Annuity Guys Blog Archives

Is a Pre-Issued Annuity right for you? – Part 2

July 5, 2012 By Annuity Guys®

This is a two part blog on Pre-Issued Annuities. In part 1 we examined some of the reasons why someone might consider a Pre-Issued Annuity for a portion of their portfolio.

In this entry we highlight some of the concerns and and negatives that must be considered when examining a Pre-Issued 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.

So now let’s consider some of the negatives on a PRE-ISSUED ANNUITY ™ :

Limited liquidity selling your payment stream prior to maturity could result in a considerable loss.
The court order process should be monitored by an expert attorney that is retained by you.
The best PRE-ISSUED ANNUITIES ™ never make it to the internet or retail lists.
The industry is controlled by a few power players catering to institutional investors.
Contracts require a 10% to 20% escrow to secure your future ownership during the court order process tying up some of your money at low or no interest for up to 90 days.
Approximately thirty percent of initiated contracts get rejected by the court and you get your escrow back to start over.
The industry is full of highly motivated commission oriented sales people that will promise the world and then fall short on delivery they would prefer for you to not have your own expert attorney.
Contracts are often discounted by two to four brokers away from the source diluting your potential yield.
Most contracts available on the internet are older inventory that has been picked over already
Life contingent contracts can end abruptly with an insurance company paying back your principal and yield early since the annuitant died unexpectedly.
Not FDIC insured.

Is a PRE-ISSUED ANNUITY™ right for you? [Read More…]

Annuity guys Video Transcript:

Eric: We talked about IRAs, and this always my biggest concern with IRA’s because you have RMDs that you’re going to have to eventually get to. Liquidity is of one that concerns because you’re buying that stream, or that lump sum, it’s already predicated. It’s already set out.

Dick: You need to balance that, in terms of your overall IRA, that you’ve got money to draw your RMDs from, or that your income stream will be adequate from the pre-issued annuity to cover your RMD. That is a consideration that you have to look at.

Eric: Liquidity in and of itself.

Dick: Let’s just talk about liquidity. That is probably, in all fairness, folks, that is the biggest negative of a pre-issued annuity. Once you buy it you have to know that you’re in a good position to hold it to maturity. If you’re in a good position, it can be a great strategy, a great financial vehicle, but if you’re not and you buy one, then you’re going to be forced to sell it on the secondary market, go through the court order process so your payments streams. That will be at a considerable loss typically.

Eric: There’s a reason that there’s so many players in this market. They’re able to sell low buy high, or . . .

Dick: Buy low, sell high.

Eric: Unfortunately in this case, the people selling are selling at a low point. We really encourage you to know exactly that you can handle that payment stream as it’s been setup, or that lump sum, those criteria fit your situation.

Dick: Another aspect of this, that folks get a little bit frustrated. You talk to a lot of people out there that are basically a commission sales person, they’re claiming to be an expert, they may have done several of these transactions, but they really don’t have what’s called a fiduciary responsibility to the client. If they are incompetent, if they’ve not done well, they’re on to their next client after they’ve placed you with something that may not have been handled properly. This is where we highly recommend that you work with someone, first of all, that is very experienced, but in addition to that, that would be an attorney, because there is a court order process that these go through and you really want to make certain that it’s properly identified, named, that all the parties involved are properly represented, and your closing documents and everything have been reviewed by an attorney; and that that attorney actually has a certain fiduciary obligation to look out for your best interest. If they don’t, they’re in danger of losing their practice.

Eric: We actually would say, we’d encourage you to actually have a retainer with an attorney signed in order to ensure that client/attorney privilege that they’re obligated to basically act in your best interest. That’s that fiduciary responsibility.

Dick: Let’s be fair, that’s going to cut down on the yield a little bit, but when we’re talking about a substantial yield, way better than what’s available in the market and you have to put out $500 out of your pocket to ensure that’s done correctly, that’s a very small part of that yield. It might be 10 basis points over 10 years or 1/10th%. I’m just throwing out some approximations here. It could be way less than that, it could be slightly more.

Eric: Exactly. Next thing is you’re not just going to run down to the corner drugstore and pick one of these up off the shelf.

Dick: No. There’s really some major players in this, and there’s not that many of the major players, 4 or 5 of them. Of those players some of them sell pretty much exclusively to institutional investors, so that leaves less to pick from. There are some smaller entities that are in this distribution vein, but what you really want, and we always are telling our clients this or the website visitors, is you want someone that’s really connected to the sources. They can have multiple avenues to look at the better pre-issued annuities that come along with better yields and better payment terms in this type of thing that most people that are out on the internet buying from a commissioned salesperson, they’re not going to actually know about these.

Eric: The earlier you are in the process, the better return you’re going to get. Insider’s advantage.

Dick: It really is. There’s nothing illegal or wrong about it. It’s not like insider trading or something, this is just knowing how to get to the item first that’s paying the highest yield. There’s another aspect, Eric, that we need to be aware of. I’m going to look back here at my notes so I can make sure that I don’t just keep rambling on and on here, make sure that we hit all of these points.

Eric: We talked about the escrow.

Dick: Right. That was . . . go ahead.

Eric: Where you were going to go?

Dick: Where I was going on it, yes.

Eric: It’s basically when you start to work with somebody, and especially on the insider aspect where you indicate this is what you’re looking for; typically, you’re going to put an escrow out there in order to initiate the process.

Dick: Right. That is the aspect that we want to be aware of, and that is that about 30% of these that enter the court order process will not go through. They’ll be declared invalid by the court system. About 70% of them are going to go through. Just what you were talking about, you have to escrow, get ahead of the curb to get the better ones, you have to actually be willing to say, “That’s a payment stream I would like to have.” Like you said escrow 10%to 20%, to hold that particular contract, that particular pre-issued annuity while it goes through the court order process, and it takes about 90 days. The worst case scenario is you’ll get your escrow back.

Eric: You’ve lost time, that’s all you’ve lost in a sense. Again, the court is protecting your process so that’s a safety side. The negative side is there are procedures and pieces that have to go through in order for this to come to fruition.

How many people are competing in this world? There’s a whole bunch of motivated commissioned people that are in there, but it’s a very small insiders group.

Dick: Yes. When we start getting into attorney’s that work in this area, that are very proficient in this area, that have some real experience, a lot of those attorney’s are actually working for the companies that are buying the settlements, selling the settlements, and this type of thing. There are some available, you can find them typically on the internet. If you’re somehow connected to the industry, you may know some, and that’s something that we can do for our site visitors, is recommend an attorney that we can refer, that would assist them.

Eric: That’s the key, I think. Our strength in this area is working with insiders. We work with somebody that’s key in the industry, that has an insider advantage, and that’s what’s benefited our clients.

Dick: It really makes the difference. I think, folks, that when you look at this whole strategy and this direction for a higher yield, I think you just need to do a little bit more homework, a little more research, become comfortable with how it works. Once you understand it, it can be a very effective, very high-yield safe type of financial strategy.

Eric: It’s an excellent tool for your toolbox. Especially in this extremely low rate environment, it gives you another option.

Dick: For that portion of your money that you want to see grow with a good yield and you can structure the payment stream to fit your needs, it’s hard to beat.

Eric: Thank you for checking out our pre-issued annuities section.

Dick: Yes. We’ll come back with more on this at a later date, and maybe go into more of the mechanics of it.

Eric: Sounds good. Have a great day.

Dick: 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.