Annuity Archives

Annuities – The Best Financial Product No One Wants!

September 7, 2012 By Annuity Guys®

Why would an insurance actuary call annuities the best financial product no one really wants? And why would he go on to say that in retirement he might not even purchase an annuity himself even when he knows they make good sense?

Dick and Eric discuss why individuals purchase annuities – even though they don’t want to…

**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.

Annuities: The best financial product no one really wants

“Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life”

People who save through RRSPs have a choice to make when they retire. They can transfer their RRSP balance to an RRIF and draw it down at their own pace (subject to a minimum) or they can buy an annuity.

The simple fact is, an annuity may be a great idea, but hardly anyone buys one.

It is easy to blame low interest rates, which depress the amount of annuity income one can buy these days. But annuities were not in vogue even when interest rates were much higher a dozen years ago.
‘Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages’

Economists have come to refer to this phenomenon as the “under-annuitization puzzle.”

Buying an annuity seems like an elegant solution since it removes the risk of outliving one’s assets (what actuaries like to call “longevity risk”), it eliminates the hassle of making investing decisions after retiring and the income stream it provides is super safe (it really is, at least in Canada). So why are they so unpopular?

In recent years, however, the economics of annuities have improved greatly. Annuities in Canada now generally return 95% to 100% of premiums paid. In fact, with the recent fall in long-term government bond yields, annuities now return more than 100% return of premiums paid in many cases. The economics, then, can no longer be blamed.

Another often-cited reason for not annuitizing is that the retiree wants to leave a large lump sum to a survivor in the case of early death. This argument, however, does not hold up on closer examination.
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Even when people have little or no interest in leaving assets behind for their heirs, they tend not buy annuities. Moreover, annuities can come with generous survivor income options, if one is prepared to pay for them. Another excuse shot down.

There are other explanations for this puzzle, including: The desire to have money on hand in retirement for a rainy day; the recognition that income needs might vary and the fixed income from an annuity might not match up well; and a reluctance to give up the chance to do better by investing in equities within a RRIF if stock markets do well.

Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages.

I would be the first to admit this reaction is not entirely rational. The reason, plain and simple, is that annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life. [Read the Full Article from Fred Vettese at the Financial Post]

Annuity Guys® Video Transcript:

Eric: The topic is annuities. The best financial product no one really wants.

Dick: Can you imagine that no one would want an annuity, Eric? Is that a true statement?

Eric: No, the people I talk to every day, everybody wants an annuity.

Dick: But that’s different. Folks, the people that we talk to may be someone like yourself that’s actually went to our national website, as Eric likes to remind me, international website.

Eric: International website.

Dick: But goes to our website and they’re already in the mindset of annuities.

Eric: Right, they’re doing their research. They’re doing the background on why this might work for them.

Dick: So we might be just a little bit skewed, do you think?

Eric: We’re taking it based off an article, and interestingly enough, it was written by an actuary who works for an insurance company. His comment and I love this, “Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life.” Well, that sounds pretty pathetic, if you ask me.

Dick: I do have to say that, before I knew much about annuities, many years ago that never entered my mind, never crossed my train of thought. Would I rather have a new car, a new house, or an annuity?

Eric: Rather than an annuity. That’s not fair. Everybody would rather have a new car or a new house.

Dick: That’s right, and really when you think about it, and that’s a lot what this article gets into is we built this money up. We accumulate this money and we like the idea of hanging onto it, controlling it, investing it, whatever we choose to do with our money, but to hand it over to an insurance company and let them give us money back, it’s kind of a transitional state that we go through to make these types of decisions, and there has to be a pretty good reason behind it.

Eric: I come from a family of educators. I’ve talked about that before.

Eric: You know right now in Illinois, we’re fighting. They’re fighting to maintain their pension. Well, what’s an annuity really?

Dick: It’s a pension-style income.

Eric: I mean for today’s 401k investors they’re basically, when you get your retirement you’ve got this lump sum. Do you want to keep the lump sum or would you rather have a pension?

Dick: The vast majority of retirees before they retire and they have this choice, not all companies give this choice; but there are a lot of corporations that will give the employee the choice of a lump sum or a pension. Now the vast majority choose the pension. They’ve worked their entire life.

Eric: For the seemingly stingy income for life?

Dick: Yeah, and yet, even those that would take the lump sum, in many cases will turn right around with that lump sum, and buy a commercial annuity that they feel is a better option, than maybe the pension the company was going to offer. So we tend to get it when it comes to that lump sum that comes from the employer, but yet many times we’ve worked all of our lives, built up all of this money and what’s the purpose of it?

Eric: It’s mine. I want to keep it.

Dick: What’s it supposed to accomplish?

Eric: That’s exactly it. It’s just future spending. It’s not savings. Its future spending is what we’ve save for, but we don’t think of it in those terms. We think of it as “This is money I saved. I don’t want to give it to somebody and then have them, give me a seemingly small allowance.”

Dick: Right, and that’s where the insurance company’s job, their job is to look at risk, to manage risk, to know what’s realistic. You’ll have to read this report, folks and kind of get the gist of what this person’s saying, because he actually is an actuary and he’s really laying out that these insurance companies don’t always win on this stuff.

Eric: And he talked about annuities are much better—the design and what they payout in today’s era, is much better than they were 10-20-30-years ago.

Dick: Right, a lot’s changed.

Eric: You really do have an actuarial advantage to buying an annuity and he admits that, even though I know this advantage exists, I’m not so sure.

Dick: I might be standoffish when I first retire, but maybe as my age advances I’m going to be more apt to do this. This kind of brings me back to a lot of the buzz that is out there and things we talk about with the hybrid annuity but one of the things that appeals so much to folks, on a hybrid-style annuity is that they are able to control that lump sum. What we call majority control the first 10-years or so of an annuity. You have some surrender charges, so you control about 90% of it during that first 10 years, and those surrender charges decline, so after 10 years, you control 100% of it and you still have a lifetime income. And yet, if you haven’t used that money in your account, it can all go on to your heirs, your spouse, whatever is important to you.

Eric: Exactly. In his life point, I guess in summation here he talks about you know what? Everybody has, even if you have that lump sum investment you have, usually a portion that’s in equities and you have a portion as you get closer to retirement that we should all be moving into those fixed payments, bonds, CD-style. What would be wrong with taking those more conservative assets, turning that into an annuity and then just truly letting your equities run, and knowing you have that **guarantee that income coming on?

Dick: Well, Eric obviously this is what we talk to our clients about. We talk to them about balanced allocation. Not putting everything into annuities, not necessarily having everything in the market. Finding that balance that works for each individual, and so to me, he’s right along the lines of what we continue to explain to people.

Eric: Exactly, yes. He takes care of the foundation very well.

Dick: So Eric, would you say that an annuity is something that no one wants?

Eric: All right, there are a few people that want annuities.

Dick: Well, folks we’re not saying that an annuity is going to be the end-all and the be-all or exactly what you need, but you do want to look at it closely and determine where it might fit into your overall financial picture. We really appreciate you spending the time with us, today.

Eric: You have a great afternoon.

Why are Hybrid Annuities so Popular?

August 31, 2012 By Annuity Guys®

What made fixed index annuities and hybrid annuities the fastest growing annuity type on the market according to a LIMRA report? Why would you consider a hybrid annuity when planning your retirement? Dick and Eric look at hybrid annuities and what makes them so special.

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What are Hybrid Annuities?

Hybrid annuities, also referred to as hybrid income annuities, are essentially a type of insurance contract allowing the account owner to allocate his or her assets into a fixed annuity with a market benchmark component, having an income rider or riders that give substantial present or future **guarantees to secure a variety of retirement objectives.

These annuities refer to a combination of several unique aspects of various types of annuities that have been combined. Technically, a hybrid annuity is a fixed index annuity with an innovative new generation income rider attached to it.

Some hybrid annuities can help to resolve the concerns with regard to other needs in addition to asset growth and retirement income––such as long-term care funding or wealth transfer to heirs––while still providing one with a secure income. These annuities are considered by many to be the answer to satisfying a combination of retirement objectives combined into one solution, thus having the potential to solve several issues in retirement.

Obtaining a hybrid annuity essentially works the same way that you choose any annuity, in that making an allocation begins by choosing the hybrid annuity after comparing rates, features and ratings that meet key retirement objectives and then funding the hybrid annuity contract with a licensed agent as the final step.

With some hybrids, if funds are required for needs such as long-term care, with certain hybrid annuities, owners can have access to withdrawals for that purpose by way of an accelerated cash account payout or a **guaranteed increased income payout, in some cases for as long as it is needed. However, if they do not need the funds for that purpose, they will receive their lifetime **guaranteed retirement income just as it was structured or use the annuity for moderate growth as a secure asset foundation to balance their portfolio.

Annuity Guys® Video Transcript:

Dick: We’re going to talk about hybrid annuities today. We’ve have a lot of different subjects, and a lot of times, Eric, we touch on hybrid annuities. But let’s talk about why they’re so popular and maybe, before we actually get into that, let’s talk about what they are.

Eric: Oh sure. I was ready to talk about why they’re so popular. What is a hybrid annuity? People call up and say, “Well, I’ve been talking to this guy about a hybrid annuity.

Eric: Then the first thing I do is I say, “Stop,” because hybrid unfortunately has become a marketing term for a lot of individuals.

