Annuity Guys®

Annuity Rates, Features & Ratings: America's trusted annuity resource. Compare best options for hybrid, index, fixed, variable & immediate annuity quotes.


Helping You Create Great Results Your Retirement Deserves!


(217)753-1515
You are here: Home / Archives for Hybrid Annuity

What do Annuities Really Earn? No Hype…

By

Apples and oranges – what do they have in common? Both are fruits!

Why would we start a discussion about annuity earnings with apples and oranges? When people start looking at annuities, they invariably want to compare them to mutual fund^s or other securities. Commonly, they will start the discussion about the merits of a particular annuity by asking about the “upside” or growth potential. Let us state this clearly – thinking of annuities as accumulation products by comparing them to securities is just plain wrong in the vast majority of scenarios. So let’s not mix apples and oranges.

Do annuities have growth potential? Sure, but do not decide to purchase an annuity expecting high single digit or double-digit gains, especially with today’s economic conditions.

Annuities are safety and security products that should be viewed in the light of their **guarantees. Dick and Eric examine what annuities really earn in this weeks video.

[embedit snippet=”video-specialist-button”]

 

**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 addition to your questions, this weeks inspiration came from…

Behind the indexed annuity curtain

By Stan Haithcock at MarketWatch.com

We all saw the original Wizard of Oz movie when they went to see the powerful Oz and were totally in awe until the dog, Toto, pulled the curtain back to show that it was just some goober running a sound board.

That curtain needs to be pulled back on indexed annuities as well because “the show” is getting to be a little overwhelming on the lunch seminar circuit and with the increasingly aggressive online annuity promoters.

First of all, let me explain the details of an indexed annuity (also called an equity-indexed annuity, fixed-index annuity, hybrid annuity). An indexed annuity is a fixed annuity with a call option on an index, usually the Standard & Poor’s 500 Index. The vast majority of the call options are one year in length, but can be as long as five years. The S&P 500 index represents over 90% of the index option choices even though other index selections (Dow, Nasdaq, etc.) can be found in some product offerings. These call options allow you limited participation in the upside of the index (not including dividends).

When indexed annuities were developed a couple of decades ago, they were designed to compete with CD returns, not market returns. They were never put on the planet to be a pure growth product, even though they are sold that way by agents and the online annuity spammers. Realistic and historical (yes agents, these are also called facts) return expectations for indexed annuities should be around 3% to 5% annually. Those annual gains, if any, are locked in at the contract anniversary date, and then a new index option starts.

Please understand that indexed annuities are complex products, and the majority of agents are unable (or unwilling) to properly explain them and usually just focus on a few sizzle points. Below I have listed some of the positive and negatives of indexed annuities and where they might work within your portfolio.

Positives

  • Used with Income Riders for target date income planning

This is how I use indexed annuities for my clients. I also attach contractual death benefits or confinement care benefits when that is the ultimate goal.

  • Downside protection

Because your potential gains are attached to a call option, if the markets go down and the call option expires worthless at your contract anniversary date, then you will not lose any money. Agents use the phrase “Zero is your hero.” That’s a pretty goofy way to put it.

  • Gains locked in

This is a very good feature of indexed annuities. If you have gains from your index option, that gain is locked in permanently, never to go below that amount. Just remember that your upside potential is very limited, regardless of what your agent tells you.

  • Possibility to capture market dips

As an example, if the S&P 500 index goes from 1,300 to 900 in one year, your index option for that year would not credit any gains, but you would start the next index option year at 900 on the S&P 500.

  • Higher actuarial payout for income

Most indexed annuities, when used for lifetime income purposes with attached income riders, have a higher actuarial percentage payout than similarly structured variable annuities#. [Read More…]

Annuity Guys® Video Transcript:

Dick: Today we want to talk about annuities, and we want to get all the hype out of the way, Eric.

Eric: The hype? There’s hype in annuities? Oh my gosh.

Dick: Well, this was inspired by Richard out in Massachusetts, one of our folks that had used the website and we had given him a referral. He sent in a question that basically said, “You know, I’ve been looking at different blogs on the Internet, and they’ve talked about the return, and the annualized return doesn’t seem to be that high.” And that’s true, isn’t it?

Eric: This is where people have the challenge. When they first start looking at annuities, they’re coming from a world where they’ve been focused on accumulation.

Dick: Right.

Eric: When we look at the mutual fund^ industry, everybody talks about, “I did this return, 20%, 30%.” “Oh, I beat the S&P.” That’s the accumulation world. The focus there is on numbers, the return I’m getting.

Dick: Exactly. Right. Is there a little hype in that world?

Eric: Oh there’s a lot of hype. You know, glossy pages with the charts that go like this. Oh my gosh.

Dick: Well, and we can look at DALBAR studies that talk about the individual investor and what they actually do earn, and it’s down below 5%, considerably below 5%. So it’s all over the board.

Eric: But must people have been conditioned to focus on the return.

Dick: Of accumulated money. Right.

Eric: Yes. I’m making this much. I’m making this much. I’m getting this much. That’s not what an annuity is about. It’s not about taking and trying to grow the asset so much as preserve it, because you’ve already done the saving part.

Dick: You’ve already done the work. You’ve built the nest egg.

Eric: What’s the goal of saving? It’s future spending. Saving is really, in this case, future spending.

Dick: Right. So would it be fair, Eric, to say that an annuity is more about security and cash flow?

Eric: Yes. Yes, it would. I would say that would be fair.

Dick: So if we were to boil it down and just get rid of all the hype, and when I say “hype,” I mean the way its presented, it may not really be hype, but it does sound good. We talk about 7% rollups on the income account and 8%. W talk about 5% payouts and 6% payouts. But if we really got down to the life expectancy and drawing the income off an annuity . . . well, first of all, let’s just talk about an immediate annuity. What would the real internal rate of return be on an immediate annuity overall?

Eric: One, two percent.

Dick: Max. One to two percent.

Eric: My thing, when we start talking about annuities, and we’re doing it now, talking about rate of return, first question I have to ask you is: When are you going to die? Then I’ll tell you what your return is going to be.

Dick: Exactly. The insurance company has this figured out statistically, and they know that, overall, your rate of return on this annuity in a statistically generalized averaged sense is going to be in the neighborhood of a couple of percent on an immediate annuity. Right now, with today’s rate, even a little less than that. Yet billions and billions of dollars of immediate annuities are sold. Why do people do that?

Eric: Safety, security, cash flow. We’re going to repeat ourselves a lot here. If you’re going to be focused on return, don’t go here.

Dick: Exactly. I know we both have got a lot to say here. But one thing that comes to my mind is all of the sure bet things that are out there in the investment world, the things that you are told you cannot lose, such as Enron, Lehman Brothers. What are some others?

Eric: Well, GM was always the . . . I grew up in a world where they always said buy GM stock, and you never have to worry.

Dick: Right. Enron? Madoff? So these are things that all look good, but those are all followed by this caveat of past performance is no indicator of future results. We tend to gloss over that and say, “Oh, they just say that.” But that’s there for a reason.

Eric: Right. But it’s a risk-reward aspect. You’re chasing the reward there and are willing to take some of that risk. What we talk about when we look at annuities, we want to take that risk and diminish it significantly so that you have that safety, you have that **guarantee.

Dick: Yes.

Eric: And that’s what we’re focused on with annuities.

