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Hybrid Annuities have too many moving parts… Says Who?

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What makes a Hybrid Annuity different from a Fixed Annuity? Answer: index strategies, an income rider, and the contractual **guarantees associated with the income rider.

What makes a Hybrid or Index Annuity better than a standard fixed annuity with an income rider? Answer: the opportunity to participate in the potential upside of index gains that can exceed the interest earned by a fixed interest only annuity.

The **guarantees may not be “sexy” but they form the foundation of why someone should consider a hybrid annuity. We all like the “potential” to do better — Dick and Eric tackle the moving parts of a Hybrid Annuity in this weeks second segment of this two-part series.

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

Enjoy our short Fog Lifter video…

“The Power of Indexing and Contractual Income Guarantees”

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Are Hybrid Annuities too Complicated?

A common complaint leveled at hybrid annuities is that they are too complicated and have too many moving parts. The Annuity Guys®, Dick and Eric, discuss why many folks in the media and investment world like to hobby-horse this point while missing the real reasons why these financial products work so well as a foundational allocation in thousands of retirement portfolios. The secret is “the non-moving parts otherwise known as contractual **guarantees.”

Contractual Guarantees – absolute **guarantees, no-moving parts.

Hybrid/Fixed Index Annuities – allow for upside potential of specified moving parts in addition to absolute contractual **guarantees.

Income Rider – addendum to an annuity contract **guaranteeing a future lifetime income plus additional benefits in some income riders (this is a contractual **guarantee).

Features, Benefits, and Facts:

  1. Annuity Owner Remains in majority control of the annuity’s cash account value during the surrender term and has 100% control after the surrender term.
  2. Full account value of the cash account passes on to heirs with no surrender or penalty charge.
  3. Guaranteed growth in deferral **guaranteeing a minimum future income. Example: Initial Premium $100,000 + 5% bonus **guaranteed growth of 7.2 percent deferred for ten years = $210,000 income account value producing a of $12,600 per year at age 70 with a single life payout.
  4. Payout percentages from the income account are based on age and a single or joint income need. Example: age seventy single payout 6 percent or joint payout 5.5 percent
  5. Fees for riders can be based on the cash or income account value and are charged to the cash account. Fees typically range from half of one percent (.5%) to one and a quarter percent (1.25%). This does not reduce the **guaranteed growth of the income account.
  6. May have a death benefit allowing the income account if it is larger than the cash account to be distributed to heirs over a five-year period.
  7. May have an increasing income as an inflation hedge.
  8. May have a Long Term Care Benefit.

Index Strategy Moving Parts:

(Index examples: *S&P 500, *Dow Jones Industrial, *Trader Vic (Commodities), *Barclays Capital Aggregate US Bond, and literally any third-party index may be specified as a measure for crediting interest).

[Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we’re going to talk about hybrid annuities. Do they have too many moving parts? Sounds like a flashback to maybe a previous episode.

Dick: Like one last week that we said ‘are they too complicated?’

Eric: This time, we talked about at the very end, all the moving parts. Now we’re going to get a little bit more detail as to, do they have too many moving parts?

Dick: That’s a good question, and I think that some folks would say, yes, it’s too complicated. There are too many moving parts. I think that you have to really weigh over who’s saying it and why they’re saying it; what their motive is.

Eric: Yeah. The first thing we should start out is where we started last week, in saying, why does somebody buy an annuity to begin with? It’s contractual to **guarantees.

Dick: Right. Exactly!

Eric: Safety, security, predictability. That’s why we like the hybrid annuities, is for those contractual **guarantees.

Dick: The moving parts, as we discussed last week folks, the moving parts are those things that are in addition to the contractual **guarantees; so those are the potential of the annuity. If you can be satisfied, and this is what we do with our clients, we help them to see where the contractual **guarantees actually do meet all of their concerns and their objections. Then if they can get some additional potential on top of that, then that’s a win-win.

Eric: Right. Let’s start with the base here. Typically, we’ve got this fixed indexed annuity as the base.

Dick: Right. That’s our chassis.

Eric: That’s our chassis. What then goes into making a fixed indexed annuity a hybrid annuity?

Dick: Typically, it will be an income **guarantee, and that income **guarantee will give a lot of different benefits, primarily knowing what your income is going to be at some point in the future that will help to offset inflation and know that you’ve got some type of increasing income at some point in time.

Eric: Right. We talk about that income rider quite a bit because of what it offers. It’s one of those things that’s attractive to people because they remain in majority control.  We’ll go into detail in the article about what majority control means. It’s also a way of taking assets and being able to pass it on to a beneficiary or heirs.

Dick: Yes. It’s not like the immediate annuity where you give the lump sum away. There’s a count value.

Eric: Too often, people want the annuity, but they don’t want to give up that control.

Dick: Correct.

Eric: That’s what that hybrid aspect brings to this chassis.

Dick: It does.

Eric: Payout percentages, as good, better than . . .

Dick: Payout percentages, as compared to an immediate annuity, if you’re starting an immediate annuity today and you’re starting a hybrid annuity today, the payout percentage will typically be a little bit less. The beauty of it is, the immediate annuity pretty much has to be started within 12 months of the time that you’ve signed up or been approved for your immediate annuity. However, with a hybrid annuity, the idea of deferral says that it’s going to pay out a lot more at some point in time.

Eric: Right. If you’re just looking for the most money you can get right now and you don’t care about anything else, then look at an immediate annuity.

Eric: If you’re wanting flexibility plus those **guarantees, that’s where the hybrid comes in.

Dick: Not only that, but there situations where the immediate annuity isn’t that much more.

Dick: Folks are more interested in that account value, if they don’t use it all up, going on to the heirs.

Eric: Right. That’s been one of the biggest reasons people are drawn toward the hybrids. The income rider tends to be the first piece that we highlight. Is it a moving part?

Dick: No. That’s what’s good about the income rider, is that it is a contractual **guarantee. That is part of that chassis that is **guaranteed.