Dick: A hybrid annuity, to us, is the fixed index or fixed annuity, usually with an indexing component, and then it has a rider typically that **guarantees income for life. These are like the newer, more innovative income riders. I know you run into this. I run into it. Folks will start describing a variable annuity^# to me, and they’ll start saying it’s a hybrid. They may have just confused it with a hybrid, or they may have been told it’s a hybrid.

Eric: In all fairness to the variable annuity^#, it was really the first one to have those riders that would give income for life.

Dick: That’s true.

Eric: So if you think of just that rider being that contextual piece that makes it more of a hybrid. Well, in my mind those pieces were always part of the variable. They weren’t part of the fixed. So the fixed has kind of morphed its way, to use a different term I guess, into that variable.

Dick: How long has it been that fixed annuities? I’m going back I would say . . .

Eric: I’m much too young to know.

Dick: I would say that it was about somewhere seven years ago that the riders on the fixed annuities really started to pick up steam. And like you say, on the variable annuities^#, they’d already been kind of a mainstay for the variable annuities^#.

Eric: Right. I think what they saw was the variable annuity^# market had a lot of traction. People really appreciated for life without having to give up their assets.

Dick: Without annuitizing

Eric: Right, annuitizing. And that’s where we always talk about the immediate annuities, that’s the component they have. You can get income for life, but you have to give up your assets. So why people are attracted and what makes hybrid annuities so popular is that aspect of, basically, income for life **guarantees without having to give up your assets. You can still pass on money to heirs. You can still change your mind. You have majority access as we like to say.

Dick: Yes, or majority control.

Eric: Majority control. So the aspect of the hybrid annuity is actually very popular for those specific reasons right now. The other thing I see right now, especially in today’s economy, when you look at where rates are, as far as what’s being paid on the growth side, not extremely attractive.

Dick: It’s not very good. It kind of goes back to the bank CD rates, savings rates, and money markets are all effected typically by the ten year Treasury, and we have that same effect on the annuities. If we said they’re paying double what the banks pay, it’s still not very much.

Eric: No. Two times nothing is still nothing.

Dick: Exactly. So you might be looking at a 2% to 3% range maybe on a fixed annuity or even a fixed index annuity. And yet, on a recent report, Eric, that we were just talking about, the LIMRA Report, it showed that people purchasing annuities, those sales are down pretty dramatically, except for the fixed index, which is what we consider the hybrid.

Eric: Which is the base of the hybrid.

Dick: Exactly. And let’s just say that for the sake of conversation, folks, in today’s annuity world, the mainstream hybrid annuity is considered the fixed indexed annuity with one of the newer income riders on it. So just for the sake of clarification, when you’re speaking with people, you really have to clarify terms. Ninety percent of what’s talked about on the Internet and what’s talked about, advisor to client and advisor to advisor, is a hybrid annuity is a fixed annuity with a newer, innovative type income rider on it.

Eric: That’s right. And those are the pieces right now that are for the upcoming retirees, basically or near retirees, as I like to think of them. That’s what makes it really attractive, because those companies are still providing some of those **guarantees in deferral for the growth component on those hybrid annuities.

That’s the other aspect of that income rider usually. It’s I’m going to **guarantee a certain percentage of growth in deferral. Right now, we’ve got in the range of 4%, 5%, 6%, 7% still available in that deferred growth. So for somebody who’s thinking about retiring in the next five to seven years, if you’re uncomfortable with what you think is going to happen in the market necessarily and you want that **guarantee, it’s **guaranteed and predictable. Those are two aspects that give near retirees comfort.

Dick: Well, and this is where, when we go back and we compare it to the variable annuity^# and we say sales are down in variable annuities^#, and yet they’re up in indexed annuities, there’s not as much potential on an indexed annuity for growth. People aren’t interested today so much in potential and growth as they are in **guarantees.

Eric: Safety and **guarantees.

Dick: Safety and **guarantee of principal, and I also say there’s one more factor that makes these so popular and that is cash flow, because we spend our life, our careers building our money up and saving, and we look at growth. So we’re accumulating net money. But what are we accumulating it for?

Eric: To spend it.

Dick: We need to spend it, effectively and efficiently, and that’s what the hybrid annuity does, is it allows you to know what type of cash flow you’re going to have throughout your retirement, to ladder it, stage it, cover some inflation hedge aspects. I believe that’s what’s driving the popularity of this hybrid annuity.

Eric: Yes, I would agree. I would say 90% of the questions I get about annuities are about hybrid annuities. When I talk to people, I say the best thing about a hybrid you work backwards. Tell me what income you want and when you want it, and I can use a hybrid annuity . . .

Dick: And we’ll tell you the least amount of money to put in to get there.

Eric: To get there. People are like, “Yes, that’s what I want. I want that predictability, reliability, and **guarantees, those contractual **guarantees.”

Dick: So, folks, we hope that this has cleared up some of your concerns and potential misconceptions, or confirmed the things that you already know about a hybrid annuity. It’s very much a part of the financial planning community today and what’s being used and what’s effective. Anything that we can do to give you more clarity and maybe some direction on these hybrid annuities, we’ll be glad to do it.

Eric: And hopefully we explained why they’re so popular right now.

Dick: Yes.

Eric: Thanks for tuning us in.

Dick: Thank you.

The Love Hate Annuity Relationship

August 17, 2012 By Annuity Guys®

Every financial product has negatives and positives, how these products are presented or utilized by companies and advisors can lead to a vast array of emotions and opinions…. Hence, annuities are no stranger to this love/hate relationship.

Dick and Eric discuss some of the rumors that annuities face that often lead to the conflicting opinions among individuals considering an annuity in retirement.

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Below are some excepts of an article by “Coach Pete” D’Arruda president of Capital Financial Planning and host of Financial Safari Radio broadcast the stimulated the idea foe this weeks commentary. [Full Article]

Annuities Have a Negative Perception

Despite their benefits, annuities have received negative attention over the years for a number of reasons, including rival products seeking to discredit them, poorly constructed products in the space and inappropriate sales of the products. It is imperative potential annuity investors have all the right information on hand to make an informed decision.

While annuities are not for everyone, those who can benefit from them should not let common misconceptions dissuade them from using an annuity as part of a comprehensive financial plan.

The Top 5 Rumors About Annuities

Every issued annuity is a variable annuity^#.
The impact of inflation is too great for fixed annuities.
With penalties and surrender charges, annuities are just too expensive.
Never use your IRA money to invest in an annuity.
With a big name comes a better return.

Remember that securing **guaranteed retirement income in this volatile, low-rate environment is difficult – but not impossible. Do your research, tune out the conflicting opinions and don’t be afraid to ask the tough questions of your financial planner. It’s absolutely possible an annuity should be part of your financial plan. Get your hands on an Annuity Owner’s Manual before purchasing an annuity and learn the good, the bad, and the fine print before you ever invest your money. [Read the Full Article]

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about the love/hate relationship that people have with annuities.

Dick: Why does that happen? I mean what is this love/hate relationship? But it really is there.

Eric: It is. We were reflecting on an article by Coach Pete, who’s on radio in the financial safari down there in North Carolina.

Dick: His radio station is really picked up all across the nation too, so a lot of people hear him.

Eric: He gets questions occasionally. One of the questions was, “What’s the true story?” Talking about the negativity of some of the annuities. Really, it’s looking at why annuities are so negatively portrayed in the media and these attempts to discredit annuities sometimes by their rival products.

Dick: I think it’s also important to recognize that there are these positive articles about annuities. There’s a lot of emphasis, even from the federal government, now that annuities could make a big difference. But yet we get a lot of negative press.

Eric: Sure. If you think about it, annuities compete for the same slice of the pie as mutual fund^{^}s, stocks, bonds, and CDs. I mean all those pieces are options for people when they’re trying to determine where to put their retirement dollars.

Dick: Do you think that some people just might try to color it, I mean the wrong way, for personal gain?

Eric: I have never seen a mutual fund^{^} company advertise ever. Well, maybe . . . You have to realize there are competing opinions, and everybody wants to think that theirs is the best. Yes, insurance companies compete against investment companies and the such. So there are conflicting opinions and approaches. You see sometimes people tend to go negative. We’re in the political campaign era. We don’t see any negative campaigning going on. I think that’s part of or one of the reasons that some people have such a negative opinion about annuities. That creates that hate relationship.

Dick: From our own perspective, when we’re working with folks that are just kind of entering that realm of understanding annuities, many of their questions center around variable annuities^# because that’s all they’ve read about in the press. They don’t know the difference between the variable and the fixed and the immediate. They pick up this negative connotation that’s continually put out there by the press.

Eric: His first point was, yeah, every annuity is a variable annuity^#. Well, that’s not true, but a lot of people confuse especially the variable annuity^# and the fixed indexed annuity.

Dick: Correct. They have some similarities.

Eric: Exactly. If you use the S&P as a benchmark, well the S&P is an investment product, right? So they think that it’s invested in the S&P.

Dick: Yet a fixed annuity is just what it says. It’s fixed. It’s safe. Your principal is **guaranteed, which is the opposite of the VA.

Eric: Exactly. In a variable annuity^#, your principal can go up and down with the performance of the underlying sub-accounts or the investment accounts.

Dick: Where with a fixed indexed, you’re not really invested into that index. You’re just using it as a gauge of rising and falling.

Eric: Exactly. That’s where the confusion comes in. It’s not necessarily a fixed return that you’re going to get with an indexed annuity. But the safety aspect of every fixed annuity out there, the worst you’ll do is a zero on the return.

