In this country there is a demographic tidal wave happening. Over 10,000 baby boomers reach retirement age every single day. The majority of those hard-working retirees and pre-retirees have spent decades planning for the time they can enjoy the spoils of their dedicated efforts.
Annuities are currently the “no-no” word in the financial industry for a lot of reasons. Many financial pundits have no depth of knowledge on the annuity subject. Too many financial advisors don’t like annuities because they feel annuities are a detriment to their business model and/or they don’t understand the category. In addition, some annuity agents push the sales pitch limits.
I have coined a phrase that, in my opinion, should define the annuity industry. It’s basic, easy to understand, and brutally factual.
“You should always own an annuity for what it WILL DO, not what it might do.”
Annuities, regardless of type, are contracts issued by life insurance companies. Most of the annuity types offered are classified as fixed annuities. Fixed annuities are regulated at the state level. Variable annuities are securities, and are regulated like stock, bonds, ETFs, mutual funds, etc.
Annuities are contracts, therefore they should be owned for their contractual guarantees only. Any buying decisions should be based on those contractual guarantees of the policy. Fortunately, most fixed annuities are contractual guarantees only contracts. These products are all simplistic transfer of risk contracts; Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Multi-Year Guarantee Annuities (MYGAs). They also have no moving parts and no annual fees.
Unfortunately, these simplistic products represent a very small percentage of the annuities sold in the United States. Commissions play a large role in their lack of popularity. Annuity agents can sell whatever annuity type they choose to sell. Too many of them focus their recommendation on high commission product types like Variable Annuities (VAs) and Fixed Index Annuities (FIAs).
In a perfect world, all agent “built-in” commissions would be the same regardless of the type of annuity sold. That would solve everything…in my opinion. Annuities would be recommended for the type of annuity that would best solve the problem or reach the goal and for the highest contractual guarantee.
“Will Do” means the contractual guarantees of the annuity policy.
There are only 2 annuity types where the returns are not contractually guaranteed. Ironically, those are the top selling annuity types in the United States...and have been for a very long time. For the record, I have nothing against these 2 annuity types at all. In fact, both can be purchased for attached contractual guarantees at the time of application. Though that’s not how they are typically sold.
The 2 types are Variable Annuities (VAs) and Fixed Index Annuities (FIAs).
Variable Annuities were first introduced in the 1950’s as a vehicle for tax-deferred growth. The potential return of VAs is linked to internal mutual funds (aka: separate accounts). That’s where the dream is sold. Each VA offers their own mutual fund choices, and the average annual fee of a Variable Annuity is between 2% and 3%. There are no-load Variable Annuities available as well, however, most have limited fund choices as well.
Fixed Index Annuities (FIAs) were introduced in 1995 to compete with CD returns, and that’s exactly what they have done since inception. Unfortunately, that’s not how they are typically sold. “Market upside with no downside” …you’ve probably heard that typical sales pitch with FIAs. Fixed Index Annuities are life insurance products, not securities. They are regulated at the state level, and it takes a state life insurance license to sell them. Because FIAs are fixed annuities, you will not lose any money. You will not get market returns with a long-term FIA policy because of the contractual realities. Some years might be better than others, but the blended return will be CD levels (or a tad better) over time. That’s a good thing, in my opinion.
“Might Do” are the hypothetical, theoretical, projected, back-tested, hopeful return proposal scenarios that are pitched and over-hyped. Never buy the dream because you will always own the contractual realities.
There is a way to turn non-guaranteed policies into guaranteed policies. If income is needed in the future, you can attach an Income Rider at the time of application. An Income Rider is a contractual guarantee for a future pension income stream that you can turn on whenever you choose. These Income Riders can be attached to many Variable and Indexed annuities.
Once that Income Rider is attached to the policy you should be solely focused on that contractual guarantee. Income Rider’s allow you to have lifetime income guarantees in place while still controlling the overall asset.
This is how to take “Might Do” and turn it into “Will Do.”
It’s an understatement to say this moment in time is going to be a turning point for this country. It’s going to make all of us reevaluate our lives and what is really important to us. This virus chaos will change how people look at their investment options and what type of retirement plan will enhance their lives. My prediction is that people will transition to more guaranteed income and in turn, shy away from stock market risk. In addition to the best inflation annuity on the planet that every U.S. Citizen owns (aka: Social Security), people will want to increase their retirement income and use their retirement savings toward these types of guarantees.
Before you decide to buy an annuity, you need to make sure that you only consider that purchase based on the contractual guarantees of the policy. Regardless of the annuity type, always own that policy for what it “Will Do,” not what it “might do.”