Dick: And that’s not for all of a client’s money.

Eric: Not all of your money. That’s right. Asset allocation, spreading the baskets out.

Dick: It’s a further diversification, another layer of protection and safety completely. And now if we get into the very popular indexed or hybrid annuity, there are a lot of things to talk about in terms of that income rollup and how it gets your income up to a certain level by a certain age, which would not be **guaranteed if you were in the market. You maybe couldn’t take that big of an income without depleting your principal much faster. So there is that aspect. But if we just talked about the overall rate of return of that hybrid annuity, we took it like some of these guys do, and they’re very good at their math and their spreadsheets. They spread it out and they show if you start a guy out at 60 years old and you defer him for 5 years or 10 years, with this 7% rollup, you turn it on, and he lives to age 90. What’s his return going to be?

Eric: Like two, three, four, five percent, perhaps. That would be on the high end.

Dick: On the real high client.

Eric: It depends on when you start.

Dick: Two percent on the low and maybe, like you say, four to five on the extreme high, but more like two to there percent would be like the max. They’re are part of the rule.

Eric: Part of what we’re looking at is we’re looking at pieces in today’s environment. Caps right now are structured around what today’s caps are.

Dick: Right.

Eric: So when we’re looking at things, we like to today’s numbers. Now, we expect caps will increase in the future. Can we **guarantee it? No.

Dick: No.

Eric: And that’s what, when we work with annuities, we really like to talk about **guarantees. Because if you’re satisfied with the **guarantee, then anything above and beyond is good.

Dick: That’s right.

Eric: And the same thing is true on the indexing side of these components. Look at what the **guarantee is. That indexing component offers a little bit of a bump. But, focus on the **guarantee.

Dick: Right. Well, folks, I think for today’s topic we want to thank Richard. Thank you Richard for that good question. Eric and I added something at the first of the year that you may not have seen on the blog site. So when you’re through with this, if you’d like, you can actually ask us a question.

Eric: That’s right. We’ve put it out there in a couple different spots. We encourage you . . . as we come up with topics, sometimes it’s nice to know what you want to actually hear about.

Dick: Right. We tried to dispel the hype here and get down to the real rate of return is and then talk about the real reason that you do an annuity and choose an annuity.

Eric: No hype, just answers.

Dick: Thank you.

Is an Old Variable Annuity Better than a New Hybrid?

By

“Don’t buy an annuity! The **guarantees they offer are often unnecessary and costly.” – has turned into “that annuity sure saved you from the market meltdown!”; and “you’d better hang on to it!”

So, can today’s annuity buyer expect the same performance from an annuity they could have purchased a few years back? Eric and Dick discuss the variable annuities  of yesteryear and how they compare to the hybrid annuities and variable annuities# of today.

[embedit snippet=”video-specialist-button-hybrid”]

 

**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.

A New Twist on Variable Annuities

Variable annuities draw fierce debate from both advocates and skeptics alike. But whether you like the **guaranteed benefits that they offer or think that they cost too much for the protection they provide, one thing is clear: Those who bought variable annuities# with **guarantee provisions five years ago got a screaming deal.

Plunging markets showed off the best attributes of variable annuities# with **guarantee provisions. Now, Hartford Financial is making an interesting offer to some of its variable annuity# holders: It’s trying to buy them out.

The pros and cons of variable annuities#

The reason financial experts on both sides of the variable annuity# debate have such strong reactions to the products is that they offer an unusual set of reward characteristics. On one hand, variable annuities# often give policyholders upside potential similar to that of mutual fund^s, ETFs, or other pooled investments. Yet the insurance aspect of annuities adds the ability to provide additional **guarantees, which regular mutual fund^s and ETFs can’t do. The view that opponents take, on the other hand, is that these **guarantees are often unnecessary and are usually costly. With annual expense ratios for variable annuities# typically well above what a similar mutual fund^ or ETF would charge, the **guarantees they offer definitely come with a cost — and under ordinary market conditions, the cost often exceeds the benefit.

How the market meltdown hurt insurers Over the past several years, though, market conditions have been anything but normal. A more than 50% plunge in the stock market from late 2007 to the market’s bottom in early 2009. [Read More…]

 by Dan Caplinger of Fool.com on November 15, 2012

Annuity Guys® Video Transcript:

Dick: We have a real twist on things, Eric. The same folks that we’re advising everyone not to buy a variable annuity#, we don’t get into the variable annuity# as much as we do the hybrid annuity, but a lot of the folks that were talking bad stuff about the variable annuity# . . .

Eric: Saying nasty things about buying a variable?

Dick: We’re seeing this change of events. Were the **guarantees were so good in the variable annuities# of yesteryear, that nowadays, the same guys that were basically saying, “Don’t buy those. They’re just paying high commissions to insurance agents,” are now basically saying, “If you’ve got one of those variable annuities#, do not let it go.”

Eric: The **guarantees you’ve got there, nobody can beat that. I don’t know how you did that. It’s interesting, because we say . . . In the fund thing in this article, they talked about, “The **guarantees were often unnecessary and costly.” Guess what, it’s **guarantees. Why is it you’re . . .

Dick: They’re not unnecessary when they’re necessary.

Eric: They weren’t costly when they saved your butt.

Dick: Exactly, when it became a great deal. That’s where we always say that hindsight’s 20/20. All the experts seem to agree, and then find out later that they’re wrong.

Eric: That’s where when we talk about annuity, you talk about the **guarantees. If you can live with the minimum **guarantee, you know exactly what you’re going to get, and you’re happy with that, anything beyond that is icing.

Dick: Right. I personally, Eric, have talked to several folks that have called in and described their variable annuity# to me. They’ve said, “It’s got a 6% death benefit. It’s got a 6% withdrawal rate that I’m taking out. I’ll get my principle back. I can take 6% out.”

Eric: We can’t get those right now.

Dick: Yeah. We tell those people typically, “Unless there’s some great extenuating circumstances, don’t give that up.” That is a very good **guarantee, and they don’t do that anymore.

Eric: Right. Some of them . . . if you bought it when the market was going gangbusters, and you had that annual lock-in or those ratchets, so it locked in at that high watermark . . .

Dick: Right. You’re working off of that now.

Eric: Then ‘shh’.

Dick: Yeah, going up from there.

Eric: Everything else going down. Now it keeps building off of that.

Dick: Yes. The variable annuity# companies, they looked at past performance. They did their actuarial studies, and they said, “Based on this, we can offer these contractual **guarantees.” What do they tell us about past performance?

Eric: Never predict future performance. Never **guarantee future performance based on the past.

Dick: Exactly. Here they are caught in their own dilemma of future performance not matching past performance, so they’re all scaling back.

Eric: We should make the point that these companies that are trying to buy out of their **guarantees, it’s not at risk to the consumer.

Dick: True.

Eric: What these companies are trying to do, they’re just trying to become more profitable, because they have to dedicate a whole lot more assets reserving for those **guarantees. They can take those dollars and use them in more profitable divisions, typically, property casually and those other areas. Those are the companies that are saying, “We can make more money by putting our dollars someplace else.” Your annuities, if you’re in one of those companies that is looking at maybe buying you out . . .

Dick: Think twice.

Eric: First of all, I don’t know if it’s a great option to buy it out. You have to weigh that very carefully, as well.