Dick: Your principal is always protected.

Eric: It’s protected.

Dick: The other thing, Eric, that we run into a lot with the VAs is the idea that, “Hey, aren’t these annuities all high fees?”

Eric: Right. With a fixed annuity, everything’s built in. It’s what you put in is what goes in. There’s no load fee. That confuses the mutual fund^{^} aspect. “Well, what’s the load I have to pay? What’s the upfront cost?”

Dick: Sure. Right.

Eric: With fixed annuities, it’s all factored into the performance of the product. What you put in actually goes into your annuity.

Dick: I do find that from folks that are just setting up an annuity that they are kind of amazed. “Okay, so I give you $100,000 or I give this company $100,000 and then they give me a bonus. I start off with $105,000 or $110,000 in this annuity. And I don’t owe you anything?”

Eric: Yeah. “How much do I have to pay for that?” The insurance company has already factored that into the program.

Dick: Right. Yet, it is a little different with the variable annuity^#, or a lot different, we should say. I’m just saying in the sense of the fee structure. With the variable annuity^#, the fees are going to be right there on your statement. For the most part, you’re going to somewhere from 3% to 5% maybe, depending on the riders.

Eric: Depending on the riders. I mean you could get one of the barebones ones that have very low fees. But most of them, if you’re really looking at the income **guarantees or the death benefit **guarantees, you’re going to have significantly higher fees.

Dick: Yes.

Eric: All right. Rather than just focusing on the variables, we can talk about some of the other misconceptions. What about inflation? Can a fixed annuity combat inflation?

Dick: I think the answer to that is obviously yes.

Eric: Why is that obviously yes?

Dick: Well, there are different ways that you can either defer a fixed annuity with a very high rollup rate, high growth rate for future income. You know that when you turn that income on, that’s going to be an offset against inflation. Yet, there are also ways to actually have cost-of-living adjustments.

Eric: The other aspect that combats inflation is if you’re looking at something that’s going to be in the equities market, you have risk involved with the volatility of the market. That’s one of the things. You don’t have to worry about inflation on the side of you haven’t worried about taking a loss.

Dick: Yes. A lot of times there’s just this automatic assumption that if your money is in the stock market, it’s going up 8% a year. If we look at the last 10 or 12 years, you’ve made virtually nothing. There’s also the possibility that your money goes negative. Now how well does that keep up with inflation?

Eric: Oops.

Dick: Not good.

Eric: No, not good at all.

Dick: It’s not good for sleeping at night.

Eric: We’ve talked about, in previous videos, strategies for addressing inflation with annuities, whether it be through laddering. There are tools out there that can help you combat inflation with annuities.

Dick: Right, and I would, folks, recommend that you go back and look at some of the other videos that we’ve done on laddering annuities and various aspects of inflation.

Eric: Sure. All right. The third point he makes is with penalties and surrender charges, annuities are just too expensive. He points out that this is partially true. There are surrenders. There are penalties. Depending on the annuity you select, I mean it can have surrenders. I can think of one off the top of my head that has a 16 year surrender. So they are out there. There are surrenders.

We’ve talked about this also in previous interviews. Why are there surrenders built into it? It’s because these are not short-term products. If you’re buying it for the wrong reason . . .

Dick: Well, these companies have to secure the clients’ money. The money goes into long-term bonds, very high-quality investment vehicles, and US Treasuries. The idea is, to protect everyone, these surrender charges have to be there.

The key to setting up an annuity properly is making sure that it does meet the objective, that it meets the long-term objective. Then you’re not going to be in a situation where you’re going to suffer a penalty or a surrender if it’s done properly.

Eric: Exactly. I think that’s the key. If you look at something that has a ten-year surrender, it’s typically a long-term product. It’s been designed. Annuities are designed for lifetime income. They are safe, secure vehicles that have longevity, basically, as part of the quotient of what they’re built on.

Dick: I think the idea of the 10 years or 12 years or 8 years, whatever the surrender aspect of the annuity is, gives the client a sense of, “Well, if things change or I would change my mind, I have this escape.” But most folks that set up an annuity really look at the benefits way beyond 8 years, way beyond 10 years or 12 years. They want this to carry them through their entire retirement. It truly is a long-term solution to a long-term problem.

Eric: Exactly. That is really the solution it should be solving. It’s not a vehicle where you are going to trade in and out of different annuities each and every other year. If that’s your intent, you’re looking in the wrong spot.

Dick: Right. Go ahead. I was going to say let’s talk about what makes people love their annuities.

Eric: Well, they take out volatility of the market performance. If you’re concerned about volatility, people typically do that. The income aspect, you have for life. There’s a novel idea. Those are the two big ones that jump into my mind right off the bat. So **guarantees . . .

Dick: Safety. I can say this, Eric, from experience with clients, many times going into it the thought of, “Should I do an annuity, shouldn’t I do an annuity,” there’s hesitation. There’s this love/hate because of all of the negative press and propaganda from all directions.

Eric: What’s coming in. Yeah.

Dick: Correct. Yet, what I find is that those folks that actually have an annuity, that have had it for several years, especially those that have come through the financial crisis, that they’re very satisfied. There is an appreciation and a love for that decision that they’ve made. Very seldom is anyone not satisfied.

Eric: I would agree. If you buy it for the right purpose, if it fits like a glove because it satisfies what your need was, then you’ll be happy. That truly is where people who have purchased it and got what they wanted and are happy. If they educate themselves going in and understand what it’s going to accomplish for them, then they will be pleased with an annuity. Most often, you’ll love the fact that you’ve made that decision because, in some ways, it’s sleep medicine.

Dick: Yeah, it is. It’s sleep assurance. It’s sleep insurance in many ways. I know that we could end it right here, but let’s hit it on the other side of it. Let’s talk about the hate. Why would you hate an annuity?

Eric: You bought for the wrong reason. You thought you were going to buy it now thinking the rates were awful, and all of a sudden rates go up higher. “Oh, if I would’ve waited, I could’ve gotten a better rate.”

Dick: Or you like maybe living on the edge a little bit, you know?

Eric: You like volatility.

Dick: You like the up and down of the market, taking that calculated risk, hoping for the best.

Or you’ve got this discretionary money that you could put into the market. It wouldn’t hurt anything. You stuck it in an annuity, and now that annuity isn’t performing at the high level of the market.

Eric: Right, you have an annuity. You have the safety **guarantees. You’ve eliminated the risk. All of a sudden, everybody else is talking about how the market is doing . . .

Dick: They’re making all this money.

Eric: Oh, I’m making so much. You missed out. Timing is everything. But, you know what, the timing of an annuity is you’ve taken that **guarantee, and you shouldn’t have to worry about it.

I guess I’m not being negative enough.

Dick: Well, thanks folks for tuning in today. We hope this helps you in your overall decision to kind of balance all of this information out there, both positive and negative.

Eric: Well, we hope you don’t hate us, but I don’t know if you’ll love is either. Thanks for coming in.

Dick: Bye-bye.

Top Five Reasons Not to Buy an Annuity

July 26, 2012 By Annuity Guys®

What are the top five reasons not to allocate funds to an annuity? Based on many years of experience and an informal office survey the top five reason are…

Too old or too young.
A lack of sufficient assets.
Expectation of an unrealistically high return.
Probability of needing annuity dollars prior to maturity.
Missing a reasonable understanding of how annuities work.

Dick and Eric examine these five reasons in this weeks commentary.

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Annuity Guys® Video Transcript:

Dick: We have an empirical study. Is that correct, Eric?

Eric: The Top Five?

Dick: The top five reasons why a person should not buy an annuity.

Eric: Yeah, that’s right.

Dick: And where’d this empirical study come from, Eric?

Eric: Well, we did a survey here in the office.

Dick: Of you … and I…

Eric: That’s right, the two of us.

Dick: So we have a slight margin of error.

Eric: It’s plus or minus five.

Dick: Five, yeah. We don’t know why five.

Eric: The five reasons that you shouldn’t buy an annuity.

Dick: Yeah, but we do really run into some very legitimate reasons. Why folks should not buy an annuity and people should know about that.

Eric: That’s right.

Dick: Reason number one, too young.

Eric: Too old.

Dick: Or too old. Age, that’s right. Let’s take the extreme ends, let’s say, too old. How old is too old?

Eric: Too old is when you start to lose benefits, so it’s age 81.

Dick: They’re gone, basically.

Eric: Basically, very few choices left.

Dick: Right, a few companies will give you a little bit, but usually the yields are low and there are no additional riders or benefits, this type of thing. One real exception to that now, on the 80-year-old, is if we find that they have a younger spouse.

Eric: Okay, and then that makes it a good deal, because the spouse is…

Dick: The spouse can get a lot of benefit, by putting the annuity in their name.

Eric: Right, so really they’re still within the guidelines of getting some of those benefits.

Dick: Right, so that does work well. Let’s go to the other extreme. Let’s talk about the younger. When’s it too young?

Eric: Well, definitely before, I would say age 25, but anything younger than that…

Dick: 16-year-olds, no way.

Eric: It’s obvious, but most of the time there, you’re in your stock accumulation stages.

Dick: Right, you might make a case occasionally, for someone in their early thirties, but probably somewhere in your mid-thirties to early forties, before it starts to make real sense, depending on your risk aversion, I would say.