Eric: I would say, if you’re looking at a fixed indexed annuity, what makes it a hybrid is, again, is adding that income rider component, that **guarantee of income in deferral. Basically, you’re building that account base in deferral.

Dick: Another aspect that lends itself to the hybrid aspect of the annuity is the idea that you can get some upside potential without the downside risk. You’ve got a little bit of that variable annuity# flair to it with that. That’s where the confusion tends to come in.

Eric: Yeah. We’ve talked about this before, too. People will call up and we’ll talk to them and say, “I’m interested in a variable annuity#.” In the mindset of somebody, the variable aspect is because it has the potential of having varying rates of return.

Dick: Right, some increased potential.

Eric: Right. In this case, an indexed annuity has varying rates of potential, sometimes based off of, basically, those indexed components.

Dick: In the early days, Eric, of indexed annuities and what we now call hybrid annuities a lot, they were sold and people purchased them, or wanted them, based on these indexes that did have all of this fluctuation and movement in them. The reason for it was because it did protect the downside, it did give them upside, and the fact of the matter is, there have been many time periods when this type of an annuity has out-performed the stock market, but it was never intended to do that in the first place.

Eric: We’ll tell you right now, if your intent is to go out there and beat the market, don’t buy one.

Dick: Don’t buy one.

Eric: That’s not the purpose for a hybrid annuity.

Dick: It’s possible that you can do it.

Eric: Over a period of time.

Dick: But it’s not the reason. It’s not the purpose.

Eric: Right. Because what you’re trying to do with a hybrid is limit your downside.

Eric: You’re taking away that downside risk of being in the market because your principal is protected.

Dick: Exactly. Eric, we’re not doing a very good job of getting to our list here.

Eric: I was going to say, we’re going to get to the second point here very soon. It’s talking about some of the moving parts that are truly involved in the indexing components.

Eric: Dick’s done an excellent job of laying out an article here, so if you haven’t had enough time to watch us, you’ll see below, or in the links below.

Dick: Read it more in-depth.

Eric: We’ve got some additional details. Caps.

Dick: Caps, okay. My cap’s hanging right there. Let’s tie the caps into; first of all, what’s an index? Most of you folks understand that when we talk about an index, this could be any type of index. It could be an index . . . let’s use the popular ones.

Eric: S&P, NASDAQ.

Dick: Dow Jones, The Trader Vic’s. You could use a gold index. You could use a bond index; any degree of creativity.

Eric: Exactly. The index could be literally the temperature outside each day. It’s a benchmark on which you can measure something. The most popular ones are those that are tied to the stock market.

Dick: They do buy call options on these indexes, so that is the purpose, why we choose an index. When we look at the caps, folks, if the market goes up 10% in a given year, and your cap is 3% or 4%, which is about where caps are now. We have some exceptions, where caps are higher, but somewhere in that 3% to 4% range, market goes up 10%, how much are they going to get, Eric?

Eric: If the cap’s 3%, you’re going to get 3%.  That’s the limiting factor. You have no downside risk. If the market’s down 10%; 0. You’ll hear a lot of people talk, “Zero is your hero,” because you don’t have that backslide in case you had multiple down years. You don’t have to worry about recovering from a backslide. The worst that’s going to happen is that you stay on a level plane.

Dick: Right. One of the things that we didn’t really touch on, which I will just drop back to for a second here and then move on, that is one the income rider. Typically, that will have somewhere in the neighborhood of maybe a 7% **guarantee; 6%, 7%, we’ve even seen 8% for some time periods, which was a **guarantee. Even though you might have a 3% cap on the indexing for your cash account, your index account could be significantly higher.

Eric: That’s why that income rider is so popular, because while it’s in deferral, you can get those **guaranteed growth periods.

Dick: Right. If we move into the spread?

Eric: Personally, I’m a big fan of the spread; and that’s not peanut butter and jelly, necessarily. I like spreads because with a standard fee, you have typically a percentage that’s pulled out every quarter, of your account, period after period. Let’s just use a round number.

Dick: You’re referring to the income rider.

Eric: Income rider fees.

Dick: Right. Okay.

Eric: You could have fees for other things, but the income rider fee, which is what makes a hybrid annuity really a hybrid, is having that income rider. There’s typically a fee associated. If that fee is ½%, that ½% is going to be pulled out on a regular interval, ir-regardless of whether or not you’re getting a gain.

Dick: Whether you had any interest earnings or not.

Eric: That’s correct. Spreads on the other hand, are typically higher than fees. A fee may be 50 basis points, ½%. You may see a spread of 1½% to 2%. The deal with the spread is the company only takes their portion if you have a gain. You’re giving up the first portion of any kind of gain that you could receive.

Dick: Right. Your account value cannot go backwards if you’re not earning with a spread.

Eric: That’s right. If you had 12 consecutive, or 10 consecutive, years of getting 0 return, whatever you put in principle-wise, would be **guaranteed to be that same level.

Dick: Right. I think that the spread has a definite place, and it should be considered in the overall picture. As we’ve experienced with certain annuities that don’t have a spread, their contractual **guarantees are so much higher for the income. Since that’s the client’s primary objective, then it makes sense to go with the fee over the spread, using that particular annuity. You have to weigh it against all those factors.

Eric: Exactly. Typically, you’ll see the spread number being higher. It’s just attractive when you’re looking at predictability, that you know that you’re not going to have any kind of negative impact just because you don’t have a return.

Dick: Another idea of using the spread is when the market has . . . when you’re using it in indexing, and maybe you’re doing an average of a year’s worth of indexing, and they will say, “If your average growth of the index for the year was 10%, you’re going to have a 3% spread.” That means that first 3% of that 10%, you don’t get.  On the other hand, if that year there was a 5% negative growth, or 10% negative growth, then your 3% spread would not be applicable, because there’s no earnings, no growth there.

Eric: Right. Where we typically see the spreads are on something that have more upside potential a lot of the time.

Dick: Right. Did I actually do the math where I said, “If you’re up 10% and you have a 3% spread, you would have 7% gain”? Let’s move on and talk about participation.

