Selecting the Best Annuity & Retirement Income Advisor

Should we as consumers place our trust in or be guided by a third-party evaluator of annuity providers? For most of us, the answer is YES.

Ratings of insurance companies should be one of the key components of your decision when selecting an annuity provider. When you purchase a lifetime annuity, you must believe that the company will survive longer than their obligation to you.

Third party ratings provide guidance to consumers who would not otherwise have any basis on which to compare companies. Should these ratings be the sole basis for making an annuity decision? NO. History has taught us that these ratings are just one piece of the total puzzle.

Dick and Eric share their thoughts on the validity of third-party ratings of annuity providers in this weeks video.

**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.

Still have concerns about annuities, check out this article on “How Safe are Annuities“.

How Safe Are Annuities?

Safety of money is generally relative to comparing levels of risk between Government backed, insurance backed or individual securities investment risk.

In regard to non-variable fixed annuities, State Regulation forces insurance companies to follow what is known as Statutory Accounting unlike generally acceptable accounting methods (GAAP) utilized by publicly owned corporations. Statutory accounting is a show me the money type of accounting whereby expenses are written off immediately and not capitalized to inflate profits for corporate convenience or even fraud. Most insurance carriers are also publicly traded companies that additionally must also meet GAAP standards.

Insurance institutions are required to demonstrate to state regulatory authorities that dollar for dollar a client’s money (premium) is safely on deposit in secure financial vehicles such as investment grade bonds or government bonds. In addition they are required to have reserves known as additional surplus reserves. The minimum amount of required reserves is decided based on the safety of the investments as determined by state regulators. So based on these stringent requirements insurance carriers are scrutinized and forced by law to meet and maintain a legal reserve for the safety of their clients.

Each insurance carrier is also compelled to participate in a mandated state insurance **guarantee association (SIGA) whereby insured clients have minimum **guarantees on their annuities and life insurance typically and minimally $100,000 on annuities and $300,000 on life insurance some states have higher limits. These **guarantees are not to be confused with FDIC insurance or used in marketing insurance products. The state’s first concern is the safety of the client so in the majority of situations when an insurer begins to have any serious financial concerns the state places them in receivership and transfer s ownership to a better run profitable carrier with all assets moved over from the faltering company. Thus the insured client remains whole and the **guarantee association is absolved of any liability. [Read More…]

Annuity Guys® Video Transcript:

Dick: You’ve probably seen a lot of the news just recently about the rating agencies.

Eric: The US governments, the state governments are suing Standard & Poor’s.

Dick: The S&P 500, that’s right the rating agency.

Eric: Standard & Poor’s is on its way to writing a nice little check.

Dick: Do you think this could have something to do with them lowering the government’s credit rating?

Eric: Are you saying there’s a…

Dick: Do you think it could be a conflict of interest?

Eric: Well, speaking of conflicts of interest. This is probably the perfect introduction into our topic today, when we talk about, when we’re looking at annuities and insurance companies, the rating agencies how do they go about determining these rating agencies, and how they’re going to be selected and how their criteria is?

Dick: Well, it’s very interesting and as you read these articles about the rating agencies out there Eric, so many of them actually are paid by the folks they’re rating.

Eric: That’s exactly, so I’m an insurance company. I want to be rated. I write you a check to come in and…

Dick: To come in and rate me, right.

Eric: … look at my books. So is there a conflict of interest there, perhaps?

Dick: I think we’d have to say, yes.

Eric: Now if you’re going to give me a bad rating, wouldn’t I be better off just not having you come in and look at the books?

Dick: Well, that being the case, you would have competitors out there that would have positive ratings, and you would have poor ratings or no ratings. So you’re forced to comply. Now is that to say that, because there is this conflict of interest that exists, that you can’t rely on any ratings agencies?

Eric: No, I say this as I say it the everyman type of philosophy in the sense of, if I wanted to go in and evaluate each insurance company on my own merits where I want to walk in and say “All right, show me your books. Show me your balance sheet. I’m going to determine if this is a safe to place to put money.”

Dick: You’d have to take a battery of CPA’s and attorneys.

Eric: I don’t have the manpower. Exactly, so what we’re doing is we’re having to rely on these third party agencies, which they’ve been doing this for hundreds of years in some cases, to take a look and say all right, what is the financial status? What’s a third party review of where they’re at financially?

Dick: And if we go from the investment world, and we look at some things that have been going on, packaging the mortgages and this type of thing, the ratings agencies did miss it.