Eric: Most of these income benefits are usually set for a 10 or the maximum I’ve seen, is a 20-year period, so really it’s the 20 years prior to retirement. So if you think of 65 being the logical retirement age, really your mid-40’s; when you get to 50, you definitely should be…

Dick: Yes, you should be moving in that direction or have a plan.

Eric: So really before that it’s another bucket, you’d probably not fit. So that’s reason number one, reason number two…

Dick: You don’t have enough assets.

Eric: You don’t have a nickel to rub.

Dick: I mean really, folks, and Eric and I were discussing this prior to going on camera here. If you’ve got less than $100,000 dollars in overall assets and we’re not talking about your home, or your furniture, or your car. We’re just saying if you’ve got less than $100,000, realistically you just don’t know what’s going to come up. You don’t know what kind of an emergency situation you might have, and it’s probably wise, not to put that money into an annuity.

Eric: We call it the liquidity issue. You don’t have enough liquid assets, to be able to do and take care of the things that may come up, and you definitely don’t want to put all of your eggs in one basket.

Dick: Correct.

Eric: So when you’ve got limited assets…

Dick: Right. It’s really iffy, and there’s always an exception. There’s going to be some exception that’s going to come along, where someone has lots of income and they may not be worried about needing liquidity.

On the other hand, I’ve seen a few situations where someone had so little income that they needed an annuity to produce enough income, just so they could live on and know that they weren’t ever going to run out of money. So there is this balance. You have to look at each person’s situation and evaluate it to be fair.

Eric: But largely, basically you have to have, typically $100,000.

Dick: Or more, and then I guess the other caveat to that, though I would say is a lot of people may only want a $75,000 dollar annuity or $125,000, but they’ve got several hundred thousand dollars in other assets.

Eric: Right, it’s an allocation.

Dick: It’s an allocation.

Eric: So we’re not saying you have to use $100,000 up. We’re saying if you don’t have at least $100,000 available, then that’s not a wise choice.

Dick: Right, moving on.

Eric: Number three, expectations of unrealistic, high returns. Annuities are a safe, stable allocation.

Dick: That’s right.

Eric: So if you don’t get, if you don’t have high risk, you don’t have high reward. You have more of a level, safe, stable…

Dick: Right. Your reward is sleeping securely at night. Sleep insurance, and knowing that you’re not going to be affected by the ups and downs of the market or of a Japanese-style situation, where the market loses 75% of its value and it doesn’t return over a 20-year period.

Eric: Right. As long as you expect, if you’re using it for income, primarily it’s a great vehicle.

Dick: You don’t have of longevity risk. It doesn’t matter how long you live, right? So it’s great for the pension-style income.

Eric: Yeah, perfect.

Dick: And growth, growth can be reasonable.

Eric: We always talk about beating the bank, by a couple percentage points.

Dick: And then if we wanted to pre-issue annuities, it could be maybe higher than that, so maybe we’re beating the bank by thre3.0-4.0%.

Eric: Yeah, so it’s expectations. If you want your cake and eat it too, this is not the vehicle for you. Because I’ve had people ask me, “I want the cake-and-eat-it-too annuity.”

Dick: Right.

Eric: Well, you have to pick and choose, and it doesn’t exist in the double-digit community.

Dick: Well, and this is where I find that people have a lot of unhappiness with the annuity they purchased, when an advisor has told them that they’ve got this unlimited upside potential and no downside risk, and they’re expecting something pretty close to a stock market gain, when the market’s going well and they don’t have it and they’re disappointed, because they were over-sold, overstated, under-delivered.

Eric: No, so don’t buy an annuity if you have unrealistic high-return expectations. All right, so number four, the probability of needing annuity dollars prior to maturity.

Dick: Well and when we say probability, there’s always a possibility for anyone that they could need the money, but if we talk of it in terms of probability we have to use some reasonable assumptions. And if you’ve got plenty of income, you’ve got other assets then the probability when you put your money in an annuity should be very, very low that you’re really going to need this money for anything.

Eric: Right, I mean if you go into it with the expectation of saying, “I’m going to go buy a new house in three years, I might use that money.”

Dick: I might use that money.

Eric: Don’t put the money there to begin with.

Dick: No, it makes no sense.

Eric: It’s not a good decision. So that one pretty much stands on its own.

Dick: Yeah. And number five, this is probably my favorite.

Eric: This is my favorite. It’s truly the number one reason not to buy an annuity and that’s that you don’t have a reasonable understanding of how annuities work.

Dick: Right. Before you can make an intelligent decision on an annuity, and there is a certain degree of perplexity and sophistication to an annuity, you need to really work with an advisor that gets it. That has access to multiple annuities. That has a great understanding of these annuities. How they work, how they inter-relate and function, and someone that can help you to understand. Not that you’re going to have the same knowledge level that the advisor has.

Eric: And I don’t think they have to understand how every annuity works. You have to understand how what you own works, the ins, the outs.

Dick: And that it’s going to meet your objectives… your stated objectives.

Eric: I talk to clients about working backwards. You work backwards from the goal and then find the annuity or the pieces that fit that goal. But you have to understand how it works and how that piece works as part of your goal. If you don’, and if you’re not comfortable, don’t do it.

Dick: Yeah, you shouldn’t do it. You’ve got to be careful. There is a point sometimes where you do rely on the advisor’s expertise, because you do have certain stated objectives, so there is this balance that you have to hit, but you do want to at least a cursory understanding of what it is you’re doing, why you’re doing it, how it works.

Eric: Right. Don’t spend more time planning your vacation than you spend planning your retirement.

Dick: That’s right, or understanding your annuity. So folks, these are the five top reasons that we’re aware of.

Eric: And based off our empirical survey.

Dick: Yes, yes, and so we think that this will give you a good basis as you’re considering putting money into an annuity, doing an annuity allocation. If these don’t really apply to you, then an annuity may be a good choice.

Eric: Good deal, I think we’ve hit the top five.

Dick: Next week, maybe we’ll talk about the five least reasons not to buy an annuity.

Eric: We’re having too much fun, we’d better go.

Dick: Thank you.

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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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.

Is a Pre-Issued Annuity right for you? – Part 1

June 28, 2012 By Annuity Guys®

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

Is a Pre-Issued Annuity right for you? If you think like most people in this low interest rate environment the answer is a resounding YES!

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Once you understand the high yielding yet safe nature of these financial vehicles it becomes apparent quickly that most of us have money that would be well suited to this type of strategy. The biggest question most individual investors have is how do I get started without making a mistake that I will regret. The key is using an expert that specializes in this field having a legal and fiduciary interest towards you as the client. The best advisor for this will have experience in the industry, inside sources for access to the best available contracts, and be a practicing attorney to follow and assure the validity of the court order process.

PRE-ISSUED ANNUITIES ™ have several positive attributes in common that make them currently in high demand:

High Yields – typically 4.5 to 8.5 percent.
Safety – payment streams are **guaranteed by highly rated insurance companies
Safety – Court order process protects both buyer and seller
Safety – Issuers – regulated by State Insurance Commissions with **guarantee associations .
Fixed and reliable income streams
Diversification for portfolios of sophisticated investors
Truly a non-market correlated asset
IRA or Qualified Account compatibility
Estate transfer to heirs
Twenty year plus successful transaction history

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

Annuity Guys® Video Transcript:

Eric: Today, we’re going to talk about pre-issued annuities, safety, and high-yield. High yield; we’re chasing numbers right now. In this day and age, everybody calls up and they say, “Where can I get . . .” and of course, it used to be, “Where can I get 5%?” now it’s, “Where can I get 3% or 4%?” Is there a place we can get 5%? Especially when they call us up, and based off the Annuity Guys® website, we get a lot of call that say, “Give me a number. Give me 5%”

Dick: This is probably the most frequent call that we get, folks. A lot of folks that are looking for CD alternatives, because CDs, as you know, Eric, what are we now? About 2% would be the max, 2 or 2½ on a really long-range CD. What we’re seeing more frequently is maybe ½%.

Eric: I was going to they all start with a dot in front of the number, unfortunately; 0.8.

Dick: Then when we come down to the new-issue annuities, new-issue annuities, again, are severely affected by this low-rate environment, which may be with us for quite some time because of our fed.

Eric: Just recently, companies are coming out and making predictions that this is the rate environment; get used to it. We’re going to see this for the next 2 to 3 years.

Dick: I’ve often brought this up, but Japan has seen this for the last 15 to 20 years and they’re the second-largest industrialized nation, their GDP, in the world. Is it possible that this becomes an extended 5 or 10-year cycle, because we’re trying to get out economy booted up and it doesn’t happen? Where can good, honest people go to get a good, fair return? That’s the big question.

Eric: The retail environment has always been, “This is what’s available to the consumer.” The nice thing is we’re breaking down some barriers and we’ve got some things that were just available for institutional buyers, banks, multimillionaires, basically people of means, or institutions of means, they dabbled in these markets before. Now you’ve got access for the consumer market.

Dick: If we go back and just do a little brief history, we’ll do something more in-depth later, but just a little brief history. Pre-issued annuities, which are called structured settlements.

Eric: Secondary market annuities.

Dick: Lottery annuities.

Eric: Life-contingent annuities.