Eric: That’s the easiest thing, in the sense of it’s taking a percentage of the growth and you get a participation percentage, typically. Back in the good old days, it might have been 50%. If the gain was 10% of the market, you would get ½.

Dick: I was always a fan of participation, but because of the financial crisis we’ve been through, the Great Recession, we’ve seen all that pare back to where participation rights are now down around 25%. The market goes up, let’s use that 10%, it’s easy to figure. If the market goes up 10% and I get 25%, what did I earn?

Eric: 2½.

Dick: 2 ½%, okay.

Eric: I got my calculator in my pocket.

Dick: You’re good, Eric. Okay. We already touched on the average a little bit, in using the spread, so maybe we’ll move on to the next one. This one’s very interesting. This one, I see messed with a little bit. When I say messed with, folks, I see you messed with a little bit, unfortunately, from advisors that overstate this particular strategy.

Eric: Are we talking about the monthly sum?

Dick: Monthly sum. The monthly average.

Eric: Look at the potential.

Dick: It does have good potential. It just doesn’t usually work out, Eric.

Eric: 2% a month. There’s 12 months in a year.

Dick: If I get 2% each month, and I add those together, that means I’ve got 24% potential. If the market goes up 24%, and it does at 2% a year, I get all 24%. Is that correct?

Eric: 2% a month.

Dick: A month, yeah, keep me straight.

Eric: For the whole year, I’ll get 24%. That’s my potential in a given year.

Dick: What’s the worst thing that can happen in that year? If you’re going up 2% every month, what’s the worst thing that could happen maybe in that 10th or 11th month?

Eric: That’s where the market loses 20% in one month.

Dick: That couldn’t wipe it all out, could it?

Eric: Yes, it can.

Dick: It can?

Eric: There’s no downside protection.

Dick: Folks, that’s the problem. The monthly sum and the monthly average has a cap on the upside, but it has no cap on the downside. The companies have figured out that, yes, there are some years where you really do capture and you get those big, big returns, and it feels good and it looks good. There are times to actually use this strategy.

Eric: Now is probably one of them, actually.

Dick: It very well could be.

Eric: I always call it the homerun versus the single. We talk about annual point being the single. You get lots of singles, but the monthly sum is truly going for the homerun. We have seen returns out there in the 14%, 15%, 18% range.

Dick: Right. More often than not, what do we see?  A big 0. We may see a client go for 3, 4, or 6 years before seeing any interest crediting to their account, and that’s pretty tough for people. They’re not going backwards.

Eric: Right, and we should qualify that. While you’ve got not downside protection on the month within the index, that doesn’t apply to the account value. The account value, the worst it’s going to do, again, is 0. Even if your index finishes down on the year, what will be applied to your account is basically 0 gain.

Dick: Okay. Now we come to a very interesting one, Eric, called the blend.

Eric: The blend, the blender.

Dick: We put it in the blender. We’ll do one of these. Here we go. Let’s make this real simple. A blend is like a balanced portfolio: You put 50% in stocks and you put 50% in bonds. However in this case, what we’re doing is we’re putting 50% in some popular index. It’s not really going in the index, as we’ve discussed many times. It’s using it as a measure. We’re putting 50% in towards an index and we’re putting 50% into . . . I’m just using 50%, folks. It could be 30% or 40%, but it all equals 100%. 50% into a fixed rate of interest. We’re just saying ½ the account goes into fixed rate of interest, ½ the account goes into stocks.

Eric: Right. Then you dump them both in the blender.

Dick: Right. Exactly. There’s no cap on the 50% where the stocks are at.

Eric: Which is what makes it attractive to [inaudible: 16:08]. You’ve got unlimited upside potential on the blend side. They all have limiting factors.

Dick: It’s tricky.

Eric: What’s in that fixed rate bucket is typically, right now it’s at 1% or 2%. The best that 50% is going to do is 2%

Dick: Yeah, 2% or 1½%.

Eric: You can get 10% or 20% over here, but it has to be then blended with that fixed rate bucket.

Dick: Typically, you could take, in a year where you had the market up 10% and you had a 2% bucket and you had a 10% bucket, and they were both equal in this case. You put in the blender, you stirred it all up, what are you going to come out with?

Eric: 6%.

Dick: About 6%. Boy, you are good. Folks, we’ve done the math for you on these. When you’re on this website, we’ve got some formulas, and we broke it down in simple terms so that you can read it slowly and get a good understanding of what we’re talking about.

Eric: We try to give you at least a cursory idea of what to expect when you’re seeing some of these terms flown about.

Dick: We’ve probably . . . hopefully, we have not. Hopefully, we haven’t thoroughly confused you. What we really want you to take away from this is that these are the moving parts that give you greater potential. These are not the specific reasons, for most of you, why you would actually buy or choose to allocate to a hybrid annuity.

Eric: If you’re buying for these bells and whistles, the fit’s probably not right.  If you’re buying for the base chassis, and you can live with that **guarantee from the income rider and from the annuity aspect and the income side, or the estate planning side, whatever that need is, if this fits your need and you can just understand that there’s the potential for a little bit more extra.

Dick: This is where a good advisor comes in, because they can look at the potential, they can look at what’s going on in the economy in general. Folks, they can help you make a good decision on which way to go in this indexing. Even if the indexing really produced nothing and you had good contractual **guarantees, which is what you should have your sights set on, you’ll be satisfied.

Eric: Exactly. Buy for the basics, and be happy with the extras.

Dick: Right. Exactly.

Eric: Hope we’ve broken down and explained to you the ‘says who’ portion.

Dick: Yes, ‘says who’. Look behind the veil a little bit and see who’s telling you that they’re too complicated, because maybe from that person it is too complicated. For someone who understands a hybrid annuity and what it does for the client, it can be very effective as a good retirement financial tool.

Eric: Thanks for tuning us in today.

Dick: Thank you.

Why are Hybrid Annuities so Popular?