Dick: Get with an adviser that can really look at it closely and say, “This is a good one. Keep it.” That doesn’t mean that all of the older annuities are good.

Eric: Right. There’s some bad ones.

Dick: Yes, there are. Yet, if you’re looking for a new annuity, there are newer annuities, and this is where we get back into the hybrid or the fixed, because they weren’t investing in the stock market or riskier investments. They’re putting the money from those annuities into bonds and very high-grade investments, US treasuries, so they weren’t hit with the same things that variable annuity# companies have been, and their contractual **guarantees are, in many case, equal to or better than what some of the past variable annuity# **guarantees were.

Eric: Those are really the new style that we like, that typically took some of those best components from those old variables, those income riders and those income **guarantees, and then added those to a fixed component. That’s where we see a lot of the move in today, where if you’re looking at an annuity today, those fixed or hybrid annuities with indexing components to get better returns.

Dick: They give you those contractual **guarantees that the old variable annuities# gave us. I guess, nobody really knows the future, but I’m going to go out on a limb here and predict something. It’s like when we look at ourselves in a mirror, Eric; we are all guilty of it. We look back 2 or 3 years ago and we go, “Wow. I was a lot thinner then. I was a lot younger then. I wish I could go back to that.” I predict that if things continue on with the type of economy and headwinds we’ve had, that we’ll look back at today’s annuities and we’ll go, “Wow. What if I would have got that setup then?” It’s that way each year that goes along, as long as there are some good contractual **guarantees. If we can lock into those and we’re satisfied with those, a lot of times later on, we can look back and go, “Wow. That was a good move.”

Eric: Yeah, I agree. It’s being satisfied with the **guarantee, as long as that . . . Are you going to answer the question? Are the old ones better than the new ones?

Dick: Many times, we end with a statement that basically says, ‘It’s depends’, and it does depend. You really do have to look at it and determine it. Most the time on an older variable annuity#, going back maybe 3 or 4 years, where that annuity had some good riders on it, there’s a pretty good chance that you don’t want to give that annuity up. On the other hand, if we’re looking at some of these newer annuities, and maybe yours was quite a bit older or you didn’t get the riders on it . . .

Eric: Don’t have the **guarantee.

Dick: Right. Or you just can’t live with the idea that your principle’s at risk and it can go backwards, there can be some reasons to change up to a newer annuity.

Eric: In hindsight, basically, or in retrospect, some of the old ones are good and some of the new ones are good; some of the old ones are bad and some of the new ones are bad. You had it, we summarized it.

Dick: That’s right.

Eric: Thanks for checking us out today.

Dick: Thank you.

Hybrid Annuities have too many moving parts… Says Who?

By

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.

[embedit snippet=”video-specialist-button-hybrid”]

 

**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”

[starrater tpl=10 style=’oxygen_gif’ size=’24’]

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.

Are Hybrid Annuities too Complicated?

By

In our conversations with people considering annuities we often hear them repeat a phrase they have read or heard from someone else, “hybrid or index annuities are too complicated”. Most of the people we know drive cars even though they can’t explain how the internal combustion engine works. Similarly, hybrid annuities can have a number of moving parts — but that should not stop you from owning one if the non-moving parts (contractual **guarantees) meet your income, growth or estate planning objectives.

Dick and Eric reveal the reason why people would choose a hybrid annuity and then provide a list of the “moving parts”.

[embedit snippet=”video-specialist-button-hybrid”]

 

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

Some of the “Moving Parts” that may be in a Hybrid Annuity

  • Contractual Guarantees (absolute, non-moving)
  • Income Riders
  • Index Strategies
  • Annual Point-to-Point with Caps
  • Annual Point-to-Point Average Spread
  • Annual Point-to-Point Monthly Average or Sum
  • Annual Point-to-Point with Participation Rate
  • Caps
  • Spreads
  • Fees
  • Uncapped Index
  • Blends
  • Biannual Point-to-Point
  • Quadrennial Point-to-Point

Annuity Guys® Video Transcript:

Dick: Eric, we hear it all the time.

Eric: “They’re too complicated!”

Dick: We see it all the time that hybrid annuities or fixed index annuities are too complicated.

Eric: “There are too many moving parts. How can you explain these things to me? It doesn’t make sense. There’s too much!”

Dick: Well, there has to be something to this because everywhere you look, that is one of the most prominent things that are written about annuities, in general. I don’t care if it’s a variable. Sometimes they say immediate annuities are simple and they are in general, but there are a lot of different parts to an immediate annuity.

Eric: Oh no, they’re simple.

Eric: They’re immediate, immediate gratification. I give you this much. You send me a check for this much.

Dick: Okay, so if these are too complicated, why should somebody even consider getting one?

Eric: Well, there’s the **guarantee aspect.

Dick: Right, that might have something to do with it.

Eric: Well, maybe a contractual **guarantee would be a good thing.

Dick: I think that might be one of the reasons why these have become so popular.

Eric: You think?

Dick: Folks, when you look at an annuity and you look at all the moving parts, there’s no question it can become very complex, very complicated. If you get lost in all of the things about an annuity, you’ll miss some of the main points, which are what you just said Eric, it is the contractual **guarantee.

Eric: That’s right when you go, and you start looking or considering an annuity for retirement, typically. What do you need? What are you solving for? Do you need lifetime income and if you do, how much? Then you look at what you have and if you purchase an annuity, this is what the minimum **guarantee is. That is the key element of a purchase of that level. What’s the minimum **guarantee?

Dick: So if I want to know that I have a certain level of income, at a certain age that is just flat out **guaranteed and I’m satisfied with that and that meets my retirement objective, then why do I have all these other moving parts?

Eric: Well, I think we refer to it maybe as gravy or icing, depending on which type of plate you prefer.

Dick: That’s what we talk to our clients about is if we can first of all, make sure that we’ve met your objectives, and that you’re satisfied, and that is absolutely iron-clad **guaranteed, then anything we can get that comes with the moving parts is extra.

Eric: That’s right. That’s what you have to understand. Working backwards, I think is the best way to look at it. It’s what do you need? Is it income? Is it growth? When we look at growth, what’s the **guaranteed rate? You know what’s the **guaranteed rate of return? If we get more than that, will you be disappointed? No.

Dick: And we might achieve a higher rate, by utilizing a death benefit.

Eric: Exactly. It’s another **guarantee. The **guarantee may come from the base of the contract or it may come from a rider.

Dick: That’s right.

Eric: But those riders are part of those contractual **guarantees, it’s built into the contract.

Dick: Yes, when we talk about moving parts and things being complicated, I know a lot of folks that are watching have had experience with mutual fund^s and different items of this nature. When we think in terms of prospectus, how complicated is that?

Eric: Well, you’re assuming one thing, people have read the prospectus. Most people don’t bother to pick up the prospectus they get from a mutual fund^. They don’t want to read the 40-50-200 pages of information, in print this small. They just don’t want to look at it.

Dick: And if you do read it, I mean obviously there is a certain complicated aspect to it, and yet it’s very similar when you’re looking at an annuity, from the standpoint that there are some parts of it that can seem complex.

Eric: Right and it usually has to do with the growth potential side, in both the mutual fund^ and in the annuity world. It’s that aspect that creates the sizzle, I think as you call it.