Dick: Pre-owned annuities. There’s so many different terminologies, but pre-issued is a pretty accurate way to describe these annuities. Someone bought this annuity originally and they don’t need it anymore, or they were in an accident, they got some type of a settlement, or they won the lottery. They don’t need the income stream, but they do need some money upfront. Folks, you’ve probably seen Imperial Structured Settlement and some other ones out there that regularly advertise on television. Some of these will come through that type of avenue, or distribution. The whole idea of this is that somebody is willing to sell their payment stream for considerably less than what it’s worth, in terms of those final payments throughout the maturity.

Eric: It’s basically, ‘I have an income stream or an annuity that I’m going to eventually get this much money for. I’m willing to sell you that payment stream, or that lump sum, and you’re going to give me a lump sum now.’

Dick: You might sell $200,000 worth of payments for $100,000, that I’m going to collect over a period of maybe 10 years, which comes out to in the neighborhood of about 7%, maybe even a little more than that. That’s a way that I can get a very substantial yield and you can your lump sum of money that you need, that’s kind of the gist of how it works. Like I said, going back in history, a lot of these companies that you see advertising on television to buy these large settlements, they will actually package these up, securitize them, sell them to institutional investors, pension funds and the like, and investment banks, and they have lots of large buyers standing in the wings. Guys like you and I, Eric, and our clients, we couldn’t have access to these, just maybe 5 years ago.

Eric: The market wasn’t there. We didn’t even know it existed, probably, until the advent of . . . from an individual consumer talking to our clients.

Dick: Folks, what really happened was we went through this financial crisis and all the credit dried up, and now all of a sudden, these institutional advisers, Eric, they just weren’t walking in and buying these bundles of securitized pre-issued annuities, so what were they going to do? They found a new avenue to sell it to.

Eric: Yes. Now we have a lot of brokers, independents, going out there and basically finding these pieces out there that are available for purchase. They’re buying them and remarketing them. You’ve got brokers online that are all over the place.

Dick: There’s some negatives that we probably need to talk about, but maybe, let’s break it down and let’s talk about positives and negatives.

Eric: Let’s highlight just first the positives, Okay? Yields: We’re in a low-rate environment right now, so a new-issue annuity, if just were looking at a [inaudible: 06:11] or CD-style, you’re only going to see a return in that 0 to upward . . . 10 years will get you almost 4%. Here, we’re looking at yields.

Dick: We start at 4, 4.5, and we’re well-connected, we know the source that we can go to. We can do considerably better, and on some of different types of pre-issued annuities, they’ll pay out a little more, like the life-contingents. We can get upwards of 8.5% over a good length of time. It’s a huge difference in yield.

Eric: So the yield is much higher.

Dick: Yes. Then we come down to safety.

Eric: We got multiple levels of safety. Who may buy these, who’s underwriting all these contracts? Where are they coming from?

Dick: The ones that we recommend, or the attorneys that we work with, recommend are really coming from A-rated, A+ rated, A++ rated . . . I guess we can do a little name-dropping here, but maybe Allstate, Prudential . . .

Eric: John Hancock.

Dick: These are really strong quality companies.

Eric: We’re not just picking for our clients, it’s not just taking anything, there is a certain requirement of what we’re looking for, from a safety standpoint. They’re safe from the underwriting of that. Somebody owns these annuities. How do they get transferred into my name, if I want to buy them?

Dick: That’s another layer of protection, another layer of safety, and it’s the court-ordered process. When this whole industry got started, like we talked about, approximately 20 years ago or so, it was a little bit like the Wild West, and it was anything goes. A lot’s changed since then, and there’s been some rulings and things that protect the person that’s actually trying to sell their lump sum. Now, this all has to go through a court-ordered process. It really protects both the buyer and the seller. It’s also very important that you have some type of legal representation as it moves through that process, that it’s done where all the I’s are dotted and the T’s are crossed properly.

Eric: That’s safety from . . . so you got a court agreement that’s been placed, so the contract is basically a court-underwritten piece?

Dick: Exactly, and it really directs the insurance company, the A-rated or A+ rated company, where there payment streams are now going to. By court order, they are to pay those to the new owner of those payment streams, not to the new owner of the annuity. The owner of the annuity remains the initial person that had the annuity issued, and that’s why we call it a pre-issued annuity. It was issued previously, and all this person is doing is selling their payment stream.

Eric: It’s not taking the ownership away; it’s really just taking the ownership of the income stream and passing it off.

Dick: Exactly. Then we have the layer of safety that all of these A-rated companies, I should say highly-rated insurance companies, they are regulated by the states, The State Insurance Commission.

Eric: The State Guarantee Association.

Dick: They each have a State Guarantee Association. I would say, folks, you have to individually look into that, what your state does, but it is another layer of protection. You’ve really got about 3 very serious layers of protection. There’s another 1 or 2 that we could talk about, and I’m not going to get into it, it’s a little bit more complex from the structured settlement side, but there’s another layer of protection, sometimes, that becomes into play.

Eric: Are these like just buying them off the shelf, in the sense of who’s buying them?

Dick: This is the trick. Folks, you can go out and Google ‘pre-issued annuities’, you can look structured settlements and the like, and you will find some companies available out there on the internet that have a retail list of what’s available. Unfortunately, the best pre-issued annuities typically never hit the internet; they’re actually taken right from the source when someone wants to sell their payment stream or their lump sum. Again, this really makes a difference if you can be connected to a good attorney, someone who knows right where the source is and can kind of cut out the middle man, cut out the brokers that are in between, because typically, you’ll have anywhere from 2 to 4 brokers involved in sharing the profits before it actually get to the clients. The more that you can cut out of that, the higher yield you’re likely to have.

Eric: Less hands in the pockets, the more [inaudible: 11:26]. These are sophisticated instruments. How would they fit in a portfolio, in a sense? Is it . . .

Dick: This is still, even though there’s a certain level of sophistication to it, it’s like anything that you do in the investment world. If you look at your prospectus what, how many pages are in an average prospectus, Eric? You’re securities guy?

Eric: The phone book? [inaudible: 11:54] pages.

Dick: 100, 150. You could say that investments are pretty technical, pretty sophisticated, and that would be true, we’ve just become familiar with them, we understand them; our stocks and our bonds, that type of thing. These, likewise, once you understand them, you realize that they’re very safe. The companies that are backing them, you can actually know your yield. You have a very reliable payout in the income stream. There’s really no volatility in it like there would be in an investment?

Eric: I think the key here is diversification, just like anything out there; it’s a key piece, to diversify your portfolio. You said it; it’s a non-market correlated asset. In today’s market, as we watch it bounce like a Wham-O ball, up and down, it’s taking that volatility out. You know exactly what you’re going to get from either the lump sum aspect or the payment stream aspect, so it becomes a nice piece to smooth out the waves with the rest of your portfolio.

Dick: I think we should also mention that it’s IRA-compatible. You’d have to setup a self-directed IRA, which there’s many different custodians out there that’ll help you with that, and we can recommend one to folks that we work with. It is just nice to know that it’s IRA-compatible. Then if you would end up passing early before you’ve received your lump sums or your payment strings, it can be paid directly to your estate or to your heirs.

Eric: Lots of pieces out there that make it an attractive option, especially for these people that, for me, this is for somebody who’s been in the CD world for a long time. They want safety, security, but they want a larger return, and it’s something that’s just going to be parked there.

Dick: It could be for somebody that’s been in the stock market, that are reaching, that are near-retirement age. They’re wanting something that’s much safer, takes the volatility out of it, but they still want to get the yield. That’s all the good things we’ve talked about.

Eric: There are some limitations. Those are on the con side.

Dick: We have to be fair about it.

Eric: We don’t have to, but it should, it makes the video that much better when we’re balanced.

Dick: Fair and balanced. We don’t want to take this away from Bill O’Reilly.

Eric: That’s right.

Tax Free Annuities – Limited Supply!

June 13, 2012 By Annuity Guys®

Tax Free annuities are entirely possible with some planning and knowledge about Roth conversions.

One of the biggest negatives continually re-hashed about annuities is that just like IRAs they are taxed at ordinary income tax rates on earnings. So why not avoid tax all together with a Roth Annuity! Oh, did I mention that when the IRA is converted to a Roth the tax must be paid in full in the next tax year. However, if you think taxes are likely to go up it may make a lot of sense to get the tax paid now when it is lower.

Dick and Eric discuss the many ways to use annuities that are tax free or tax advantaged in this short video.

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Want more Roth & Annuity information? Kelly Greene of the Wall Street Journal authored two articles that look at the impact of Roth conversions.

Annuity Payments Using a Roth IRA Are Tax-Free

As long as you meet the holding and age requirements for a Roth individual retirement account, your annuity payments should be tax-free.

Many retirees are considering immediate fixed annuities these days. Generally, you hand over a large chunk of money to an insurer, which issues you a monthly check for life. The appeal in a recession is that annuity payments could soften hits suffered by your other investments. (The main drawbacks: Once you hand over your money to the insurer, you generally can’t get it back. And your fixed payments might not keep up with inflation.)

As Roth accounts increase in size, using them to buy plain-vanilla annuities might make sense for a portion of conservative retirees’ nest eggs, said Jeffrey Landers, an investment adviser with Wachovia Securities in New York.

A Roth annuity could assuage two of the three top concerns his retired clients have, he said: outliving their income and future tax increases. He suggests addressing the other big retirement worry, inflation, by using 25% to 30% of a nest egg to buy an annuity covering basic expenses, and continuing to invest the rest in a diversified way.