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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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**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.

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

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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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**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.

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

  1. Every issued annuity is a variable annuity#.
  2. The impact of inflation is too great for fixed annuities.
  3. With penalties and surrender charges, annuities are just too expensive.
  4. Never use your IRA money to invest in an annuity.
  5. 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.

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

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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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**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.

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.

Why You Should Ladder Annuities…

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When your financial advisor starts to talk to you about laddering, realize that they are talking to you about using financial products with varying maturities and that they are most likely not thinking about a trip to the hardware store.

In today’s low interest rate environment laddering annuities allows clients to potentially capitalize on increasing rates without forgoing returns that can only be obtained by committing to a longer maturity period. Laddering provides an opportunity for conversion of shorter maturity annuities to better options if they are available earlier – then the maturities continue to provide that option on a regular ongoing basis.

Perhaps the best option to ladder annuities is by staggering deferred hybrid annuities for future income. By laddering hybrid annuities you can create a income stream that will combat inflation and provide for added flexibility with future income.  It can also be an excellent strategy for financial security should you live a longer then expected life.

Eric and Dick break down some of the pros and cons for laddering annuities.

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

See how Scott Bulmer and  Kevin Hedstrom address this same topic in a recent issue of Life Health Pro.

Customize Annuity Options With Laddering

As an agent who has worked with hundreds of clients to help them build and protect their retirement nest eggs, I am now faced with helping my clients make the dramatic shift from the wealth management phase (gathering and growing assets) to the income management phase (preserving and distributing assets). With 78 million baby boomers racing toward—or already in—retirement, the need for retirement income protection has never been greater.

It’s been well documented that since Jan 1, 2011, about 10,000 baby boomers have and will continue to turn 65 each day. This demographic phenomenon forces our industry to be the catalyst in moving clients’ mindset from accumulation to income distribution strategies. Our retiree clients now need to draw down their assets to generate a reliable, secure income stream that will allow them to maintain the lifestyle they so desire during their retirement years.

With the latest gyrations in the stock market, historically low interest rates and the economic turmoil here and abroad still fresh in their minds; clients are looking for less risky solutions to creating a secure retirement income combined with growth potential. Those clients nearing or in retirement can’t afford to weather another pullback in the market as was experienced several years ago. They just don’t have the time horizon or risk tolerance to recover unless they want to continue working throughout their retirement. In addition to market shifts, we are dealing with traditional safe money alternatives, such as CDs, money market funds and saving accounts, that may be out of favor due to these low rates.

Fixed indexed annuities as a solution

All of these forces—demographic and economic—pose an interesting challenge to agents. The major risks facing senior clients today are:

  • Market risk—The ongoing volatility in the stock market
  • Inflation risk—The erosion of one’s purchasing power
  • Longevity risk—The increase in life expectancy

The average individual’s lifespan has increased markedly over the last 50 years, and people now have to worry about running out of money before they run out of time.

A product solution to mitigate these risks that I’ve incorporated in my practice is the fixed indexed annuity. Since their introduction in 1995, indexed annuities have given people the opportunity to participate in the upside of being linked to an index, such as the S&P 500, without having to worry about losing money. Clients are very receptive to the dual nature of this product, which, at its core, is an insurance contract. They get the opportunity to partake in the upside potential of the stock market, with the **guarantee they won’t lose money. In addition, over the years, these products have performed as they were designed to. [Read More…]

Annuity Guys® Video Transcript:

Dick: One of the things that Eric and I find ourselves involved in a lot of times with annuities is laddering those annuities.

Eric: Right. It’s a technique or a strategy that we employ that uses multiple annuities with basically different maturity dates. So you would start with perhaps a three-year or a five-year or a ten-year, different layers.

Dick: I think a lot of folks, Eric, are familiar with CDs. You’re familiar with CD laddering. You may not have called it laddering, but staging your CDs over a period of time.

Eric: Staging or staggering.

Dick: It works very well for annuities for different reasons.

Eric: Right. Well, what are some of those reasons? Safety because you could use three different companies.

Dick: Diversification helps with that safety.

Eric: Right. Then you’ve also got return.

Dick: If you’re wanting to grow your money. We’re in a very low interest rate environment. So what do we think is going to happen maybe over the next three to six to eight years?

Eric: We expect interest rates to rise because they’re at all-time lows. They’re almost at zero in the case of the Fed rate.

Dick: Sure.

Eric: So we expect to see growth. But what do you do now? In order to get the biggest return right now, you have to commit to seven, eight, nine, or ten years.

Dick: It’s a pretty long period of time. Right.

Eric: Is it a smart decision to say, “I want to put all my money in a ten year product right now,” knowing that rates are likely to go up in say three or four years?

Dick: It probably isn’t if you’re looking for growth.

Eric: Right. But are you willing to sacrifice three years of growth just waiting?

Dick: Well, the alternative to that though, Eric, is if we don’t do anything, we get no return at all.

Eric: Well, actually we lose money.

Dick: We lose money because of inflation.

Eric: Inflation.

Dick: Exactly.

Eric: Yeah, exactly. By looking at, in the case of return, staggering those things. Monies are coming due at various intervals. It gives you that.  The one thing I like to use annuities for in laddering is the income riders and the income **guarantees.

Dick: Right, which is a completely different way of looking at annuities and using them, but it’s been very effective for our clients.

Eric: The strength of an annuity right now, especially the hybrid annuities, is the **guarantees for income and deferral. You still have the five, six, or seven percent out there that you can get in a deferred for income. If you use a stage one annuity, perhaps turn income on right away knowing that you’ve got this **guarantee in deferral, your stage two or the second rung of the ladder you can turn on.

Dick: This helps us to offset inflation, because we know that, initially, we can start off with an income that would be adequate for that time period, but that we’re going to need to supplement that income five years, eight years, or ten years down the line. The next annuity kicks in at that stage, which is laddered.