Dick: Truly, we’re aware of this because we’ve seen it, where an advisor or an agent is overzealous trying to sell an annuity. They paint this picture of all this upside potential. No downside risk, but a lot of upside potential. That is not always going to be the case. In fact, it’s just way overstated.

Eric: People take the marketing components of everything and talk about the potential. When we talk to prospects, clients, whoever here, we’ll have someone come in and say “I just talked to this guy and he talked about this 7.0% or 8.0% **guarantee.”

Dick: Right 7.0% or 8.0% growth and compounding.

Eric: Yeah, and it’s **guaranteed. And then we always have to pull them back a little bit and say that may be on the income rider portion. Now it’s a contractual **guarantee component, but they have to understand that that’s a number they can only use for income. As long as that meets their basic need, it’s part of that contractual **guarantee, but they have to understand how it works.

Dick: Right, exactly. Folks, there are genuinely a lot of different aspects, especially to a hybrid annuity or what we would call a fixed indexed annuity which is the hybrid annuity. Eric, I thought we’d just kind of run down this list and we’ll put this on the blog site.

Eric: List the moving parts here for you.

Dick: Yeah, and maybe we could aim for next week or something, to get a little more into each moving part.

Eric: I think that would benefit most of the people we speak with, because the confusing part, the complication comes from the moving parts.

Dick: And I would say, folks don’t get too hung up on this, because we’re going to make it sound real complicated here. The fact of the matter is that, if you’ll truly focus on the contractual **guarantee aspect, you’ll understand that these are just options that you have, that can be used. And that’s where you do need an advisor, to help you to make those decisions, on what might give you greater potential.

Eric: All right, so what are the moving parts? You made a list, because we didn’t want to forget anything and I’m sure we will forget something.

Dick: Our biggest challenge will be not to actually start describing these, as we go through them. He’s just going to read the list.

Eric: We decided it would take way too long to describe each one individually in this episode.

Dick: Well, I’ll tell you what, you want me to just go ahead and read it?

Eric: Yes, read them.

Dick: Okay, we’ve got first of all the annual point-to-point with a cap. There’s an annual point-to-point with an average, where the index is again, averaged over the course of a year, and typically there will be a spread in there.

Eric: See, he’s explaining them already. He’s trying to explain it. See now your head’s starting to spin isn’t it?

Dick: Okay, I’ll stay on track. Here I go, annual point-to-point with a monthly average, or also called monthly sum. Annual point-to-point, with a participation rate could be 100% could be… There I go; caps, spreads, fees, uncapped indexes, blends, two-year, four-year, three-year, five-year point-to-point.

Eric: Points, yeah. I’m sure we left out something.

Dick: I did pretty good.

Eric: He finally reined it in a little bit. He really wants; we really do want to break it down for you.

Dick: We will. It’s tough not to start explaining, folks.

Eric: We really do want to break it down for you.

Dick: We will. We’ll break it down more.

Eric: Give you a reason to come back and check the email registry.

Eric: We appreciate you tuning in today.

Dick: Thank you very much.

Why Hybrid Annuities Are Game Changers

By

Two recent studies discuss the overwhelming growth of annuities as a sought after financial product. LIMRA cited the significant growth in the number of Baby Boomers now doing their research for information about annuities online. While, Cerulli Associates in a recent survey revealed that annuities have become the most requested financial product that clients ask their advisors about. With all of the mixed press, for and against annuities, these are significant upward trends as those near or in retirement move towards the security of annuities seeking growth and income **guarantees.

These studies failed to point out the impact of hybrid annuities — Dick and Eric discuss Why… hybrid annuities are the real “Game Changers”.

[embedit snippet=”video-specialist-button-hybrid”]

 

**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.

Advisors Say Annuities Are Now Their Most Requested Product

Advisors report that clients request annuities more than any other unsolicited product, according to new research from Cerulli Associates.

Annuities ranked sixth in 2011, but interest in the product has increased over the last year, marked by a 15% increase in the number of times clients request annuities from their advisors, according to the report, Annuities and Insurance 2012: Evaluating Growth Capacity, Flows and Product Trends.

“We’ve seen a tremendous year-over-year increase in the number of times financial advisors receive requests from their clients for annuities,” Donnie Ethier, senior analyst at Cerulli, said in a statement.

Of the advisors surveyed, 60.8% of advisors had clients who requested annuities, just above Roth IRAs, which 58.8% of advisors were asked about. [Read More…]

 

More Consumers Use the Internet to Research Insurance and Annuity Products

Study Finds Agents and Advisors Still Play a Vital Role in the Purchasing Process.

WINDSOR, Conn., Oct. 10, 2012 — Sixty-one percent of consumers who researched individual insurance or annuity products looked online, a significant increase over the 38 percent of consumers who looked online in 2006.

“With two-thirds of Americans conducting searches online, it is not surprising that the number of people seeking information about life insurance and annuity products online has increased more than 60 percent over the past six years,” said Mary Art, research director, LIMRA technology research. “However, despite the popularity of online sources, more consumers (69 percent) sought information from agents, brokers and advisors, who are often viewed as the most valuable and influential information sources.”

The top three reasons consumers sought information online are:

  1. Research companies and product offerings
  2. Seek general product information
  3. Compare prices

This is true across all age-groups and income levels.

The study found that more consumers value information gathered online in 2012 than did in 2006, although it still lags behind insurance professionals. In 2006, only 18 percent of recent researchers considered Internet sources to be their most valuable sources, significantly less than the 25 percent found in 2012. In contrast, 37 percent of consumers rate insurance professionals as most valuable in 2012, eight percentage points lower than those who did in 2006. It is also important to note that one in six (16 percent) consumers cite workplace sources as most valuable.

“Companies need to understand that one size does not fit all when it comes to educating consumers about products and services,” noted Art. “Using a multi-channel approach will reach a broader audience in the ways they want to collect information and will most likely lead to more sales.” [Read More…]

Annuity Guys Video Transcript:

Eric: Today, we’re going to talk about why hybrid annuities are game-changers in today’s environment.

Dick: They have changed the annuity world.

Eric: That’s right. It’s not just playoff time in the baseball season. It’s the game-changing time here in the annuity world.

Dick: That’s right.

Eric: There’s a couple things that have come up in the news recently, for some reports that have talked about annuities in general, so we should probably start there, in the fact amongst advisors the Number 1 question they’re getting asked now is about annuities. They want to know what’s . . . it’s the most-requested product out there.

Dick: Right. that’s moved up from a year ago, Eric, where it was asked, it was the Number 6 question on the list and now it’s moved up to the Number 1 question. What do you suppose is driving that?

Eric: Our website, probably. Obviously if you’re watching, this you’ve been driven to inquire about annuities.

Dick: You know what, that brings up our other article, which we’ll tie them all together here, is that the consumer now, about 60% of the consumers are going online, investors are looking at annuities and trying to decide how that fits into their portfolio, and they’re relying on the internet for that.

Eric: Right. There’s a lot of numbers we can throw out here: 10,000 people a day are turning age 65. People are retiring, that’s an obvious number. More and more people are retiring, so what do you want? You want safety, security, income.

Dick: Right. You want to get money over to heirs; you want to do it the most efficient way.

Eric: People are concerned. When you look at the problems that Social Security, Medicare, all these government programs are having, they’re looking to other avenues for safety and security. What better than annuity? That’s really what we talk about, with the foundational aspects of annuities being safety, security, and income.