Eric: Well, and that was always the question. How could they miss it? There are some suggestions that perhaps, they didn’t even follow their own standards, when doing those evaluations. Then of course, then we hear about things in the recent past, not so recent past like Enron where they were too late to the bell, and then it even goes back to the 1970’s where New York City had its issues, and of course, the ratings agencies didn’t quite get on top of that in time.

Dick: Now I look at insurance companies a little differently and I think there’s good reason for that, and that is that state by state they have what we would call a statutory type accounting requirement where, maybe a good description would be show me the cash. In other words, they can’t use what’s the generally, acceptable accounting practices, the Gott method, which is used by corporations and that allows corporations to put these things off into the future, to hide present income or to hide present expenses to kind of cook the books. Used properly it’s fair, but if you want to cook the books you can do it sometimes.

Eric: There’s a little bit more manipulative action.

Dick: The Enron example would be good. But when it comes to insurance companies, they have to have everything transparent, out in the open in the statutory type accounting. So the third party rating agencies have quite an advantage there.

Eric: And we have a favorite, in the sense of, when we typically have a conversation with a client we tend a lot to use AM Best, because of their history with evaluating insurance companies, and that’s what you want, a consistency across time in what they invest since 1906.

Dick: They’ve been doing it for over 100 years and the thing that I like about it is that they have just a history, that when you go back and you look at companies, things don’t change fast. So a rating where a company has an A or A-plus rating, if they were to move down to maybe all the way down to a B-rating, that good take place over years and years and years. It isn’t typically anything that happens overnight.

Eric: Let’s talk about ratings and I hate to the example of one company, but it’s AIG.

Dick: Everyone knows AIG.

Eric: Everybody knows AIG. Here it is. Here’s a company that had an A-rating, on the insurance side. Now there’s always some question as to “All right, were they really in trouble,” in the sense of they’re going through a government bailout, all these things are happening.

Dick: And they were rated by AM Best, and yet even CNN reported that folks may need to be aware because of AIG going through all of this trouble, and it really had more to do with their investment side, and amazingly their insurance side was A-rated, remained A-rated, is still A-rated and very safe, and secure.

Eric: And that’s where you have to look at a company, when it’s a large company like that, that has multiple divisions. The insurance side may be a separate entity than what’s maybe getting the black marks out there.

Dick: Exactly and what would’ve actually taken place with AIG or other insurance companies is, if they really had gotten into trouble, all of the assets are there that gives them an A-rating. They would’ve been put in receivership. So a more profitable company that has economies of scale is making a profit off of their assets would have all of AIG assets moved over to them, and they would continue to operate profitably with those assets.

Eric: So I guess let’s look at this in totality now. So if I’m somebody coming in looking at annuities can I rely on these third party ratings, effectively, to help me judge what something is going to be a good choice for me.

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

The post Annuity Ratings, are they Believable? appeared first on Annuity Guys®.

Be aware that:

•  Cap rates on IUL policies are about 3 to 5 times higher than those on index annuities;
•  There are IUL policies which allow you to add a rider that will **guarantee lifetime income;
•  IUL policies if configured properly can generate a tax-free income stream;
•  An IUL may NOT be the right choice for your **guaranteed lifetime income…

Dick and Eric discuss the differences between index annuities and index life insurance; both have become increasingly popular for retirement planning.

**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.

Indexed Universal Life Insurance Policies: The Perfect Option for Professionals and Business Owners

by Timothy R. Fussell

For a professional such as a doctor, attorney or CPA, the Indexed Universal Life policy is perfect for your retirement needs. Often as a professional, you operate as a P.A. being taxed as a sole proprietor, an S Corporation or a C Corporation, and under the tax codes you are limited to retirement account choices. The SEP IRA, Solo-401k or the UNI-401k, all allow you to save on a tax-deferred basis; but the maximum contribution limit is still the same $49,000.00.

Now let’s explore the IUL (indexed universal life) and why it is a better choice. As a professional of these types, your income level is much higher than average, so you max out your contribution very early in the year. With the IUL, there is no limit on how much money you can contribute—the money still grows tax-deferred, but with a several advantages.

Now comes the great part! In the event of a business need, the money in your tax-deferred accumulation account can be used, through interest-free loans, for the purchase of new equipment, to expand the practice, or just to carry you through a tough time. At retirement the money is paid to you in the form of tax-free loans against your account value. The income would be a lifetime income with of loss in a down market, and at the end of the income, your death, the face amount of the life insurance policy would still go to your heirs as a tax-free death benefit. The tax-free death benefit would, at any time, be the security to your family that their lifestyle would continue in the same manner to which they had become accustomed—a **guarantee the retirement account cannot promise. If, through a consultation with your insurance professional, it is determined that your life insurance needs exceed the desired amount of contribution in the IUL, a term life insurance policy can be added to meet your life insurance needs at a lower cost.