Eric: Exactly. The it’s even nice to have an optional rung that may sit out there that you may never even anticipate turning it on. But if you have longevity that you don’t either anticipate or something happens, you’ve got that third one out there that’s in deferral getting those **guarantees. So it becomes that additional rung.

Dick: Right. It can pass on to the heirs, or you can turn it on if you need it. One of the things that we really don’t know right now is what is going to happen to certain pensions, what cutbacks or things might happen with Social Security. So it’s nice to have that contingency, that annuity out there that’s going long term.

Eric: Right, and it’s nice to have one that’s especially geared for growth. You know that it’s going to be at this level here, this level here, and this level here. The **guarantees, having those **guarantees out there.

Dick: When would it maybe not make sense to ladder?

Eric: Not use a ladder? Well, obviously if you have limited assets. There are just times when there are minimum deposit requirements, and if you have limited assets, you may only have an option of one annuity. That’s one.

Dick: Sure. When we say “limited assets,” maybe $100,000 or $200,000, somewhere in that neighborhood? I guess it depends on the income that you need. It depends on the growth that you need.

Eric: Right, it depends on all that.

Dick: I do know that the more money that you have, folks, especially when you start getting up there in the $400,000 to a million or a million plus, it makes a lot of sense to ladder and diversify as compared to maybe below $400,000. There can be some good reasons to still ladder and still diversify, but you have to look at it a little closer.

Eric: Right. One of the things we run into a lot is much of the time you’ll see one specific annuity that performs best for somebody’s situation, and there’s just not another comparable piece that does the same thing.

Dick: So the tradeoff is to get the diversification, the safety, and the laddering that maybe you’re looking for, you have to take considerably less in benefits.

Eric: It’s simply deciding to take a pay cut. If you value the other things you get in the willingness to take a pay cut, that’s what that balance is.

Dick: Then there are, again, some annuities out there, on the growth stage where it’s not just income or the pay cut, where they give a really nice death benefit. On top of that death benefit, they will give a nice return, so that you would maybe have the potential to see somewhere between a 6% to a 10% return from a very safe position with your assets. It may be a situation where a person would say, “Hey, because I want this to go onto my heirs, I don’t really need to ladder it,” depending on the amount of money.

Eric: It’s the **guarantees. You are getting a contractual **guarantee in this case from an annuity that is superior to something else that’s offered by anybody.  It’s if you’re willing to take less and go here and split them, that’s an option. If you know your best circumstances lays right here, sometimes you’ll decide not to ladder.

Dick: I would say, just for folks as we kind of wind things up here, that in most cases the laddering is a good thing, works, and should be looked at. Occasionally, though, it’s not. I mean occasionally you’re going to want to go with one company that gives you the greatest benefit, and it isn’t going to make as much sense to ladder.

Eric: The best way to say this is, “You know what? Sit down with someone who can run the numbers for you, talk to them about what the pros and the cons are, and then ultimately you get to make the decision.” Now, I think it should always be one of the things that’s part of the consideration and part of the discussion. For most advisors, that’s exactly how they’ll present it: Here’s option one, here’s option one and two, and here’s how that works out.

Dick: Right. What are you comfortable with?

Eric: Exactly. Where is your comfort level? You’re in control.

Dick: Right. Pick what’s best for you.

Eric: Exactly. Thanks for checking us out.

Dick: Thank you.

 

Annuity Timing – Jump in or Wait?

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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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**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.

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.

Are You Too Young or Old to Purchase an Annuity?

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What is the best age to purchase an annuity?

There have been a plethora of articles and reports about unscrupulous agents who sell annuities to senior citizens who did not understand what they were buying or the contractual ramifications of their decision. Due to the publicity of many of these unfortunate events there has been a blanket statement made by many that annuities should not be purchased by any over 70….. Hogwash!

In the world of financial planning and investment advising there is a need to have safe money options regardless of age. The key relies on the fact that the financial product should provide a solution to a financial need.

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

Annuities by their name are designed to be income producing financial instruments. Yet, they can also be used effectively as estate planning tools.  Unfortunately for senior adults insurance companies safeguard themselves from bureaucratic regulators by limiting annuity purchase ages – most companies would rather err on the side of not selling an annuity to someone approaching or exceeding eighty years old than to risk being accused of an unsuitable sale by a regulator even if the annuity would be a great benefit to the purchaser.

Why wouldn’t an eighty two year old on their own or with their families consent buy an annuity when they want safety of principal, a higher growth potential than the local bank, a 5 to 10% bonus and all of the account value to bypass probate and go directly to their heirs with no surrenders or penalties? The main reason is that senior citizens are discriminated against by overzealous regulators that in the name of protection have caused the door to be shut on this legitimate purpose for annuities in estate planning.

It should be noted that the age limiting also applies to younger individuals. We have seen insurance companies pull back on benefit eligibility for younger individuals which seem “to promise to much” based on today’s interest rate environment when these benefits are extrapolated out over a younger person’s lifetime.

So again, what is the best age…

The most common age tends to be between 45 and 65. However, it depends on the type of annuity and your planned retirement age. Our most common experience has been to start utilizing annuities in retirement planning 1-15 years prior to retirement. Annuities excel at keeping retirement dollars safe and secure while providing growth for retirement income. We often discuss with clients that they should consider annuities for their income foundation or “If they cannot afford to lose principal” or if they “do not have the time to recover from losses in riskier financial choices” — then annuities are always prudent alternative for consideration.

It seems that every month or so I see a newspaper and magazine financial writer that writes a column gets asked a question like, “I’m 70 years old and my advisor wants me to by a (fixed, variable, hybrid) annuity, should I do this?” I’m sorry, but no columnist can effectively answer that question in 300 words or less, unless his/her answer is “it depends.” It’s not uncommon for retirees to live into their 90’s – and a 70 year old with a family history of longevity may be a candidate for an annuity if they have a concern about outliving their money. It should be part of the discussion – if it fits the need.

 So if I’m in my 20-40’s then I should not consider an annuity… right?

