that being said, common sense says that if you spend more than you make, eventually you will go broke and our government has to figure out a way to meet its obligations and payoff its debt.

Annuities; just like equities, bonds, and commodities; to name a few, can have a place in a well structured portfolio. Dick and Eric examine the potential effects that the collapse of the dollar would have on the annuity industry and address annuity strategies that are best suited for this particular situation.

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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.

Considering an inflation adjusted annuity? Check out this recent USA Today article from John Waggoner

Should you get an inflation-adjusted annuity?

An inflation-adjusted annuity aims to solve the problem by giving you an automatic cost-of-living increase every year. But the cost is steep.

Most people still have nightmares about math word problems: “If Nate has 37 red gumdrops and Hope has 43 blue feathers, what time will their train reach Altoona?”

If you have a 401(k) plan, you’re being asked to solve a similarly impossible problem: “Assume that R is the amount of money you’ll need to retire, X is the number of years you’ll live, Y is your rate of return, and Z is the rate of inflation. You have no idea what X,Y, or Z is. Solve for R.”

One solution is an inflation-adjusted annuity, which promises to pay you a sum that will rise with the cost of living every year until you die, much as Social Security does. Should you try one? Only if you expect to live long — and even then, you’d be better off waiting until interest rates rise.

The rule of thumb with 401(k) withdrawals is to start by taking out 4% of your portfolio the first year, and adjusting that amount upward for inflation each year. Most times, it’s too conservative: You’d need a $1.25 million portfolio to get an initial $50,000 annual withdrawal. But when the first few years are down years in the stock market, your withdrawals can simply aggravate your losses and increase the chance you’ll run out of money.

Because the stock market is unpredictable, to say the least, some people use an immediate annuity to smooth out some of the bumps in a portfolio. An immediate annuity is a contract between you and an insurance company. You pay the company a lump sum, and they agree to pay you a set amount per month for the rest of your life. If you live to 120, you win. If you join the Choir Invisible the year after signing the contract, you lose, and the annuity company pockets your investment.

The payout is based primarily on an interest rate — what the company expects to earn on your lump sum. As a simple example, suppose you want to invest $100,000. According to Immediateannuity.com, a 65-year-old man could get $548 a month for life — a 6.58% payout rate.

The 30-year Treasury bond yields about 3%, and insurance companies are not magic yield-making wizards. Some of the extra yield comes from the money left on the table by annuitants who have gone to the great field office in the sky.

The rest comes from the insurance company’s own investments, which is why it’s good to choose a financially strong annuity company. You want a company that can still pay, even during economically stressful times. States do have **guaranty associations backing annuity policies, typically to at least $100,000, but it’s best to avoid shaky companies entirely.

While the annuity’s payout is decent, it’s fixed. Let’s assume that inflation averages 3% — the average inflation rate since 1926, according to Morningstar. The effects of inflation are cumulative: After 30 years of 3% inflation, your $548 will have the buying power of $220. Unless you plan to live on toasted plaster, you’ll have to find a way to offset inflation, and a fixed annuity won’t provide that.  [Read More…]

Annuity Guys® Video Transcript:

Dick: Today, we want to give a shout out to Jack in California.

Eric: You don’t know Jack.

Dick: I do know Jack. In fact, this is for and Jack and Sharon. Jack, hey, we appreciate the question. The concern today is what happens if the dollar collapses, what does that do to annuities?

Eric: Right. What’s it going to do to fixed index annuities and hybrid annuities? Excellent question. Now, we first have to define the collapse of the dollar I guess. If we look at it in a Zimbabwean sense . . .

Dick: Or Germany.

Eric: . . . where they’ve had, basically, a decimation of their currency . . .

Dick: Anarchy in the street.

Eric: . . . then the honest answer is nothing can save it.

Dick: Nothing’s going to save it.

Eric: In all honesty, it wouldn’t save the country. Social Security would be messed up. Your pension would be gone.

Dick: Right. Even having gold, you’d need to hire the A-Team to protect your gold.

Eric: Your interests.

Dick: I think that we’re all looking for that answer that is somewhere in the middle. We’re facing a lot of headwinds in our economy. Our government does not look very reliable, at this point, to make the right decisions.

Eric: Right. Peter Schiff is one of those guys that’s been calling for the collapse of the economy because of, basically, the overspending. I don’t think anybody would deny that, as a country, we’ve maxed out the credit cards. Until we start paying them down, we’re kicking the can down the road. We haven’t had a budget in, what, three years on a federal level.

Dick: The debt just keeps rising and rising, and it’s going to have to be paid back. The alternatives aren’t very good. You can raise taxes, which is political suicide, or you can devalue the dollar, which looks like everybody just raising their price. But really the value of the dollar is dropping.