A business owner has many of the same needs but also faces many different challenges. The IUL is even more exciting in these cases. All of the benefits listed above still apply to the business owner, but if you are an S Corporation, you could have the option of making the premium contributions as a draw against the profits of the corporation and avoid the self-employment tax/social security tax, which could add to the benefits of the IUL.  That alone is a 13.3% tax savings!

To a business owner with a partner or partners, another issue is presented that makes an IUL a perfect choice. Should a partner/partners die, you would have the need for a Buy-Sell Agreement to determine the value of the buy-out of the deceased partner/partners. The best way to fund the buy-sell agreement is through life insurance policies. The buy-sell agreement would either be a cross purchase buy-sell or a stock purchase buy-sell. These differ based on your corporate structure. Your insurance professional should have a working knowledge of the two types of agreements and work with your CPA and attorney to make sure they are set up correctly. [Read more…]

Annuity Guys® Video Transcript:

Eric: Today, we’re examining indexed universal life and how it would compare to perhaps a hybrid annuity or annuities in general.

Dick: Right. First of all, let’s say, “Thank you,” Eric, to Steve.

Eric: Steve up in Wisconsin for submitting his question. Please continue to submit your questions, and we’ll examine them as the weeks go on. So for those of you that submitted questions.

Dick: We’ve got some already.

Eric: We’ve got some in the hopper, and those of you that have questions, keep them coming.

Dick: Today, in comparing indexed universal life and it’s also called equity indexed universal life or EIUL, but the more technical, correct term would be IUL, very safety-oriented product. It’s a life insurance product and there are a lot of good comparisons we can do with that and annuities, so why don’t we just start off talking about the life insurance part, the IUL.

Eric: We don’t talk about life insurance too much here, so let’s talk about one, why someone would even compare in the sense of I’m going to think of it in terms of, if I’m not going to select an annuity for retirement income would I select an equity or in this case, an indexed universal life policy.

Dick: Or if I was looking at growth compared to… Well, I’m just saying if I was comparing the two for growth. Okay, maybe I’m getting– go ahead.

Eric: You’re good at jumping ahead.

Dick: Jumping ahead of you.

Eric: Darn it. So what we want is trying to grow the policy to the largest amount, so that we can use it for a retirement supplement. Because, really here we are talking about the living benefits of the IUL, in this case, being able to use it as a supplement for retirement. Now what it has is the ability to have a double digit cap compared to with the low, single digit caps, of today on the annuity world or on the hybrid annuity.

Dick: And that’s large Eric, because when we look at the caps on most annuities, the fixed index annuities which are referred to as the hybrid annuity, the caps are down below 5.0%. Some substantially down in the 2.0-2.5-3.0% range, so when we start talking about the IUL, now we’re looking at 10-12-15% caps, even.

Eric: Right, so we have growth potential.

Dick: Potential, right.

Eric: Because here we’re talking about index games, there is not that **guaranteed rollup side. So on the hybrid annuity side you’ve got those income riders that have some of those **guarantees.

Dick: Contractual **guarantees for the future income.

Eric: So that is the one comparison on the caps side. Now what are we going to use for withdrawals on the life insurance side? How are we going to get money out of this?

Dick: Well, if we take actual withdrawals, we’re going to pay taxes.

Eric: Taxes?

Dick: So we don’t want to take withdrawals.

Eric: Well, then why would we even consider this?

Dick: And when we compare it with an annuity, when you take withdrawals out of an annuity, you pay taxes. But there is a really nice aspect to the IUL, and that is you can borrow out of it, and it is just like the old, traditional whole life policies you can borrow out of it and not pay taxes on it and IRS has allowed that. On borrowed money, any time you borrow money from a bank or anywhere, there is no tax paid on borrowed money.

Eric: Now do I have to pay this money back?

Dick: Actually, technically you do.

Eric: But when do you have to pay it back?

Dick: Through your death benefit.

Eric: And that’s the key element here. It’s really part of the death benefit and that’s what makes it, basically you’re going to pay it off at some point in time.

Dick: Right.

Eric: Those dollars that you’ve accrued are going to get paid back at the time, when you’re gone basically, as that death benefit is disbursed.

Dick: Right. One of the things that I want to bring out is that, if you want to use the IUL folks, you cannot use your qualified funds or your IRA money, unless you’re willing to just go ahead and pay the tax on it and move it over. Then you have to do a real analysis on how that might…

Eric: Just as a reminder neither of us are accountants nor tax professionals so we would advise you to consult your tax professional when it comes.