For younger individuals two key elements need to be part of the consideration when discussing if an annuity is a valid option. First, what are they giving up and at what cost? Younger clients who are disciplined enough to make regular contributions into an investment can benefit from dollar cost averaging. Also, they have the advantage of time — the longer the time before the dollars are needed the more likely they are to benefit from the volatile upside of some of the riskier investments. Second, how do they handle the loss of principal? Can they continue to invest into a financial product that may not always consistently grow? If they cannot stomach a loss then other safe money options like annuities should be part of the discussion.

Get Good Advice

In closing, we encourage you to get good advice. Find a financial professional that will listen to your needs and then work with you to find proper solutions. Ultimately it will be you who makes the decision on what to do with your dollars. Do not make decisions based upon a newspaper article or what your neighbor just did that sounds so great. Work with someone who has your goals in mind and you have a much better chance of meeting your retirement target.

Eric: Today, we’re going to talk about what is the best age to purchase an annuity. Now Dick, I see it in the newspaper all the time, “Dear Abby,” well Dear Abby isn’t quite right, but a financial columnist gets the question, “Dear, Dick; I’m 70-years-old. My financial adviser wants me to buy an annuity. Is this a good recommendation?”

Annuity Guys® Video Transcript:

Dick: Absolutely, if you’re 70-years-old, you should never buy an annuity.

Eric: Now 70 and a day, you’re okay.

Dick: Or what about 69 and a half?

Eric: Okay, that’s fine.

Dick: You know really folks; this is the problem with columnists and 300 word articles or whatever. They don’t really take your individual situation into account and where one 70-year-old buying an annuity could be completely the wrong thing, you know Eric we’ve seen that, on the other hand there are other 70-year-olds that have a unique situation, where an annuity could be the exact perfect answer for them.

Eric: Age; we hate to say age doesn’t matter, because really it comes into play in a certain aspect, but it’s all about longevity, expectations, and partly being part of your financial plan.

Dick: Right. If you want to get money over to heirs, maybe your children, you want that money to be safe. You want it to have better earning potential maybe than what the banks could give you.

Eric: Right now, that doesn’t take a whole lot.

Dick: It doesn’t take much. So there could be many of those factors. You want to avoid probate; that could be a good reason to consider an annuity for that purpose.

Eric: Exactly. So the blanket statement to say, “I’m too old for an annuity,” is not the right way of saying it. Now there are certain considerations. I would say as far as liquidity as far as what’s a sound investment, you have to trust the decisions, and that the people you’re working with are giving you good advice. If you ever don’t feel comfortable with any financial advice, get a second opinion.

Dick: And this is where I’ve had taken issue anyway, with some of the compliance regulations and the regulators, which they try to make it one rule fits all, and they don’t really take the individual into account. And I very frequently find that an older person is truly discriminated against, because they cannot choose what is best for their situation. The insurance companies are afraid to sell them an annuity or to allow them to purchase an annuity, because it could be looked at as something incorrect, even though for that person, it would be the very best thing in their situation.

Eric: Yeah, I think part of what happened; this is the historical perhaps side of it. There was a time when annuities were sold and the reflection was that, basically agents were just selling them because of a higher commission level. They were just going to sell them, no matter if they were the right fit or not.

Dick: Yeah, unscrupulous. Not doing the right thing. Taking advantage of people, and yet in every investment that we’ve known out there in the world of investments, there’s been someone that will take advantage of another person. So we have to be somewhat careful, and we can’t change the way the whole world, the investment world is set up. But because of that, I do feel that the protection rules have come down so strongly that now the insurance companies are afraid to sell or allow an older person to purchase an annuity.

Eric: And we’re not suggesting that if you have dementia that you should purchase an annuity. Basically, what we’re saying is that, if you’re of sound mind, and you’re making sound decisions and you understand how it fits.

Dick: And maybe even bringing the family into the decision. But even in the environment that we have now, if the family wants to come into the decision and help their 80-year-old mother purchase an annuity that would be a great thing for the family and for the goals and objectives of the client, they can’t do it.

Eric: Some insurance companies basically tie agent’s hands, based off of age. It depends on the company and what the age cutoff is.

Dick: Right, it seems like, when we get up around in that area of 78-80, in that neighborhood, it becomes pretty minimal what’s available.

Eric: Then of course there are people, I’m going to say in my age group that…

Dick: The much younger…

Eric: They’re also the discriminated against group that some of the benefits, I call them the richer benefits that are available on some annuities, the income riders. We’re actually too young. The benefits are actually too great.

Dick: The companies feel and I think that this should be a cue to some folks that are maybe a little bit more in that sweet spot, which I’m approaching, somewhere in that 50-year- old up to 65-years-old, that some of the **guarantees and that the companies feel are just a little bit too strong to offer to a younger person that could take advantage of that. So we do find this sweet spot to be somewhere between the ages of near 50, up to maybe a little over 65 or pushing 70, where an annuity can be positioned, either to start income immediately or defer it for up to 10 or 15 years.

Eric: I really like that. For me in my practice, those 10 years before retirement, it should be part of the discussion. Even if the decision is no, it should be part of what’s looked at as part of this.

Dick: I can’t tell you how many times, I know you’ve heard it over and over too. That someone has said, “I wish I would have known this ten years ago, five years ago, because why was I wasting my time?” Their money many times, hasn’t done any of the things that it needed to do, to be ready for where they are today, and they could have positioned it with contractual **guarantees, which is what annuities offer and at least that foundational portion of their income or their assets would have produced the income that they needed by this stage.

Eric: Well, and it takes some of the guess work out. If you take a portion of your retirement savings and you position it in a place where you know that you’re this age, your goal is to retire here, isn’t it nice to have predictability of what that income level is going to be at that point, and that is where it becomes part of the discussion.

Dick: So I think that truthfully, getting back to what we were discussing initially and that was too old or too young? I think that we would have to say that it depends on your unique situation. You’re never too old or too young, if it fits what you need.