Dick: When you look at this number, you threw a statistic out there, 10,000 a day. Folks, that equates to 78 million Baby-Boomers over the next 15 years. Baby-Boomers are some of the folks that are most comfortable with the internet. The first ones in, not so much. Now as we see this trend begin to change where folks rely on that online information to make their decisions.

Eric: That’s right. They’re turning more and more online to get a little bit of information, and they’re curious about annuities. These two articles didn’t surprise us because, surprisingly or not so surprisingly . . .

Dick: We got our beak both worlds.

Eric: . . . we tend to talk to quite a few people about annuities . . .

Dick: We’ve seen that volume go up, and up, and up.

Eric: That’s right. We can personally say from our own website that started with just our little Central Illinois focus, we now have a national focus.

Dick: It’s just mushroomed out, exactly. Yet there’s really a larger percentage still, about 69% of individuals also want to get their information from someone on a local basis. It’s a mixture of the two that work so well. I think that’s where we come in, Eric, in trying to do both. We run our local practice, so we meet with our clients. We have this national website, which is, folks, it’s loaded with information that you can do your research. Then we’ll actually take that next step and help you get involved with a local advisor.

Eric: All right. Now we’ve said all these things, now what the heck does that have to do with hybrid annuities being game-changers? I can tell you when I talk to people, and I can tell you, out of 100% of the people I’ve talked to today, almost every single one asked me about hybrid annuities and what the potential was for either inflation hedging or deferral. We know that the hybrid annuity has really become a game-changers.

Dick: What will maybe, like you say, a 100% today, and at least 10 to 1, 5 to 1, 10 to 1, when folks call in, they may have an interest in an immediate annuity or a variable annuity#, but it always tends to come back around to the hybrid annuity, which really is the fixed indexed annuity with some of these new income riders. Folks will ask us about that and kind of want us to explain it.

Eric: Really, we always talk about . . . I talk to people about working backwards from your goals to figuring out, one is an annuity a right vehicle, and then how do we meet those goals? A lot of times, we’ll end up looking at those income riders to meet those goals, because I like **guarantees. That’s what those income riders and those . . .

Dick: Contractual **guarantees. If we can live with the **guarantees, anything else is icing on the cake.

Eric: Icing. I like icing. What are the **guarantees that are possible with a hybrid annuity? You have income **guarantees; income for life without giving up your lump sum.

Dick: Right. It’s predictable income that can grow over a period of time.

Eric: You have some annuities in the hybrid world that those income riders can actually produce an increasing income **guarantee, which is unique and innovative. Then the deferral aspect of those income riders; right now, everybody knows interest rates are . . .

Dick: Down.

Eric: Boo. These unique components the insurance companies are offering on these income riders is as **guaranteed growth rollup for money that can be used for future income.

Dick: Right, while it’s in deferral. That way you have this predictable future income; there’s no surprises. The only surprise could be something that would be better than the minimum. Not likely though with today’s cap rates.

Eric: Right. It’s neat when we find something that’s innovative, that we think is going to outperform, but most of the time, we’re not trying to beat the insurance company. You want the insurance company to be in business as long as you’re going to need . We’re looking for, basically, something that provides both you and the company a **guarantee. They’re going to be both in business.

Dick: The way that the hybrid annuities really have changed the game is a lot of folks, as we would say, your parents’ annuity was an immediate annuity. That immediate annuity carried the stigma of, “I have to give the insurance company all of this money, and if I die, they get to keep it?” That didn’t go over well, as you can imagine.

Eric: It helped them build a lot of big buildings.

Dick: Yet the hybrid annuity comes along and says, “We’re going to work it out so that you can have a the rest of your life, and you can also have your lump sum. If you haven’t used it all, it can just pass on to your heirs.”

Eric: Right. If you don’t’ use it all, we’ll actually give you it back. Whatever you haven’t used, you get it back. Very unique, very innovative, taking the best of the variable world that was very indicative. Now we’ve seen, from a performance standpoint, what’s being offered in what we see people purchasing more often now. We had an article or a blog we did, it’s been about a month ago, the enhanced numbers, what you see the most growth in the annuity world.

Dick: That was the LIMRA Report. Folks you can go back, 3 or 4 blog posts back.

Eric: We’ll put a link out there.

Dick: Another link we’ll put in there. The only area there’s been growth.

Eric: Yeah, it grew, what, 10%?

Dick: Yes. Year-over-year, or [inaudible: 07:27].

Eric: Versus some of the other types of annuities that are actually . . . they’re still being sold, but there just not the growth there.

Dick: Right. Yeah, folks, the hybrid annuities have really had explosive growth and there’s a reason for that. People are cautious and careful about what they do. We live in an information age where folks can go online; they can find the truth out about things. You can fool a few people part of the time, but you can’t fool everybody all of the time. These are legitimate, suitable products if they’re used the right way, and many people are very, very pleased with them.

Eric: That’s right. If you’re looking for safety, security, but yet, not willing to give it all up, consider a hybrid annuity. It’s a game-changer.

Dick: It is a game-changer.

Eric: Thanks for watching today.

Dick: Thank you. Bye now.

 

Why are Hybrid Annuities so Popular?

By

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.

[embedit snippet=”video-specialist-button-hybrid”]

 

**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.

Why You Should Ladder Annuities…

By

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.

[embedit snippet=”video-specialist-button”]

 

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.

 

Annuities – Liquid or Not?

By

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.

[embedit snippet=”video-specialist-button”]

 

**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.

 

Understanding Immediate Annuities

By

Today, people are living longer than ever before. While the idea of living a longer (and hopefully healthier) life is appealing to most of us, the tradeoff for many people is the fear of outliving their retirement savings.

On top of that, the immense costs of healthcare today––along with constantly rising inflation––continue to compound an already stressful situation for many. However, there is an option available to retirees that can help ease the stress of outliving their savings while providing them with an income stream almost immediately upon funding it. That financial vehicle is an immediate annuity.

While many annuities are created to build up the account value for retirement, an immediate annuity is actually designed to provide income immediately to its holder.

[embedit snippet=”video-specialist-button”]

 

**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.

Immediate annuities are insurance products that pay their owners a regular income––monthly, quarterly, or over another desired time frame––for as long as the annuity holder lives.

These products are essentially a contract between the annuity owner and an insurance company. They are typically purchased with a large cash lump sum by retirees in order to pay living expenses in a reliable pension style INCOME over a long period of time. In exchange for this lump sum deposit, the insurance company will provide them with a regular income for a specified time OR long as they live, regardless of how long that may be.

Plus, if it is a lifetime annuity, this benefit will continue for as long as the single or joint annuitant is living. Therefore, an immediate annuity actually pays for living a long life instead of the emphasis being on heirs receiving a large payout when the immediate annuity owner dies. It is possible for the immediate annuity owner’s heirs to receive some of the deceased owners intended income if he or she should die prematurely.

Immediate Annuity Features

Throughout the years, there have been some modifications to the original immediate annuity design. Many of these annuity features, which may or may not be available on all immediate annuities, or offered by all insurance companies, are discussed below:

Inflation protection: With this option, the immediate annuity income payments offer some form of a hedge against inflation. Here, the annuity owner may choose to have his or her income payments increase by a certain percentage each year, typically around 3 percent. Another choice may be to have the annuity income payments actually tied to an inflation rate by the use of a consumer price index. When this option is chosen the initial payout of the annuity starts lower.