Eric: Right. So your buying power is going kaput. Now, if I own an annuity, am I better off than if I don’t own an annuity?

Dick: Well, I’m going to answer that, but before I do, let me just say this, folks, the topic that we’re on today is complex. It is a very big concern that we talk about regularly with our clients. It’s very important that you do work with a good local advisor, somebody that actually gets it, works from a point of safety and diversification. That’s what we’re really going to talk about today. Your question, Eric, in terms of, if I have an annuity and the dollar starts to devalue, my question would be, same as yours: How far is the dollar devaluing, and did I set my annuity up to offset inflation?

Eric: Right. There are annuities that exist right now, hybrid style annuities, where the income rider is tied to something called the CPI or the Consumer Price Index.

Dick: Right. And immediates will . . .

Eric: They have the ability to, basically, be indexed to that. So those products exist right now if that’s one of the things you’re concerned with. You can set it up. Now, you’re going to start a little bit lower, typically, than you would if you took a level payout.

Dick: When you turn your income on, it’s going to start at a lower level. Yes.

Eric: Right. Now, depending on inflation or that index, you’ll get bumps in your income as those things increase. There are ways to dial in from that, but you’re making a choice to trade, perhaps a higher level now for future safety and security if those things do happen.

Dick: The other aspect of that for those of you that have means, that have the assets to work with, annuities may be one small portion or one moderate portion of your portfolio. It is not the end all and the be all.

Eric: No. We you always talk about asset allocation or diversification. You don’t want to put all your eggs in one basket. It’s really that simple. So having some hard currency. We’ve talked about if you’re worried about the economy as a whole and our domestic crisis, and you think companies here are going to be impacted, you may make the decision to make some investments in companies that are either multinational or overseas.

Dick: Right.

Eric: There are lots of options in securities, bonds, hard currency, gold, silver, platinum.

Dick: Take care of all of it. I don’t want to say in summation, but should we avoid buying annuities with the current economic situation and if the dollar is going to start to see this impact?

Dick: Well, Eric, I think that as we look at this whole situation, I think we want to always be cognizant of how long annuities have actually been around. Annuities go way back to the Roman Empire. That’s where the word comes from, “annua,’ annuity.

Eric: I “annua” that.

Dick: You “annua” that. Then, as we move forward into our modern times, we have annuity companies that have existed for 300 years. Do you think they have seen some devaluing of currencies?

Eric: Oh, yes.

Dick: Do you think they have seen some revolutions? The answer to that is yes, and even those that are quite plentiful in the United States, that are in excess of 100 years old. Insurance companies have a proven record of being able to withstand deflation, inflation, world wars. Not that in a total collapse, an anarchy type collapse that they’re going to be unharmed, but are they worth a diversification in your portfolio to have an allocation towards annuities? I think that any reasonable prudence would say yes.

Eric: Yes. It’s worth considering for a portion of your portfolio.

Dick: Yes. Hey, Jack, thank you for the question. The rest of you out there that maybe now have more questions, send them in, and we’ll get to them as soon as possible.

Annuities vs (IUL) Indexed Universal Life – How do they compare?

By

What are the differences between a hybrid index annuity and an (IUL) index universal life policy? Wow! Steve, we thought we were about the only ones who ever discussed this. Great question! The answer can typically be found by beginning with the end objective. In other words, what is the end goal for these dollars and when do you need them?

Be aware that:

  •  Cap rates on IUL policies are about 3 to 5 times higher than those on index annuities;
  •  There are IUL policies which allow you to add a rider that will **guarantee lifetime income;
  •  IUL policies if configured properly can generate a tax-free income stream;
  •  An IUL may NOT be the right choice for your **guaranteed lifetime income…

Dick and Eric discuss the differences between index annuities and index life insurance; both have become increasingly popular for retirement planning.

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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.

Indexed Universal Life Insurance Policies: The Perfect Option for Professionals and Business Owners

by Timothy R. Fussell

For a professional such as a doctor, attorney or CPA, the Indexed Universal Life policy is perfect for your retirement needs. Often as a professional, you operate as a P.A. being taxed as a sole proprietor, an S Corporation or a C Corporation, and under the tax codes you are limited to retirement account choices. The SEP IRA, Solo-401k or the UNI-401k, all allow you to save on a tax-deferred basis; but the maximum contribution limit is still the same $49,000.00.

Now let’s explore the IUL (indexed universal life) and why it is a better choice. As a professional of these types, your income level is much higher than average, so you max out your contribution very early in the year. With the IUL, there is no limit on how much money you can contribute—the money still grows tax-deferred, but with a several advantages.