Eric: That’s right. It has to be a solution to a financial problem and it’s a piece of the puzzle. If it fits it should be part of the consideration. So talk to your financial adviser. Find somebody that you trust and that you feel comfortable with and have the discussion.

Dick: That’s right. Thank you.

Annuities – Liquid or Not?

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As advisors who specialize in retirement planning one of the first questions we discuss with clients surrounds the subject of  liquidity. We need to insure that our clients are equipped for whatever financial challenges life may present them with and sometimes that means needing access to some cash quickly.

So are annuities liquid financial vehicles? Can annuities be converted to cash? Maybe — depending on the type of annuity and the timing, some annuities can be converted to cash quickly. There is really a scale of liquidity from liquid to illiquid across various annuity types with immediate annuities being illiquid while variable, fixed and hybrid annuities offer many opportunities to access cash with no penalties.

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

In a March 2012 article in Insurance News, “Debunking Annuity Objections” Sheryl Moore an objective industry expert addresses the topic of annuity liquidity. Sheryl does an excellent job articulating just how insurance companies keep annuities secure by purchasing high quality bonds whose maturities coincide with the surrender period for the purchased annuity. In addition insurance companies must also have reserves set aside that are determined by the state insurance commissions as adequate. Consequently, if an annuity is redeemed early the insurance company may be required to redeem the underlying bonds prior to maturity resulting in a financial loss to the insurance company. So as a safeguard to their financial stability the insurance companies include surrender charges to maintain their continued viability and safety for all clients involved.  Since annuities have to be reliable as long term financial vehicles for retirement, surrenders cause people to think twice before bailing out unless it is absolutely necessary, thus protecting others that remain.

It should be pointed out that cashing out an annuity is not the only way to obtain liquidity. Virtually all non – immediate annuities provide for a portion of the annuity that can be withdrawn each year without penalty – and for most annuities this amount is 10 percent of the value of the annuity annually. In addition, it is typical for annuities to provide for access to funds without penalty should the annuitant be confined to a nursing home, disability or being diagnosed as being terminally ill.

In addition, all annuities offer the option of annuitization **guaranteeing a lifetime income and most annuities pay the account value to the beneficiaries upon the death of the annuitant.

If you use an annuity or series of annuities in your retirement planning understanding how you can get access the account value should be part of the conversation with your advisor. Just know that a full pre-mature surrender is not the best or a preferred option for most annuity owners. A very small percentage of annuities are surrendered in full prior to maturity.

Annuity Guys® Video Transcript:

Eric: today’s topic is annuities, are they liquid or not?

Dick: Yeah, can we put our money into these? Are we going to lose our money or how long is it going to be gone for? How does this work, Eric?

Eric: How big is the vault that you have to put that in? Can you get into the vault? When we start talking about liquidity, and it’s one of the first questions we are typically asked or actually, we address with clients, because annuities typically are long-term.

Dick: They are. They’re long-term retirement vehicles and you shouldn’t look at them as your liquid money, even though there may be liquidity there.

Eric: Right, each type of annuity has kind of a different level of liquidity.

Dick: So let’s talk about first of all, the annuity that has no liquidity.

Eric: I was going to say medium, minimal, yeah, I always give you the little caveat there.

Dick: Minimal, there’s some liquidity there.

Eric: With an immediate annuity, you’re going to take your liquid asset really, and you’re going to give it to the insurance company in exchange for an income stream. So the problem is that lump sum is gone now, if you had to go out and salvage it, if you really think about it.

Dick: Get something out of your annuity.

Eric: You could sell it on the secondary market. You’re going to get pennies on the dollar.

Dick: It wouldn’t be a good idea, unless you really have to.

Eric: That would be a last ditch.

Dick: Effort.

Eric: Uncle Joey’s in prison, I don’t know.

Dick: Let’s not go there.

Eric: I was going to say, so just don’t even consider it as part of being sound financial planning.

Dick: Make a good plan and then you won’t need to cash that immediate annuity in.

Eric: That’s right.

Dick: Let’s talk about some annuities that are more liquid or considerably more liquid. Go ahead.

Eric: The next level is really that fixed, indexed hybrid, which is all built on that kind of fixed annuity chassis.

Dick: Fixed annuity chassis, right.

Eric: The best part about most of those and this is a typical aspect; you’re going to get a 10% after that first year. Your first year is usually for some, it’s 5.0%, for some it’s no withdrawal that first year, but typically, after that point in time you’re able to withdraw 10%.

Dick: At least by the second year, the 13th month you can take 10% out, and the beauty of that is that there’s no penalty and there’s no surrender.

Eric: So it’s actually some liquidity of what you’ve deposited. Some do it based on the account value. Some do it based off of the original deposit.

Dick: Right. So when we’re looking at this type of liquidity, again 10% is a long ways from 90% or 100% of what you actually put into the annuity, yet the idea of liquidity in an annuity is that, when you structure your financial plan properly, you’re not looking for liquidity with an annuity. That’s not the purpose of that money.

Eric: Right. Annuities are geared towards income, you know, or savings?

Dick: Or safety and giving money back to heirs.

Eric: You should know there are ways to get access to some of that cash, if you need it. But just knowing how you’re structuring your whole plan allows you to safeguard those places.

Dick: You know we talk about 10% but then there are some other provisions in an annuity, because folks, these annuities really are true retirement vehicles, and so the annuity companies look at these and say well, what would be a real emergency, a real liquid need perhaps in retirement, and one would be terminal illness. Another would be a long term care need and those all have some provisions for liquidity.

Eric: I was going to say, most annuities have those pieces built in.

Dick: You get all your money back with no penalty or surrender.

Eric: Obviously, the one that we never like to even mention necessarily, because it’s really not liquidity for you, but it’s liquidity for your heirs if you would pass, all that account value would move on to your heirs.

Dick: That’s important to know, because I have frequently sat down with someone who was just investigating annuities initially, and did not understand that those penalties and surrenders are not passed on to heirs. They get the full account value including bonuses, and there are no penalties. No surrenders.