Refund, liquidity, and withdrawal options: The traditional refund feature on immediate annuities has typically been either a cash refund or an installment refund that ensures after the annuity holder’s death that the beneficiary will receive an amount of money that represents the difference between the initial deposit amount and the amount of the income payments that the annuitant received during his or her life. This, however, reduces the amount of the systematic payout when comparing to life only with no beneficiary benefit.

There are several different ways to structure an immediate annuity with regard to the income payment options. These options include:

Life only: A life-only immediate annuity can also be referred to as a straight life annuity. This means that the annuitant will receive annuity income payments for the rest of his or her life, regardless of how long that duration may be. The payments will cease and all of the unused initial premium will be to the insurance company’s benefit or detriment based upon the annuitant’s actual death and life expectancy underwriting calculations.

Certain period: This structure is not considered to be a life annuity. Rather, the annuity payments will only go on for a fixed period of time, such as for ten years. Even if the annuitant is still living at the end of the stated time period, the annuity payments will cease at that time. However, should the annuitant pass away within that time period, the beneficiary will continue to receive the payments until the period of time has expired.

Life with period certain (or certain and life): This type of immediate annuity payment structure is a combination of both the life and the certain period structures, meaning the annuity will pay income benefits to the annuitant for as long as he or she lives. However, if the annuitant passes away during a specified period of time, say ten years, then the beneficiary will continue to receive income payments from the annuity until the end of that ten-year time period.

Life with cash refund: This can be considered a money-back **guarantee annuity. The income benefit payout is for life. However, if the annuitant passes away before the payments that total at least the amount of premium paid, then a lump sum payment is made to the annuitant’s beneficiary.

Life with installment refund: This, too, can be considered a money-back **guarantee annuity. This immediate annuity payout option is similar to the life with cash refund option, except the annuitant’s beneficiary will continue to receive the monthly annuity income instead of a lump sum until the full amount of the premium has been paid out.

Joint and survivor: This annuity income payout option will **guarantee that the income payments will continue for the lives of both annuitants. Along with this, period certain options can also be added. This particular payout option is typically used with married couples in order to provide income as long as either one of them is still alive. In some instances, the income benefit may drop when the first spouse passes away.

COLA SPIA: This annuity income payout structure has payments that increase or decrease by a floating percentage which fluctuates when tied to a consumer price index, each year. In this case, however, the initial income benefit will likely be lower than those that are non-COLA (cost of living adjustment) annuities.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about immediate annuities and do a little comparison with immediate annuities and why you might consider an immediate annuity.

Eric: One of the things we often hear, in today’s world, where you have this hybrid annuity, which gives you lifetime income as well as some other bonuses/extras, why would you ever want to actually look at using an immediate annuity, where you’re going to give up your assets?

Dick: Right. That is the difference, Eric. When we think about the hybrid annuity, it’s kind of your cake and eat it too annuity, where you can get your lifetime income, but you don’t have to give up your asset. Yet, there is a place for an immediate annuity.

In fact, let’s do a little history lesson. How about some trivia here? When we think about an immediate annuity, it literally goes back to the early Roman Empire. They called it the “annua,” and that’s where the word annuity comes from. So it is a very early form of an annuity, and it has really gone through the test of time, spanned the centuries.

Eric: So next time you have your toga on, you’ll know to get your annua language out. Exactly. It’s an old standard. It was the first kind of annuity out there, the standard lifetime annuity. You gave up a lump sum, and you got a lifetime income stream.

Dick: It is probably the truest pension-style income. In fact, immediate annuities, a lot of companies will offer a choice of a lump some or an immediate annuity.

Eric: I talked about immediate annuities with a lot of clients, when they were saying, “Hey, I’ve got a 401(k). I want a lifetime income. What can I do to get my own personal pension?” That’s kind of how we think of it. The thing is you’re usually giving up that 401(k) in exchange for that lifetime income stream. Now, the big thing here is you realize that none of those dollars are going on to heirs.

Dick: Yes. Well, in a true pension, there’s no money in a pension, as a rule. When you have a pension, when you pass, the money ends, or if you’ve chosen a survivorship option, you’ve probably taken a little bit lower payment on your pension, and then some of those payments will go on to perhaps a spouse.

Eric: Exactly. When I grew up, my parents were educators. So they had a traditional kind of benefit program, where they have a retirement that’s there as long as they live. The bad thing is, once they’re gone, nothing goes on to me. Being a little self-serving here now. The 401(k) plan . . .

Dick: Why didn’t they get a hybrid annuity?

Eric: Exactly. Why can’t they get a hybrid annuity? So when they’re looking at it, that’s the old style. The hybrid, on the other hand, allows you to pass some of those dollars on to heirs typically.

Dick: Right. So, really, where the immediate annuity fits, let’s just give some examples. Someone who really wants to start income right now.

Eric: With an traditional immediate annuity, typically you’re going to get a higher payout than you would with a hybrid. You’re going to start with a little bit higher. . .

Dick: Typically. But we have seen a few instances where . . . you’ve got to run some illustrations to know.

Eric: Exactly. So that’s one of the things that when people are going that direction, that’s usually the reason.

Dick: General assumption is you’re going to get more income.

Eric: A little bit more. A higher percentage to start with.

Dick: Right. Then the other key factor would be that, perhaps, if you’re going to use an immediate, you really aren’t as concerned about giving money over to heirs.

Eric: Right. Are there ways to get money on to either survivors or heirs? That’s one of the things we . . .

Dick: With an immediate?

Eric: An immediate annuity. You can structure it so that it’s a joint lifetime payout. So if you and a spouse purchase an immediate annuity, you can set it up so that it is the lifetime of both of you or either of you. Whoever lives the longest, those payments will continue. There are little tweaks that you can even do there, where you can set it up so that once one passes, it sometimes reduces by a percentage.

Dick: A percentage, so they only get three-quarters or one half of the annuity.

Eric: Right. The other way that you can somewhat pass on dollars to heirs is there are a couple of things. You can do a period certain, where it’s lifetime with a certain number of years **guaranteed. A lot of times you’ll see somebody do a lifetime annuity with 20 years **guaranteed. So that 20 years of payments is **guaranteed.

Dick: So if I pass in 5 years, somebody is going to get another 15 years of payments. But what does that do to my income?

Eric: It’s going to reduce your payments. You have to realize going in, if your goal is the highest payout possible, you don’t want to add any of these other pieces. But if you’re wanting to try to pass on money to somebody, that’s a way of **guaranteeing basically that some of that comes back. One of the things I always look at is either the installment refund or the cash refund, which says once you purchase the immediate annuity, if you haven’t gotten back at least what you paid in principal wise, that amount will be refunded either to your heirs or to your estate.

Dick: Well, isn’t that the installment refund?

Eric: The installment refund keeps the payments coming back to your return of principal.

Dick: Okay. So you’re talking about the full lump sum.

Eric: Yes, just a refund of whatever you’ve put in, so it’s either a lump sum or installment refund.

Dick: One of the biggest vulnerabilities that Eric and I look at with our clients, and what we think you should be concerned about, is inflation. That is probably one of the biggest vulnerabilities we face. We have had historic inflation the last 4 decades of over 4%. We believe that the stage is really set for some higher inflation over the next two or three decades, which is going to cover most retirees. So if we would happen to go through a stretch of 4% or 5% – I’m not talking about runaway hyper third world country inflation – but if we’re talking 4%, 4.5%, 5%, 6% inflation, that makes that immediate annuity, if you have no inflation cost of living adjustment, a COLA on it, it really puts you at a disadvantage.

