In our conversations with people considering annuities we often hear them repeat a phrase they have read or heard from someone else, “hybrid or index annuities are too complicated”. Most of the people we know drive cars even though they can’t explain how the internal combustion engine works. Similarly, hybrid annuities can have a number of moving parts — but that should not stop you from owning one if the non-moving parts (contractual **guarantees) meet your income, growth or estate planning objectives.
Dick and Eric reveal the reason why people would choose a hybrid annuity and then provide a list of the “moving parts”.
**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.
Some of the “Moving Parts” that may be in a Hybrid Annuity
- Contractual Guarantees (absolute, non-moving)
- Income Riders
- Index Strategies
- Annual Point-to-Point with Caps
- Annual Point-to-Point Average Spread
- Annual Point-to-Point Monthly Average or Sum
- Annual Point-to-Point with Participation Rate
- Caps
- Spreads
- Fees
- Uncapped Index
- Blends
- Biannual Point-to-Point
- Quadrennial Point-to-Point
Annuity Guys® Video Transcript:
Dick: Eric, we hear it all the time.
Eric: “They’re too complicated!”
Dick: We see it all the time that hybrid annuities or fixed index annuities are too complicated.
Eric: “There are too many moving parts. How can you explain these things to me? It doesn’t make sense. There’s too much!”
Dick: Well, there has to be something to this because everywhere you look, that is one of the most prominent things that are written about annuities, in general. I don’t care if it’s a variable. Sometimes they say immediate annuities are simple and they are in general, but there are a lot of different parts to an immediate annuity.
Eric: Oh no, they’re simple.
Eric: They’re immediate, immediate gratification. I give you this much. You send me a check for this much.
Dick: Okay, so if these are too complicated, why should somebody even consider getting one?
Eric: Well, there’s the **guarantee aspect.
Dick: Right, that might have something to do with it.
Eric: Well, maybe a contractual **guarantee would be a good thing.
Dick: I think that might be one of the reasons why these have become so popular.
Eric: You think?
Dick: Folks, when you look at an annuity and you look at all the moving parts, there’s no question it can become very complex, very complicated. If you get lost in all of the things about an annuity, you’ll miss some of the main points, which are what you just said Eric, it is the contractual **guarantee.
Eric: That’s right when you go, and you start looking or considering an annuity for retirement, typically. What do you need? What are you solving for? Do you need lifetime income and if you do, how much? Then you look at what you have and if you purchase an annuity, this is what the minimum **guarantee is. That is the key element of a purchase of that level. What’s the minimum **guarantee?
Dick: So if I want to know that I have a certain level of income, at a certain age that is just flat out **guaranteed and I’m satisfied with that and that meets my retirement objective, then why do I have all these other moving parts?
Eric: Well, I think we refer to it maybe as gravy or icing, depending on which type of plate you prefer.
Dick: That’s what we talk to our clients about is if we can first of all, make sure that we’ve met your objectives, and that you’re satisfied, and that is absolutely iron-clad **guaranteed, then anything we can get that comes with the moving parts is extra.
Eric: That’s right. That’s what you have to understand. Working backwards, I think is the best way to look at it. It’s what do you need? Is it income? Is it growth? When we look at growth, what’s the **guaranteed rate? You know what’s the **guaranteed rate of return? If we get more than that, will you be disappointed? No.
Dick: And we might achieve a higher rate, by utilizing a death benefit.
Eric: Exactly. It’s another **guarantee. The **guarantee may come from the base of the contract or it may come from a rider.
Dick: That’s right.
Eric: But those riders are part of those contractual **guarantees, it’s built into the contract.
Dick: Yes, when we talk about moving parts and things being complicated, I know a lot of folks that are watching have had experience with mutual fund^s and different items of this nature. When we think in terms of prospectus, how complicated is that?
Eric: Well, you’re assuming one thing, people have read the prospectus. Most people don’t bother to pick up the prospectus they get from a mutual fund^. They don’t want to read the 40-50-200 pages of information, in print this small. They just don’t want to look at it.
Dick: And if you do read it, I mean obviously there is a certain complicated aspect to it, and yet it’s very similar when you’re looking at an annuity, from the standpoint that there are some parts of it that can seem complex.
Eric: Right and it usually has to do with the growth potential side, in both the mutual fund^ and in the annuity world. It’s that aspect that creates the sizzle, I think as you call it.
Dick: Truly, we’re aware of this because we’ve seen it, where an advisor or an agent is overzealous trying to sell an annuity. They paint this picture of all this upside potential. No downside risk, but a lot of upside potential. That is not always going to be the case. In fact, it’s just way overstated.
Eric: People take the marketing components of everything and talk about the potential. When we talk to prospects, clients, whoever here, we’ll have someone come in and say “I just talked to this guy and he talked about this 7.0% or 8.0% **guarantee.”
Dick: Right 7.0% or 8.0% growth and compounding.
Eric: Yeah, and it’s **guaranteed. And then we always have to pull them back a little bit and say that may be on the income rider portion. Now it’s a contractual **guarantee component, but they have to understand that that’s a number they can only use for income. As long as that meets their basic need, it’s part of that contractual **guarantee, but they have to understand how it works.
Dick: Right, exactly. Folks, there are genuinely a lot of different aspects, especially to a hybrid annuity or what we would call a fixed indexed annuity which is the hybrid annuity. Eric, I thought we’d just kind of run down this list and we’ll put this on the blog site.
Eric: List the moving parts here for you.
Dick: Yeah, and maybe we could aim for next week or something, to get a little more into each moving part.
Eric: I think that would benefit most of the people we speak with, because the confusing part, the complication comes from the moving parts.
Dick: And I would say, folks don’t get too hung up on this, because we’re going to make it sound real complicated here. The fact of the matter is that, if you’ll truly focus on the contractual **guarantee aspect, you’ll understand that these are just options that you have, that can be used. And that’s where you do need an advisor, to help you to make those decisions, on what might give you greater potential.
Eric: All right, so what are the moving parts? You made a list, because we didn’t want to forget anything and I’m sure we will forget something.
Dick: Our biggest challenge will be not to actually start describing these, as we go through them. He’s just going to read the list.
Eric: We decided it would take way too long to describe each one individually in this episode.
Dick: Well, I’ll tell you what, you want me to just go ahead and read it?
Eric: Yes, read them.
Dick: Okay, we’ve got first of all the annual point-to-point with a cap. There’s an annual point-to-point with an average, where the index is again, averaged over the course of a year, and typically there will be a spread in there.
Eric: See, he’s explaining them already. He’s trying to explain it. See now your head’s starting to spin isn’t it?
Dick: Okay, I’ll stay on track. Here I go, annual point-to-point with a monthly average, or also called monthly sum. Annual point-to-point, with a participation rate could be 100% could be… There I go; caps, spreads, fees, uncapped indexes, blends, two-year, four-year, three-year, five-year point-to-point.
Eric: Points, yeah. I’m sure we left out something.
Dick: I did pretty good.
Eric: He finally reined it in a little bit. He really wants; we really do want to break it down for you.
Dick: We will. It’s tough not to start explaining, folks.
Eric: We really do want to break it down for you.
Dick: We will. We’ll break it down more.
Eric: Give you a reason to come back and check the email registry.
Eric: We appreciate you tuning in today.
Dick: Thank you very much.
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