Eric: It is a strength in the annuity system, in the sense of being able to purchase something. You may have gotten a bonus or something right up front. Those things typically, if you would pass even the second day you’ve owned it, that full account value moves on to heirs.

Dick: Now, Eric a lot of people would see this as being very counterintuitive, because I am going to make a statement here, and that statement is simply that surrenders can actually be good, and there’s a reason why surrender charges. Now, Eric says, no, never. Eric, it depends on which side of the fence you’re on.

Eric: That’s right.

Dick: If you’re the person wanting to get some money out, then you think surrenders are bad. On the other hand, if you’re the person that’s got your money long-term in an annuity, and it’s supposed to accomplish your retirement, you don’t want other people pulling their money out prematurely.

Eric: That’s correct. When you understand how insurance companies reserve for annuities and how they’re constructed, you want your company that you’re doing business with to be financially stable.

Dick: Very secure. Remain viable.

Eric: And how these annuities are constructed is once you purchase an annuity, that insurance company is going to take those dollars, and typically run down to the investment bond market.

Dick: Treasuries.

Eric: Buy high-quality bonds.

Dick: Right.

Eric: And that’s what they use to reserve your annuity. Now why is that important? If the insurance company has to go sell some of those underlying bonds early, because you’ve surrendered prior to your maturity time, they’re going to have to sell those bonds on the open market.

Dick: Perhaps take a hit and this is what some of that surrender charge offsets, but it also makes you take pause and think twice before you go cash in an annuity.

Eric: That’s where you look at it as being the surrender fees are actually part of the overall construct of the insurance companies that help them protect the system. It helps protect the entire, basically industry and what you’re protecting the people…

Dick: Ultimately, it protects the people that are insured. They’re relying on their annuity for their retirement.

Eric: So that’s where he is saying it’s a good thing, if you’re trying to get to the liquidity aspect.

Dick: Now another thing that I find very interesting that gets overlooked a lot of times is folks will think, well once that surrender period ends, which is in 10-years and that must be the end of my annuity, but it’s not. No, that’s where you now have full liquidity. You have full control over your money, but they still have contractual obligations to you.

Eric: That’s right.

Dick: When you set up the annuity originally.

Eric: That’s the key thing. The word annuity, typically in my mind, means lifetime. Once you start it, you’re into a lifetime contract. You can decide at some point…

Dick: To end it early, to walk away.

Eric: But you’ve, basically you’ve got a commitment.

Dick: You’ve got them on the hook. That’s what your contractual **guarantees do.

Eric: That’s right. The other thing we didn’t talk about as far as, another way of getting liquidity with an annuity is obviously, annuitization, any annuity can be annuitized. What does that mean? Basically, it means you’re turning it to into a lifetime income stream.

Dick: So you’re really setting a fixed annuity into what would normally be called an immediate annuity, if you purchased it right off the bat, and wanted an income stream. What we found to be very popular lately has been the hybrid annuity. The idea of the hybrid annuity is it’s kind of like you’re having your cake and eating it too. Where you can have your lifetime income, but in addition to that you’ve still have got your asset.

Eric: Dick likes to talk about this, so I’m going to put him on the hook. We talk about majority control, a lot of the times with hybrid annuities, especially. You want to kind of explain a little bit about what—when you talk about majority control.

Dick: When you first start out with an annuity obviously there are surrender charges and the surrender charges are higher in the earlier years. But even in the worst case scenario as a rule, when you subtract the bonus out, because let’s face it, if a company gives you a bonus for putting your money with them, if you take your money out early they want their bonus back. They want their money back.

So when we say majority control, that surrender charge kind of in its worst case is about 10%. So that means you literally control 90% of your principal and then you have a decreasing surrender charge over the years. So you continue to gain a higher and higher majority, until you have 100% majority control, and yet you still have contractual **guarantees that that company has to honor. So this is what we say majority control, which is the opposite with the immediate annuity, because with the immediate annuity, you’ve given up your lump sum and you have no more control over your asset. Did I do a good job?

Eric: That was it. Thank you. I think that helps people a lot of times, because when you’re thinking about, especially with liquidity if you’re looking at a hybrid annuity, really you have to understand, for the most part unless it’s a really weird contract, you’ve got at least 90% control of all the dollars from day one.

Dick: Exactly.

Eric: And so it’s a good way of thinking about it, because I’ve seen the market take a 10% dive and you lose 10% over a period of time.

Dick: Right, sure. Absolutely, and we know that that’s the beauty of an annuity is it gives you that security and safety, and it takes the volatility away of the market, and so for at least a portion of the portfolio we recommend a lot of times that that’s the foundational portion of the portfolio.

Eric: So I guess to try to sum up this topic, we would say just know that when you’re going into the annuity market that one, you’re going to have majority control in situations, and also know there is more than one way to get access to your dollars.

Dick: Yes, there are and as we kind of hinted, it’s important to not think in terms of well, taking all of my money out of the annuity at one time, but taking a 10% or what you really need, and that when you structure that annuity originally that you structure it as a long-term portion of your portfolio. Okay, folks, hopefully we’ve covered liquidity and annuities and I’m sure there is more that we could say, Eric.

Eric: Liquid or not?

Dick: Have we said enough today? We never know how to wind these up.

Eric: Ending is always the hardest part.

Dick: Thank you for watching.

Eric: Have a great day.

 

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

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

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

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

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**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.

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

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

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

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

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

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

Annuity Guys® Video Transcript:

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

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

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

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

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

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

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

Eric: Put it in a savings account.

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

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

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

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

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

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

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

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

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

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

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

Dick: Yes, you do.

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

Dick: No, no.

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

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

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

Dick: Good strategy. They’ve earned well.

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

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

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

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

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

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

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

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

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

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

Fixed Index Annuity Returns Reviewed

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

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**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.

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

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

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

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

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

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

Annuity Guys® Video Transcript:

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

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

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

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

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

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

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

DICK: Yes.

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

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

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

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

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

DICK: Right, we call it the lost decade.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DICK: Thank you.