Dick: Although, we work with this every day and constantly talk about the taxes.

Eric: So now is the government going to come in and take my tax benefit away?

Dick: Well, that is a question we are frequently asked. I am asked that on The Raw, I’m asked that on life insurance or life insurance that’s being used in more of a retirement account type situation, and the answer to that is, it can happen. It could happen. However, if we go back and look at other times where Congress has stepped in or the government…

Eric: Screwed us?

Dick: … took advantage of us? Typically, they have grandfathered us, so that if we are in a situation where, in good faith…

Eric: Great grandfather’s covered, I get screwed.

Dick: So if we operated in good faith and set this up, and did it under the current tax provisions and laws and by the way, this is the IRC, Internal Revenue Code 7702 provision same type of thing that the IRC 401k, same area that comes from, it’s the 7702. So if you see the 7702 Plan that’s what they’re talking about.

Eric: He wants to be an accountant.

Dick: It’s very legitimate, it’s very real and it works and a lot of professional people use this, because they can put large amounts of money in. They keep their principal safe. They lock in their gains. They’ve got annual reset. There are some wonderful things about it, but Eric, who’s it going to work best for and at what stage?

Eric: You’ve got to be in your accumulation stage it’s probably the easiest way. So young professionals perhaps, I’ve heard it called a Big Boy Roth, because you can dump oodles and oodles of money into it and let it grow. There is not a limitation to the contribution amount. Now they have to be dialed in the right way and that’s one of the things that…

Dick: A little secret.

Eric: Yeah, strategy wise, usually you have the smallest amount of death benefit that you can have on life insurance.

Dick: Which means you pay the least amount for insurance and the agent makes the least amount on…

Eric: … commission. So you can see how there could be a confliction amongst the person that might be trying to talk to you about this, so usually we see only larger clients.

Dick: I like that word, though, Eric, confliction

Eric: Confliction. I’ve got an ointment that takes care of that.

Dick: Let’s trademark that.

Eric: So yes when your conflicted agent comes in and says…

Dick: Yes, we need to make sure you’ve got plenty of life insurance. Let’s not go too far on this, because there are times when a lot of life insurance is good for heirs and different things. But the way to make an IUL really work well, and again back that original question I had posed and that was, what stage, and I am just going to go ahead and answer it.

Eric: Say 15 to 20 years.

Dick: Yeah, 40 to 50-years-old, that you can really let it sit.

Eric: You’re 15 to 20 years from retirement. You have to have at least that amount of time really, for it to really function well and that’s the key, I think. Because at that point in time, it starts to get the extra dividends, the extra pieces, the extra credits that can make it really hum. Then you can have a rider on there that has a loan provision for life, so you can treat it very much like an annuity, but you have to have the forethought to have done these 15-20 years before retirement.

Dick: Correct.

Eric: So if they haven’t done that, income **guarantee-wise.

Dick: It’s really based more on potential. Yes, now let’s talk briefly, because this is a long video, let’s talk briefly about the annuity and why the annuity would have certain aspects…

Eric: Advantages?

Dick: … and advantages over the IUL, because the IUL is pretty cool the way it works.

Eric: They’re very cool. I love them. I would say **guarantees though, especially **guaranteed lifetime income, for someone that’s nearing or close to retirement is the key. I don’t want to say it’s the singular piece, but it is the first and foremost.

Dick: Because with the IUL I have to have potential for growth, I have the potential for growth, and I have to get the growth through that potential, but with the annuity I have a contractual **guarantee.

Eric: Yes, and that’s the key. We’ve talked about the hybrid aspect, you also have other annuities such as immediate annuities, where you’re going to have payouts of your principal plus, **guaranteed for life. Now the insurance aspect without a rider, you could actually run out of basically, enough account value, because you have to keep the insurance in place long enough to die, because if you don’t die with any insurance left, you haven’t paid off your loans.

Dick: And probably, Eric the best advice that we can give you, beyond the general information we’ve just given you is work with an adviser who really understands how to compare these two, and, maybe it’s not one or the other, maybe it’s some of both.

Eric: Yeah, could be. It depends on your end goal. What do you want these dollars to do for you? So work backwards and work with an expert.

Dick: Steve, thank you for this question, and those of you out there who have questions, we’ve probably caused you in this video to have some more questions. Feel free to send those in to us and we look forward to answering them.

Eric: That’s right. As you can see, we’ll tackle just about any question as long, as it relates somewhat, to our annuities world. Thank you very much.

Dick: Thank you.

The post Annuities vs (IUL) Indexed Universal Life – How do they compare? appeared first on Annuity Guys®.