Or, if you are willing to accept a slightly smaller annuity payout, you could buy an annuity with annual raises.

Of course, if you purchase an annuity, payments usually end with your death. Thus, if you use a Roth IRA to buy an annuity, your heirs might not get to enjoy one of its best features — a tax-free inheritance.

To hedge your bets, you could buy an annuity with your Roth that **guarantees payouts for a set time period, such as 10 years. [Read More…]

Why It May Pay To Convert to a Roth IRA

Investors and financial advisers are preparing to take advantage of a new tax law that makes it easier to gain access to Roth IRAs—even if it means breaking a sacrosanct rule about Roth conversions.

Starting, Jan. 1, the $100,000 income limit disappears for converting traditional individual retirement accounts and employer-sponsored retirement plans to Roth IRAs, one of the biggest changes on the IRA landscape in years. Roths, of course, have long been viewed as one of the best deals in retirement planning; after investors meet holding requirements, virtually all withdrawals are tax-free. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we are talking about tax-free annuities.

Dick: Better get them while they last, Eric.

Eric: They are in limited supply. When their shelves are empty, they are all gone.

Dick: That is right.

Eric: You better act quickly.

Dick: How about that? Tax-free annuities; isn’t that the opposite of what we’re told? Stereotypically, annuities are taxed at ordinary income tax rates, just like IRAs.

Eric: You know what the CPAs are calling right now, “They are wrong. The tax-free annuity doesn’t exist.”

Dick: Our phone’s going to be blowing up.

Eric: They’ll tell you it doesn’t exist. I have not seen anyone advertise for a tax-free Annuity.

Dick: Here we have a limited supply.

Eric: That is right; we’ve got them in short supply. Dick, you got to tell us, how does one get one of these limited supply annuities?

Dick: Here we go. What we have is no different than what you have, and that is you have your traditional IRA, that IRA can be converted to a Roth, of course, you will have to pay your tax the following year.

Eric: They are not tax-free then.

Dick: You have to pay the tax in the IRA.

Eric: It’s the first, okay.

Dick: Folks, once that you’ve actually converted to the Roth, you can then put that money into an annuity. That annuity becomes fully tax-free. It can give you a tax-free income for the rest of your life; it can pass tax-free to your heirs. It can actually become a retirement account for your heirs. There’s some intricacies to that, which we can talk about. The idea of using a Roth strategy in an annuity is not that well-known, it’s not talked about that often, and it can be a great advantage.

Eric: We say limited supply; why do you say limited supply? We’ve Roth’s for how long? There’s been a recent change though, it used to be there was an income threshold out there.

Dick: In 2010 they wiped it out. If you make over $100,000, it doesn’t matter, you can convert. Limited supply, we’re having a little fun with this, folks, like an annuity sale. The limited supply really comes down to Uncle Sam giveth . . .

Eric: And Uncle Sam taketh away. When someone’s looking for tax dollars . . .

Dick: Our government needs money.

Eric: If you believe taxes are going up, raise your hand. If that is the case, is better to then . . .

Dick: It is likely that Roth could be an endangered species.

Eric: Roth will turn to Moth.

Dick: It could.

Eric: It is going to mothballs very soon.

Dick: Getting poetic.

Eric: Yes, I am trying to rhyme.

Dick: If we’re in this situation where taxes were likely to rise, the government is looking for revenue, the Roth advantage benefit could be closed, tightened up. What we really experienced in the past Eric, with various insurance products and tax advantages, as long as they were entered into legally and under IRS and government-type sanctions, then usually, there was a guy in there who grand fathered in. It’s the new folks coming in that were somewhat penalized.

Eric: usually, they won’t go back and try to take it away from you, usually. Right now we believe that if people get it in before the government decides that this money is too tempting, we’ve got to reach in there and get [inaudible: 03:46].

Dick: We can just let these people this tax-free advantage.

Eric: Or their kids or their grandkids.

Dick: That’s where we go into it is potentially limited supply. Folks, this is something you genuinely want to consider, you want to use an advisor that really understands the Roth-IRA, the tax advantages, and the ways to incorporate that into annuity. Eric, I’d like to point out another thing while I’m thinking about it here; there’s different ways to convert an annuity to a Roth-IRA. We could use an existing annuity that’s an IRA.

Eric: You are saying if I own an annuity that has an IRA wrapper with it already . . .

Dick: You can convert it.

Eric: I don’t have to convert the annuity? I don’t have to go get a new annuity?

Dick: You do not. You can actually convert that annuity in to a Roth. Even better, in some situations where you’re doing proper planning and you know in advance that you’re going to be converting this, you may want to go ahead and convert your Roth inside your present account then transfer the Roth into an annuity, if that was the purpose or the reasoning; pick up that 10% bonus, tax-free, 8% bonus, or whatever you get with the annuity. Again, as maybe you have an income rider. I’m getting too much here.

Eric: I just got a tax-free bonus.

Dick: It is just the whole package of being tax-free, and the fact that if you put an income rider on it, that you’re going to have potentially tax-free income. Even if your account value goes to 0 because you have lived a long, long life, your income will just continue tax-free.

Eric: Obviously, there are standard benefits of the Roth that you don’t have to worry about RMDs; the transfer of wealth tax-free. In many ways, it [inaudible: 05:44] life insurance. One thing that I was looking at earlier was the Social Security Tax aspect. The reason that comes into play, even with annuities with IRA wrapper, a lot of times you are going to take those RMDs that are going to kick that Social Security income level to a level that’s taxable.

Dick: It really can push it up in to that taxable.

Eric: If that is one of the things you can potentially avoid by converting it into a Roth, there’s even sometimes that it’s . . . usually, the rule of thumb used to be you want to be able to pay for that conversion, those taxes basically, out-of-pocket. You don’t want to reduce your balance.

Dick: Exactly.

Eric: Some of the formulas that we’ve looked at actually said, “You can save more on the backend by not having those RMDs force you in to a higher taxable consequence.” Now we’re talking all sorts of fun things.

Dick: I think a lot of it, Eric, gets down to; do we believe taxes are going to go up? If you believe taxes are going up, folks, raise your hands. It’s unanimous, no hold-outs. Most rational folks . . .

Eric: And some irrational.

Dick: . . . believe that taxes have nowhere to go, at least for the next 10 or 20 years, but up. It’s a perfect place to look at Roth and say, “Whether I’m going to use the money or I’m going to pass it to my heirs, I want to protect them from increasing taxes.”

Eric: If nothing else, it needs to be one of the things you consider for your retirement future, is how it will impact. Work with a good advisor, discuss the possibilities, and it should be one of those pieces that’s on the table. Taxes are going up; limited supply.

Dick: That’s right. Get them while they last. Thank you.

Eric: Have a great day.

Never Place an IRA in an Annuity? Wrong!

June 8, 2012 By Annuity Guys®

One question that seems to come up on a regular basis is “should I use my IRA/401k dollars to purchase an annuity?” As financial advisors and planners we have to take a “big picture view” prior to answering, because it really depends.

What benefits or options are you seeking to get from your annuity that you could not get from an IRA placed in another financial vehicle?

Many CPAs have a blanket answer when questioned about IRA dollars being used in annuities – it goes some thing like this “No. Your IRA already has tax deferral so their is no advantage to obtaining an annuity with your IRA dollars.” That answer for many retirees is incomplete at best! What about safe asset growth, income **guarantees, or income for life – not to mention a potential IRA “tax trap”?

For more insights into the IRA/Annuity question check out this short video.

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This is a question that has been debated many times… check out this MarketWatch article by Robert Powell from 2005 for more insights into this discussion.