Now comes the great part! In the event of a business need, the money in your tax-deferred accumulation account can be used, through interest-free loans, for the purchase of new equipment, to expand the practice, or just to carry you through a tough time. At retirement the money is paid to you in the form of tax-free loans against your account value. The income would be a lifetime income with of loss in a down market, and at the end of the income, your death, the face amount of the life insurance policy would still go to your heirs as a tax-free death benefit. The tax-free death benefit would, at any time, be the security to your family that their lifestyle would continue in the same manner to which they had become accustomed—a **guarantee the retirement account cannot promise. If, through a consultation with your insurance professional, it is determined that your life insurance needs exceed the desired amount of contribution in the IUL, a term life insurance policy can be added to meet your life insurance needs at a lower cost.

A business owner has many of the same needs but also faces many different challenges. The IUL is even more exciting in these cases. All of the benefits listed above still apply to the business owner, but if you are an S Corporation, you could have the option of making the premium contributions as a draw against the profits of the corporation and avoid the self-employment tax/social security tax, which could add to the benefits of the IUL.  That alone is a 13.3% tax savings!

To a business owner with a partner or partners, another issue is presented that makes an IUL a perfect choice. Should a partner/partners die, you would have the need for a Buy-Sell Agreement to determine the value of the buy-out of the deceased partner/partners. The best way to fund the buy-sell agreement is through life insurance policies. The buy-sell agreement would either be a cross purchase buy-sell or a stock purchase buy-sell. These differ based on your corporate structure. Your insurance professional should have a working knowledge of the two types of agreements and work with your CPA and attorney to make sure they are set up correctly. [Read more…]

Annuity Guys® Video Transcript:

Eric: Today, we’re examining indexed universal life and how it would compare to perhaps a hybrid annuity or annuities in general.

Dick: Right. First of all, let’s say, “Thank you,” Eric, to Steve.

Eric: Steve up in Wisconsin for submitting his question. Please continue to submit your questions, and we’ll examine them as the weeks go on. So for those of you that submitted questions.

Dick: We’ve got some already.

Eric: We’ve got some in the hopper, and those of you that have questions, keep them coming.

Dick: Today, in comparing indexed universal life and it’s also called equity indexed universal life or EIUL, but the more technical, correct term would be IUL, very safety-oriented product. It’s a life insurance product and there are a lot of good comparisons we can do with that and annuities, so why don’t we just start off talking about the life insurance part, the IUL.

Eric: We don’t talk about life insurance too much here, so let’s talk about one, why someone would even compare in the sense of I’m going to think of it in terms of, if I’m not going to select an annuity for retirement income would I select an equity or in this case, an indexed universal life policy.

Dick: Or if I was looking at growth compared to… Well, I’m just saying if I was comparing the two for growth. Okay, maybe I’m getting– go ahead.

Eric: You’re good at jumping ahead.

Dick: Jumping ahead of you.

Eric: Darn it. So what we want is trying to grow the policy to the largest amount, so that we can use it for a retirement supplement. Because, really here we are talking about the living benefits of the IUL, in this case, being able to use it as a supplement for retirement. Now what it has is the ability to have a double digit cap compared to with the low, single digit caps, of today on the annuity world or on the hybrid annuity.

Dick: And that’s large Eric, because when we look at the caps on most annuities, the fixed index annuities which are referred to as the hybrid annuity, the caps are down below 5.0%. Some substantially down in the 2.0-2.5-3.0% range, so when we start talking about the IUL, now we’re looking at 10-12-15% caps, even.

Eric: Right, so we have growth potential.

Dick: Potential, right.

Eric: Because here we’re talking about index games, there is not that **guaranteed rollup side. So on the hybrid annuity side you’ve got those income riders that have some of those **guarantees.

Dick: Contractual **guarantees for the future income.

Eric: So that is the one comparison on the caps side. Now what are we going to use for withdrawals on the life insurance side? How are we going to get money out of this?

Dick: Well, if we take actual withdrawals, we’re going to pay taxes.

Eric: Taxes?

Dick: So we don’t want to take withdrawals.

Eric: Well, then why would we even consider this?

Dick: And when we compare it with an annuity, when you take withdrawals out of an annuity, you pay taxes. But there is a really nice aspect to the IUL, and that is you can borrow out of it, and it is just like the old, traditional whole life policies you can borrow out of it and not pay taxes on it and IRS has allowed that. On borrowed money, any time you borrow money from a bank or anywhere, there is no tax paid on borrowed money.

Eric: Now do I have to pay this money back?

Dick: Actually, technically you do.

Eric: But when do you have to pay it back?

Dick: Through your death benefit.

Eric: And that’s the key element here. It’s really part of the death benefit and that’s what makes it, basically you’re going to pay it off at some point in time.

Dick: Right.

Eric: Those dollars that you’ve accrued are going to get paid back at the time, when you’re gone basically, as that death benefit is disbursed.