Eric: Yes, especially if you’ve got longevity in what you’re looking at. You realize you’re taking a level payment and you’re stretching it over your lifetime. So your purchasing power is going to diminish with inflation.

Dick: Right. So one of the things that we do suggest, very strongly, is that whatever type of annuity, whether it’s an immediate annuity, a hybrid annuity, a deferred annuity where you’re deferring it for a long time, that you’re really taking inflation into account. There are different ways to structure for inflation, but if you’re not taking it into account, you’re really setting yourself up for a bad situation.

Eric: Right. That’s another aspect that you can add to an immediate annuity. Some of them you can add a cost of living adjustment. Others have a fixed percentage.

Dick: Tied to a consumer price index or a fixed percentage.

Eric: So those are things you can add, but you realize you’re going to start lower.

Dick: Your payments are going to start lower. Right.

Eric: So it’s all about the tradeoffs.

Dick: I love the idea of a real cost of living adjustment. So if things get carried away and we start seeing 5% or 6% inflation, we’ve covered a major vulnerability in a retirement plan.

Eric: Yes. That’s what we’re looking at here. When we’re looking at immediate annuities, we’re looking at you creating your own personal pension.

Dick: Yes, that’s right.

Eric: If you’re into this marketplace, where you’re going to create a personal pension, and you have that magic number you know that you need to hit and you can anticipate the growth, that’s where this product really comes in.

Dick: So if we’re to kind of wind up this discussion on immediate annuities, being a true pension-style income, where would we summarize that this is going to fit? What type of person should buy an immediate annuity, should really consider it for their retirement portfolio?

Eric: I always say it’s someone with no heirs, that doesn’t have to worry about passing on dollars to somebody in the future. They’re not worried about that. They want the highest payout now, and that’s really the person that I start with.

Dick: Right. I think that, in winding this up, we just want to say, do a fair comparison. You may be the ideal person for an immediate annuity, but get with a professional advisor, run some illustrations, compare it. We have actually seen situations where a hybrid annuity can right off the bat outperform an immediate annuity. It’s not often, but it does happen.

Eric: Yes. Very good.

Dick: Thank you.

Annuity Fees – The Nasty Truth

By

The conventional press has maligned annuities for years due to high fees and surrender charges, as well they should… when they exist. Confused yet?  You should be. We have all heard the saying about throwing out the baby with the bath water and the same can be said about annuities. If we group all annuities into the “high fee” category we will be throwing out the baby.

Before we continue our thoughts we must express what we feel is obvious. All financial products have a cost of doing business whether it is a reduction of dividends returned, a fee or a charge. Financial professionals, investment and insurance companies are all compensated for their efforts in assisting you. So as we proceed we are not seeking to find the “free lunch” financial product – we are trying to make sure that you understand what you are paying so that you can make the determination as an informed consumer.

[embedit snippet=”video-specialist-button”]

 

**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.

Dick and Eric discuss annuity fees and some of the hazards and misconceptions of with differing types of annuities.

Annuities come in many “Flavors”

A trip to your local financial professional to select an annuity can seem a lot like a visit to Baskin Robbins… you may end up wishing there were only 31 flavors.

Let start on the most basic level (the chocolate, vanilla & strawberry if you will), here we have variable, immediate and fixed annuities. Variable annuities have fees… lots of them typically. Fixed and immediate annuities typically do not have any fees or charges.

Variable Annuities

Variable annuities all have at the very least mortality and/or expense charges (M&E). This fee pays for the insurance **guarantee, commissions, selling, and administrative expenses of the contract.

Variable Annuity Fee Guide

Annual fee (as % of account value) for:NumberTypical
The insurance (M&E)_____%

1.35%

The investments within the annuity_____%

0.95%

Riders and options_____%

0.65%

Total annual fee:_____%

2.95%

What you pay to get out
Surrender charge (as % of withdrawal)_____%

7%

Years before surrender charge expires_____

8

 

Your next questions should be, “What do I get for paying this fee?”  You usually get an added death benefit that basically **guarantees that your account will hold a certain value if you die before the annuity payments begin. This typically means that your beneficiary will at least receive the total amount invested even if the account has lost money.

The other expenses in the M&E are just truly that – expenses.

In addition to M&E expenses variable annuities# (VA) also have management fees on subaccounts.  The subaccounts are the mutual fund^ choices available within a VA. The management fees are the same as an investment manager’s fees within a mutual fund^. These fees will vary depending on the subaccount options within the annuity. Typically, they will be less than those charged by a managed mutual fund^ within the same investment category — though not always.

The fees associated with a VA’s riders and options can increase the cost of the VA significantly, but these are optional. However, I would hazard to say that most of today’s variable annuities# are sold because of the riders and **guarantees associated with them.

Why would anyone consider a VA with the amount of fees attached, two primary reasons; tax deferral and unlimited market upside potential.

Immediate and Fixed Annuities– the NO Fee Option

For the purpose of our fee discussion when we look at these annuities in their basics forms there are no fees are charges associated with these products. How do the agents and insurance company make money then you ask… similarly to the same way banks make money when you obtain a certificate of deposit. The expenses and cost are figured into the price of doing business by limiting or “managing” what they will return to you in the form of interest or dividends.

What about Equity Index or Fixed Index Annuities

Let me state this emphatically. A fixed index annuity is still a fixed annuity! So there are still no fees.  All the index does is offer a choice to tie interest crediting to a gain in an index rather than a fixed number stated by the annuity provider.

Ready for the Chocolate Sprinkles – of Fixed Annuities

Due to the popularity of the income riders on variable annuities#, fixed annuities have begun to add their own riders – typically for a fee. Some of these annuities are referred to as “Hybrid Annuities” because the riders let you construct an annuity that can combine pieces from the fixed, immediate and variable worlds.

The Ever Popular Hybrid Annuity – Fees can be Tricky

Hybrid annuities typically charge fees for income riders. The income riders typically have fees of less than one percent. However, you need to be sure you know which account the fee is based from. Hybrids with income riders have an account or ledger that tracks the value of the income rider account growth – this account typically grows at a higher percentage than the cash accumulation account.

A key for understanding hybrid account fees is to determine which accumulation total the fee is based upon. Some companies use the number to determine the amount of fee, even though you cannot use this account for a lump sum withdrawal. Other companies use the actual cash accumulation amount to determine the fee. However, the fee is always deducted from the case accumulation account and never from the account.

Why would you pay a hybrid rider fee? Much like the variable income rider, the hybrid rider fee allow for predictability of accumulation for an account geared toward retirement income. The main difference is that the insurance company is assuming the investment risk with a hybrid annuity.

Conclusion

The fees and expenses imposed by some annuities can be costly to own. You have to understand what you are getting for those dollars you are giving up. Annuities of all varieties are basically tools to give you insurance on you income. They are vehicles that are designed to provide a . When utilized correctly they can provide a level of comfort and security for anyone wanting a **guaranteed lifetime income.

Annuities are multifaceted devices that can be key pieces of a savings or retirement plan. Do not let the popular media discourage you from choosing the best decision for your future! Understanding what each annuity fee does empowers you to the best decision for you.