Do annuities belong in an IRA?
BOSTON (MarketWatch) — It is, without fail, one of the all-time great debates in the financial-services industry. Do annuities — variable, fixed or index — belong in an IRA? The answer, unfortunately, depends on who you ask.
Firms that manufacture and distribute such products, not surprisingly, say yes. And consumer advocates, also not surprisingly, say no, citing among other things a suit filed last week alleging that a major insurer improperly sold variable annuities^# for use within an IRA.
Consumer advocates and industry experts point out it’s unwise to invest solely in a tax-deferred product, an annuity, inside an IRA which also offers tax-deferral. “Since money invested in an annuity grows on a tax-deferred basis, I’m not a big fan of using them in IRAs,” says Ken Little, author of “The Idiot’s Guide to Annuities.”
Others, including the National Association of Securities Dealers, agree. Don’t invest in a variable annuity^# inside an IRA solely for its tax-deferral is the upshot of one notice the NASD sent to brokerage firms it oversees. And insurers don’t dispute that advice. Heather Dzielak, vice president of Lincoln Financial Group’s annuity business, says this: “If (a person’s) primary goal is tax deferral, variable annuities^# within IRAs offer no additional tax advantage over the IRAs inherent tax deferral feature.”
But Little, the NASD and others do leave the door open for investors to put their money into such products for other reasons, especially if they understand the costs associated with the benefits they are buying.
For instance, some experts say investors who want, in addition to tax-deferral, certain **guarantees — **guaranteed interest rates, a death benefit, or what insurers call living benefits (**guaranteed minimum accumulation benefits, **guaranteed minimum withdrawal benefits, and **guaranteed minimum income benefits) — and don’t mind paying, in some cases, about 2 percentage points for those **guarantees might consider using an annuity in an IRA.
[Read More…]
Annuity Guys® Video Transcript:
Dick: Eric, frequently, we see articles from the investment industry, from CPAs, just financial magazines, and they talk about an IRA not belonging in an annuity.
Eric: That’s good. We’ve had clients, even the last couple of months here, they’re retiring. They’ve got 401Ks. They have these qualified buckets. It’s time to start spending these dollars. That’s their savings for retirement.
Dick: All these years, they’ve put this money away for their retirement to produce an income.
Eric: They’re starting to think about spending down their 401Ks or their IRAs.
Dick: What do their CPAs tell them?
Eric: “You’ve already got tax deferral in an IRA and 401K.”
Dick: Why would you want an annuity with tax deferral? That is the standard argument that’s used. What’s wrong with that argument?
Eric: You mean you can’t have double tax deferral?
Dick: Why would you need double tax deferral?
Eric: You can’t get that.
Dick: You don’t need an annuity. Is that why people buy an annuity? Is that why people use that for a portion of their portfolio? For tax deferral?
Eric: No. That’s what we always say. There’s no universal answer, but when it comes to tax deferral, do you need a double tax deferral? No. What are the other benefits that they really offer to you?
Dick: The reasons why, right.
Eric: You have IRA dollars; you’re saving for retirement. You’re now going to start to spend your retirement. What does an annuity do for you?
Dick: Safety, security, income **guarantees. In a down economy, in a volatile economy, it’s a sense of knowing where you’re going to be today or 5 or 10 years from now.
Eric: Just because I have an IRA it doesn’t mean I automatically get income for life?
Dick: No, you do not.
Eric: But I have tax deferral.
Dick: Unless everything works out perfect or you have an annuity. In no way do we advocate with our clients or to those who listen to our videos that you put all of your money into an annuity.
Eric: No. When we hear CPAs automatically discount an annuity for IRA dollars or qualified dollars, we have to pull our hair out and see we’ve been doing this a lot lately, because it can be poor advice in a universal sense. You can’t just universally say, “No, you should never put IRA dollars or qualified dollars into an annuity.”
Dick: It makes more sense when you’re younger to think that way, when you’re in that accumulation portion of your life, where you’re growing your dollars. It wouldn’t make a lot of sense to buy an annuity when you can have your money invested where it can potentially earn more and grow. No, that portion, but what happens is that same argument that’s used during those years doesn’t get carried over into the retirement years. It actually gets carried over instead of that transition where things change. Let me ask you a question here to get off the subject a little bit; where are taxes going?
Eric: Taxes?
Dick: Are taxes going down or up?
Eric: Let’s see here. If I had to be a betting man, I don’t think Vegas would give me good odds on this, but I would guess they’re going up.
Dick: I think you might be right. I think most of the folks that are watching this will agree with us. If taxes are going up, then what do I have if I have a pile of money I’ve never paid tax on?
Eric: You got a good deal, because you never pay tax on it.
Dick: What’s going to happen to it?
Eric: Is the government going to make me take these dollars and pay taxes?
Dick: Do you think maybe I have a trap here that I’m caught in, a tax trap? That’s what I see an IRA is, it’s very much a tax trap because we are likely to see increasing taxes as time goes by. Wouldn’t it make more sense to systematically be removing some money from that IRA, using it for the intended purposes of creating income and getting some money out of there so that it’s not all taxes in one large amount?
Eric: That sounds logical, but what would your CPA say? I’m making fun of CPAs right now.
Dick: What do CPAs do? In reality, when you think about it, they’re very, very good at saving us money on taxes in the year we’re going to file our return, or looking forward to the next year. Looking at the 20 or 30 years, a lot time . . . Folks, if you have one of those CPAs that looks 20 years down the line and projects things out for you, and look at ways to save you money, you have one of the rarest CPAs out there; they’re in the top 1% or 2%. Nothing against CPAs, they do a great job; they keep us legal, they save us money on taxes, but a lot of times, they’re looking at what can we save today. They’d rather defer some dollars from tax, not really thinking in terms of what’s happening with potential tax rates 10 or 20 years from now and getting that money out.
Eric: From a CPA’s standpoint, they’re thinking about tax now. Yes, if the answer is there a difference between a tax-deferred scenario between the IRA and the annuity? Of course not. If you’re saying, “What about the other benefits” Then, yes, that’s where the annuity, using qualified dollars makes perfectly good sense.
Dick: It does. When we say, “Never move IRA money into an annuity. Never buy an annuity with IRA money . . .”
Eric: Wrong.
Dick: Not.
Eric: Wrong. Take your personal situation and apply it. Basically, no, there are times when it does make sense.
Dick: There are. But everybody’s situation is different. They need to get a good advisor for that, a good local advisor. Thank you.
Eric: Have a good day.

Annuity Timing – Jump in or Wait?

June 1, 2012 By Annuity Guys®

Annuity Guys®, Dick and Eric examine the question on the mind of many people when comes to selecting an annuity in today’s depressed rate environment – should I jump in now or should I wait?

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Read the article that stimulated this weeks topic…

Why Indexed Annuities Keep Charging Ahead

In the first quarter, indexed annuities topped the charts in sales growth among all annuity lines as compared to first quarter 2011.

The sales volume still did not surpass that of more traditional annuity products, such as variable annuities^# and fixed deferred annuities, but in terms of sales growth, the products were definitely the leader of the pack, and by a substantial margin.

What’s behind it? The answer is in the sales results themselves.

The sales results

First quarter indexed annuity sales reached $8.1 billion — up 14 percent compared to first quarter 2011, according to estimates from LIMRA. AnnuitySpecs.com is reporting similar results — first quarter sales of $8 billion in 2012, up by more than 13 percent from first quarter last year.

The differences in results reported by the two firms are not significant, given that the firms have slightly different lists of participating companies as well as different research parameters and definitions.

But the double-digit growth that both firms identified is significant, especially when viewed against the performance of other annuity product lines. For example, total variable annuity^# sales fell by 7 percent in first quarter 2012 compared to first quarter last year, according to LIMRA. That was on first quarter 2012 sales of $36.8 billion.

In addition, total fixed annuity sales fell by 10 percent on first quarter sales of $18 billion, LIMRA says. That was despite the two-digit jump in sales of indexed annuities, which are included in the fixed total.

The total fixed annuity plunge was a result of sales declines in most fixed annuity categories that LIMRA tracks other than indexed annuities. These other categories include fixed rate deferred annuities (down 28 percent on sales of $7.1 billion compared to first quarter last year), book value annuities (down 32 percent on sales of $5.8 billion), and fixed deferred annuities (down 11 percent on sales of $15.2 billion). Fixed immediate annuities were the only products to flatline, coming in at 0 percent gain on sales of $1.8 billion.

AnnuitySpecs points out that first quarter indexed annuity sales did lag the previous quarter by 3 percent. But Sheryl J. Moore sees the product’s 13 percent increase over first quarter sales last year as the more compelling figure. Moore is president and CEO of Moore Market Intelligence, which owns AnnuitySpecs.com.

“No other lifetime income product is as strategically positioned to thrive in this low-interest rate environment. In fact, the indexed annuity is well-suited for any market environment,” Moore said in releasing her firm’s first quarter numbers.

LIMRA portrays indexed annuity sales as “the driving force in the fixed market” for the first quarter, and points out that for the third consecutive quarter, the products “outperformed traditional fixed annuities, capturing 45 percent of the fixed annuity market.” [Read More…]

Annuity Guys® Video Transcript:

Eric: We’re going to talk about annuity timing. Should you jump in or wait?

Dick: Well, that’s the big question. Do we jump in or do we wait and that’s a question we hear all the time.

Eric: We’re hearing it a lot.

Dick: Recently.

Eric: Especially even with people we’re working with in the last couple weeks, because things are changing. The market is changing, but why is the market changing?

Dick: Well, I think it has something to do with the government forcing these interest rates down.

Eric: Uncle Ben, are you doing it to us again?

Dick: These treasuries are setting new records on the downside, literally daily. So this is really making a difference and putting a lot of pressure on the annuity companies, and obviously banking instruments too, to lower rates dramatically.

Eric: Right. I mean we look at what has happened and I’m going to blame Europe, because they’re not here in the room with us, but the pressures of what’s happening with Greece and Spain and the euro and the flight to safety has been the flight to the United States. Bring us all your dollars, your euros, your yen. We’ll take them all and it’s pushing down the fed, the 10-year treasury is down 25%, from the beginning, just a couple of months ago.

Dick: So the big question gets down to do we jump in and do an annuity now for timing issues or do we wait for the rates to increase? Just recently, Bernanke has indicated that we’re likely to see this low rate environment, for three to five years. It wasn’t very long ago he was talking about the next year or two.

Eric: Yeah, it started it was going to be—when they started making these announcements telling us, giving us the information on how long they’re going to… it was 2013, then it became 2014, and then his latest statement is 2015. So now we’re in a—I don’t want to say **guaranteed low rate environment.

Dick: Yes, so how long do we wait for retirement? How long do we wait for these rates to change? Retirement isn’t always, say a choice. I mean there are a lot of reasons why we retire, and sometimes we just need to make that decision, because we need the income or we need the safety of the money. There are many reasons that we would move some money into an annuity.

Eric: Right and I think that’s the key. Why are you putting money into the annuity? If you need income and you don’t want to have to have that worry about outliving your money that’s where the strength of the annuity still lies. Now are we starting to see annuity companies start to pull benefits off the table?