Dick: Right. One of the things that I want to bring out is that, if you want to use the IUL folks, you cannot use your qualified funds or your IRA money, unless you’re willing to just go ahead and pay the tax on it and move it over. Then you have to do a real analysis on how that might…

Eric: Just as a reminder neither of us are accountants nor tax professionals so we would advise you to consult your tax professional when it comes.

Dick: Although, we work with this every day and constantly talk about the taxes.

Eric: So now is the government going to come in and take my tax benefit away?

Dick: Well, that is a question we are frequently asked. I am asked that on The Raw, I’m asked that on life insurance or life insurance that’s being used in more of a retirement account type situation, and the answer to that is, it can happen. It could happen. However, if we go back and look at other times where Congress has stepped in or the government…

Eric: Screwed us?

Dick: … took advantage of us? Typically, they have grandfathered us, so that if we are in a situation where, in good faith…

Eric: Great grandfather’s covered, I get screwed.

Dick: So if we operated in good faith and set this up, and did it under the current tax provisions and laws and by the way, this is the IRC, Internal Revenue Code 7702 provision same type of thing that the IRC 401k, same area that comes from, it’s the 7702. So if you see the 7702 Plan that’s what they’re talking about.

Eric: He wants to be an accountant.

Dick: It’s very legitimate, it’s very real and it works and a lot of professional people use this, because they can put large amounts of money in. They keep their principal safe. They lock in their gains. They’ve got annual reset. There are some wonderful things about it, but Eric, who’s it going to work best for and at what stage?

Eric: You’ve got to be in your accumulation stage it’s probably the easiest way. So young professionals perhaps, I’ve heard it called a Big Boy Roth, because you can dump oodles and oodles of money into it and let it grow. There is not a limitation to the contribution amount. Now they have to be dialed in the right way and that’s one of the things that…

Dick: A little secret.

Eric: Yeah, strategy wise, usually you have the smallest amount of death benefit that you can have on life insurance.

Dick: Which means you pay the least amount for insurance and the agent makes the least amount on…

Eric: … commission. So you can see how there could be a confliction amongst the person that might be trying to talk to you about this, so usually we see only larger clients.

Dick: I like that word, though, Eric, confliction

Eric: Confliction. I’ve got an ointment that takes care of that.

Dick: Let’s trademark that.

Eric: So yes when your conflicted agent comes in and says…

Dick: Yes, we need to make sure you’ve got plenty of life insurance. Let’s not go too far on this, because there are times when a lot of life insurance is good for heirs and different things. But the way to make an IUL really work well, and again back that original question I had posed and that was, what stage, and I am just going to go ahead and answer it.

Eric: Say 15 to 20 years.

Dick: Yeah, 40 to 50-years-old, that you can really let it sit.

Eric: You’re 15 to 20 years from retirement. You have to have at least that amount of time really, for it to really function well and that’s the key, I think. Because at that point in time, it starts to get the extra dividends, the extra pieces, the extra credits that can make it really hum. Then you can have a rider on there that has a loan provision for life, so you can treat it very much like an annuity, but you have to have the forethought to have done these 15-20 years before retirement.

Dick: Correct.

Eric: So if they haven’t done that, income **guarantee-wise.

Dick: It’s really based more on potential. Yes, now let’s talk briefly, because this is a long video, let’s talk briefly about the annuity and why the annuity would have certain aspects…

Eric: Advantages?

Dick: … and advantages over the IUL, because the IUL is pretty cool the way it works.

Eric: They’re very cool. I love them. I would say **guarantees though, especially **guaranteed lifetime income, for someone that’s nearing or close to retirement is the key. I don’t want to say it’s the singular piece, but it is the first and foremost.

Dick: Because with the IUL I have to have potential for growth, I have the potential for growth, and I have to get the growth through that potential, but with the annuity I have a contractual **guarantee.

Eric: Yes, and that’s the key. We’ve talked about the hybrid aspect, you also have other annuities such as immediate annuities, where you’re going to have payouts of your principal plus, **guaranteed for life. Now the insurance aspect without a rider, you could actually run out of basically, enough account value, because you have to keep the insurance in place long enough to die, because if you don’t die with any insurance left, you haven’t paid off your loans.

Dick: And probably, Eric the best advice that we can give you, beyond the general information we’ve just given you is work with an adviser who really understands how to compare these two, and, maybe it’s not one or the other, maybe it’s some of both.

Eric: Yeah, could be. It depends on your end goal. What do you want these dollars to do for you? So work backwards and work with an expert.

Dick: Steve, thank you for this question, and those of you out there who have questions, we’ve probably caused you in this video to have some more questions. Feel free to send those in to us and we look forward to answering them.

Eric: That’s right. As you can see, we’ll tackle just about any question as long, as it relates somewhat, to our annuities world. Thank you very much.

Dick: Thank you.