Annuity Guys® Video Transcript:

Dick: We want to clear up some misconceptions maybe about annuities and fees, because you see that in the press a lot don’t you, Eric?

Eric: Oh, the conventional wisdom, everything you read, headlines, “Oh, annuities fees, don’t use them. They’re so bad, nasty, nasty, nasty.”

Dick: Now there is some truth to high fees in annuities. We don’t want to say that there isn’t any aspect of that that needs to be brought out.

Eric: Well, the analogy is throwing the baby out with the bathwater.

Dick: Yeah, we don’t want to do that.

Eric: If you’re going to cast all annuities as being bad, then you’re going to lose some good opportunities, because not all annuities if your fee driven, are bad.

Dick: Well, even the annuities that have the higher fees, in the right situation, if they’re presented properly, they may fit certain situations.

Eric: Exactly, usually you’re exchanging a fee for some kind of service or some kind of piece that you’re given.

Dick: Right, so you’re either going to pay a higher fee or perhaps you may earn a little less.

Eric: Let’s deal with the first flavor of what the highest, the typical highest fee annuity, which is the one that is most castigated about and written about, which is the variable annuity#. Variable annuities typically have higher fees.

Dick: Much higher fees.

Eric: And the reason is…

Dick: They have more upside potential. That’s one aspect of a variable annuity#, yet the fee structure has to do with mortality, because they have a death benefit.

Eric: A lot of them have a death benefit. Then they also have mutual fund^ options, their investment options. So what you’re doing is taking out an annuity wrapper, so to speak and wrapping it around a mutual fund^ option.

Dick: And typically Eric, when we have a mutual fund^ just an average fee structure for a mutual fund^, is approximately what?

Eric: Oh, you’re getting at least a.50%.

Dick: A half is minimal, pretty much.

Eric: Now I’m not talking about the load expense that you’re going to pay up front, your ongoing expenses could be .50% and usually 1.50%, so those fees exist in either world.

Dick: And I believe according to some data on Morning Star that they kind of look at the average and the average mutual fund^, is somewhere around 1.15% now. It used to be 1.5% not very long ago, but it is right around 1.15%. So you take 1.15% and say on a variable annuity# your mortality expense, your mortality and your expense ratio, M&E charges, you’re looking at an average of somewhere around maybe 1.50% or so. You put that with 1.15%, now you’re pushing you’re pushing 3.0%.

Eric: And then you start adding on the riders and that’s where the variable annuities# get really expensive, but that’s the…

Dick: That’s the **guarantee part of a variable annuity#.

Eric: Exactly, those are usually what most people are sold on, when they buy a variable annuity#. You want that insurance on your investment.

Dick: Right. So if the investments are not performing very well, obviously those fees are going to eat in pretty quick to the principal. In addition if you’re taking money out, so the principal may be at a little more risk, but the income is not or the potential for your heirs with a death benefit, because of the rider on the variable annuity#.

Eric: Right, but that’s typically the one thing we see out there when people are looking at fees, they’re looking at that variable annuity# and so you can have variable annuities# as low as .25% and as high as over 5.0%, if you start adding on all those riders.

Dick: It really adds up fast.

Eric: So there’s your high fee option. If you’re fee adverse knowing that your principal’s at risk and some other things with the variable knowing how they work, you have to make the educated choice.

Dick: Right, right and then a lot of times all annuities as we started out saying, in the press you tend to see annuity, high fee, but there are a lot of annuities that have no fees.

Eric: Exactly and when you look at fixed annuities and immediate annuities there are no fees.

Dick: There is no fee. It’s kind of known that you’re not, maybe going to earn as much—when I say you’re not going to earn as much; you’re don’t have as much earning potential, as you would have maybe in a variable annuity#, where it can earn as high as the market goes. You may have a declared interest rate in a fixed annuity or you may have an index option, which indexes to a popular S&P or Dow Jones or something of that nature.

Eric: And those are your low fee/no fee options. People say, “How do you get paid? How do those places make money if there are no fees?” Well, it’s the same way a CD at a bank. The bank doesn’t say, “Oh, I’m going to charge you a fee. I have to pay the salary of the guy that sold it to you.” It’s all factored in as a part of the price of doing business. It’s all built-in to that expense. So what you’re earning on that annuity is truly all, basically earnings. There are no fees that are taken out of those products.

Dick: So I think that’s one thing that we just want to clarify, is that when you are buying an annuity that there are some annuities that really virtually have no fees. They protect your principal. They maybe don’t have as much upside potential. They’re purchased for other reasons than just the potential of a high return. They are purchased for safety, for a more secure retirement vehicle, and those are the ones that do not have fees.

Eric: Now when we talk about fixed annuities and we say there are no fees there is of course the mystical hybrid annuity, which is built off of a fixed annuity chassis, in the sense of your principal is not at risk. However, there are fees associated typically through the riders.

Dick: Yes, there are.

Eric: That is one of the things, when you look at a fixed annuity you can’t just throw the blanket over the fixed annuity and say none of them have fees.

Dick: There are some fees.

Eric: Because if you’re going for that hybrid option, which has basically, an income rider or a long-term care rider, if you’re adding a rider on, that’s where you are going to potentially see fees.

Dick: Right. I do think that we have to add the caveat that the fees typically are very low on the indexed annuity, under 1.0% as a rule, and sometimes some of those riders come with no fee involved. We do want to make that clear.

Eric: Exactly, so it’s understanding, if the rider that you’re buying gets you further to what you’re trying to accomplish with either your savings plan or your retirement cash flow plan, those are the times you’re willing to give up some of that upside or you’re willing to pay for that **guarantee. It’s insurance on your money. It’s insurance on your retirement plan.

Dick: Well, you know that you can potentially by buying a rider, by paying a fee, say it’s a .50% or .75% something of that nature, you know that you can **guarantee that your income potential could double in 10-years of what you would have today, just by buying that rider. That could be money very well spent.

Eric: Well, you’re putting a **guarantee of your future income in the bank. You’re banking on that retirement dollar being there, you’re buying an income stream. That’s what those riders are designed for. They’re designed for income, not for accumulation. If you’re designing them for accumulation, you’re being sold a bag goods, because that’s not what they’re for. They’re income riders, for your future income.

Dick: Exactly. Well Eric, I don’t know that if we’ve cleared up everything on fees, today.

Eric: Well, not necessarily everything. I guess the one thing we should in closing with the hybrid annuity. There is one caveat that you always have to be careful, when you’re working with your adviser you want to ask, “Is the fee based off of the cash account or the accumulation account?” Now we’re not going to explain that in this video, because it would take us another 30 minutes.

Dick: But there’s another part of that I want to give a little clarity to and that is that the fee never comes out of the income account, so even though we haven’t gotten into the detail of the income account and the cash accumulation account, we’ve done that in some other videos. That the fee always comes out of the cash account, so it reduces your cash value, but the income account has whatever the compounding amount is in there, say if it’s 8.0%, it’s not deducted. There is nothing deducted. So now we’ve really confused you.

Eric: I was going to say, “Now we’ve confused you.”

Dick: You have to watch our next video.

Eric: Perfect time to call your financial adviser or to give us a call.

Dick: Or give us a call.

Eric: Thanks very much for watching.

Dick: Thank you.