Dick: Last week we had what three or four of them? Major companies start to pull back and just yesterday maybe, we were notified again?

Eric: I’ve seen two today of companies that have made announcements that within the next week to two weeks they are reducing their benefits.

Dick: And how many people have we met with over the past year or two that said that they were going to wait for things to go up?

Eric: Yes. I can remember two years ago when, oh my, gosh it was at 4.50% in the caps and they were like, “You know it’s going to go up to 5.0%. I’m going to wait till it’s a 5.0%.” Right now people would kill for 4.50%. So it’s trying to predict the market on that side, you just can’t do it, if you’ve got a crystal ball… What we’ve got though is we’ve got **guarantees of the fed. That’s probably not a **guarantee.

Dick: I was going to roll with you on the **guarantees. I was going a different way.

Eric: Prediction by the fed that basically, “Hey, we’re going to keep rates at a low level.” So timing-wise, do we wait? Well, if it’s income…

Dick: Then we should not wait, because the **guarantees that are offered right now on annuities for this income account, for the rollup to create a larger income in deferral is still excellent, and it’s about to take another step back.

Eric: It’s still better than what you’ll get in other areas sometimes, but the annuities excel right now with income. Guaranteeing a rollup and deferral, those are the pieces that really are superior. The lifetime income benefits versus some of the other pieces.

Dick: And if you need immediate income there is the possibility of using a hybrid, as some type of an inflation hedge or using an immediate annuity that has a **guaranteed cost of living adjustment. So there’s no reason not to consider going forward, if it’s that time to retire with immediate income or putting money aside for deferred income, because this is where the annuities really do shine.

Eric: Exactly. All right now so if I wanted to buy an annuity for growth, I’m trying to get the most bang for my buck in the sense of return, should I still buy an annuity now or should I consider other alternatives?

Dick: Yeah, we have a bridge to nowhere and we have an annuity in a package deal, right now. No, Eric. I say if you want growth we really have to think outside of the box. I think that we can still utilize safe money vehicles and use insurance companies for this, but I think that we need to be looking at more the secondary annuities, these would be like, pre-owned or pre-issued annuities, and you can find yields all over the internet.

Eric: Pre-owned, is that like buying a pre-owned car, a pre-owned annuity?

Dick: It’s certified. Actually, it is certified by the court. They’re court ordered. So they’re very, very safe. It’s backed by the insurance company, or the annuity company, the same as a standard annuity. Someone actually bought an annuity. Decided for whatever reason they did not need this annuity and they sold it on the secondary market.

And so by doing that, it can create a much higher yield. So we’ve been able to help different ones with yields in the neighborhood of between 5.0-6.0%. However right now, you see on the internet, you see advertised a lot, if you know where to look, somewhere in that 4.0-5.0% range. It just depends on the source that you have for these annuities. Another one would be that you could get growth. What would be another area?

Eric: Well, as you say, sticking with similar life insurance, in the sense of you’ve got life settlements, now. Life settlements are a little bit more unique in the sense of you’re buying life insurance that somebody decided that they didn’t need. Usually, it’s that someone purchased it and it was for a spouse and the spouse predeceased them. So they have a life policy they no longer need, so there’s more benefit to them by actually selling it on the secondary market, than cashing it out sometimes.

Dick: Right. So you know you’re going to get paid out on that and you know it’s **guaranteed by the insurance company that’s behind it, so it’s relatively safe, very safe actually.

Eric: You’re basically buying—you and usually a group of people are buying the premium. You’re paying the premium, in exchange for the death benefit, so you don’t necessarily always know when…

Dick: You never know when somebody is going to pass.

Eric: The people that underwrite these basically go in and they calculate, look at the life expectancy.

Dick: Of their life expectancy.

Eric: Usually they try to time it to 3-4-5 years, so you could expect it to happen, but you can’t **guarantee it. You’re putting this down, knowing you’re going to get this. You just don’t know how long it’s going to take.

Dick: So you always know that you’re going to have an increase in the money. You just don’t know what the percentage of the yield will be, based on the timing.

Eric: Right. You know you’re going to get the death benefit. You just don’t know when it is coming. You’ve also gotten another life insurance product. You’ve got your indexed life insurance. Now your caps there have not been impacted nearly to the extent that the annuities have. You’re still looking at caps that 12-14%.

Dick: Yes, and they’ve held up all through the whole financial crisis, so that’s again not for everyone, but it is an area where if you’ve got the right scenario, the right situation you get a pretty darn good growth on that. You do have to pass a medical audit.

Eric: Yeah, you have to be insurable or know somebody that’s insurable.

Dick: Know somebody who is insurable, right. So that’s thinking outside of the box.

Eric: There are alternatives out there, safe money alternatives.

Dick: If you want to earn somewhere in that 5.0% to maybe 7.0% range, and even in some cases it can go into the double digits, but we’re trying to be a little bit more conservative.

Eric: We’re by nature conservative.

Dick: Under, what do we call that, under promise?

Eric: Understate.

Dick: Over deliver.

Eric: That’s right.

Dick: Back to, did you have a point that you wanted to hit there, on something?

Eric: No. I was looking at the article that kind of stimulated the topic for today and talking about the changes, and what’s going on in the annuity market.

Dick: The annuity world out there.

Eric: You’re seeing a lot more of the purchases on the indexed annuity side, and I didn’t know if we were ready for the summary statement in this sense, but it’s basically looking at the changes and there are a lot more people purchasing indexed annuities.

Dick: Right, which are considered the hybrid annuity, so the fixed index annuity.

Eric: We like to personally think we’re responsible for the increases in the annuity market, but in all likelihood, probably not.

Dick: We’re rising a tide, across the nation with them.

Eric: And it’s because of one, the income riders. The ability for in retirement, and then you also have a safety of principal and a hope for gain.

Dick: Right. So you put all those factors together and compare the hybrid annuity or the indexed annuity to just a standard fixed annuity or the variable annuity^#. What we’ve seen is a great increase in the overall rate of sale, of the indexed annuity and the hybrid annuity and a decrease in the fixed annuity, which is paying very low rates right now, and also in the variable annuity^# which introduces the market risk factor.

Eric: People are agreeing with us more and more that they see the benefits of safety of principal and **guarantees, either whether it be, through just the **guarantee of not losing principal or increases in income.

Dick: Right. Well, I think we need to sum it up with—is this a good time to jump in?

Eric: Yes, and no.

Dick: He sounds like me, now.

Eric: If your timing is that you need income, if you want growth, there are vehicles out there that we would encourage you to look at.

Dick: If you want income it’s a definite, that a portion of your portfolio can go towards an annuity and the timing is probably better to move than to wait.

Eric: If you’re retiring now?

Dick: Or in the near future.

Eric: Yeah, as you say, you probably don’t have time to wait.

Dick: So that’s it for today, folks. Thank you for spending time with us.

Is Social Security an Annuity?

April 27, 2012 By Annuity Guys®

It is important to understand the way that Social Security was designed to function. By commercial standards, this is the ultimate lifetime annuity. The definition of an annuity is basically exchanging one’s money with some entity in return for a reliable income stream over a period of time based on a predetermined agreement. The strength of the annuity in this case is the full backing of the US government which is considered to be the safest financial haven of the entire world. With this, Social Security’s ultimate annuity aspects are:

Full Backing of the US Government
Tax advantaged – 0 to 85 percent is taxed based on income
Inflation Protection – cost of living increases (COLAS)
Income for life – eliminating longevity risk
Spousal, Family and Survivor benefits
Priced less than commercially available annuities

What did retirees do before 1935 when Social Security was not available? What about those less fortunate who had no supplement for their retirement income to survive? There was more family and church involvement on behalf of the poor and more hardship for certain. Here are some recent statistics from www.SSA.gov that demonstrate why Social Security, like it or not, is likely to be continued to a large degree as part of what it means to be a Social Security entitled US citizen.

In 2011, nearly 55 million Americans will receive $727 billion in Social Security benefits.
Social Security is the major source of income for most of the elderly.
Nine out of ten individuals age 65 and older receive Social Security benefits.
Social Security benefits represent about 41% of the income of the elderly.
Among elderly Social Security beneficiaries, 54% of married couples and 73% of unmarried persons receive 50% or more of their income from Social Security.
Among elderly Social Security beneficiaries, 22% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income.
Social Security provides more than just retirement benefits.
Retired workers and their dependents account for 69% of total benefits paid.
Disabled workers and their dependents account for 19% of total benefits paid.
About 91 percent of workers age 21-64 in covered employment in 2010 and their families have protection in the event of a long-term disability.
Just over 1 in 4 of today’s 20 year olds will become disabled before reaching age 67.
67% of the private sector workforce has no long-term disability insurance.
Survivors of deceased workers account for about 12% of total benefits paid.
About one in eight of today’s 20 year olds will die before reaching age 67.
About 97% of persons aged 20-49 who worked in covered employment in 2010 have survivors insurance protection for their young children and the surviving spouse caring for the children.
An estimated 158 million workers, 94% of all workers, are covered under Social Security.
50% of the workforce has no private pension coverage.
31% of the workforce has no savings set aside specifically for retirement.
In 1940, the life expectancy of a 65-year-old was almost 14 years; today it’s almost 20 years.
By 2036, there will be almost twice as many older Americans as today — from 41.9 million today to 78.1 million.
There are currently 2.9 workers for each Social Security beneficiary. By 2036, there will be 2.1 workers for each beneficiary.

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