Annuity Returns: Potential vs. Contractual

Hello, welcome to The Annuity Man. I am Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. What we're talking about today is annuity returns, potential versus contractual. Unicorns chasing the butterflies or the contractual realities. The sizzle or the steak. The will do or the might do. Which one's better? I can tell you right now, one's better. Annuities are contracts, so we will talk about how agents pitch potential, what you need to be aware of, and why you might want to veer toward contractual because annuities are contracts.

The Hopeful Scenarios

Let's talk about potential hypothetical, theoretical, back-tested, hopeful agent return scenarios. "Gosh, I hope they come true because these proposal numbers look so good." Anybody can juice numbers, but most annuities that you can buy are contractual. There are only two primary types that you can buy that are not contractual, meaning that, well, they're contracts, but the return part of it is hypothetical, non-guaranteed.

Let's talk about the first one, which I do not sell. It is the only annuity type I don't sell because I sell contracts. I sell will do, not might do. I sell things that don't lose value. That doesn't mean these products are bad; it just means that that's not what I do. They're Variable Annuities, and variable annuities are, in essence, there's mutual funds. The annuity industry calls them separate accounts, but for me, you, and the public, they're mutual funds. So, mutual funds are inside of a policy.

Of course, you get to choose those mutual funds, but mutual funds can go up and down. I mean, they can. And in volatile markets, they certainly do. Can you attach guarantees to Variable Annuities with riders? Riders are attached benefits. Certainly, you can do that, but the dream of a Variable Annuity is that you will get these market returns. Now, the good news about Variable Annuities is there are some no-load Variable Annuities. What that means in English is that there are no fees and there are no agents involved. Oh yes, there are no agents involved. And there's 100% liquidity on day one, which is good because most Variable Annuities have a surrender charge time period, and the average annual fee on a Variable Annuity is around two to 3% for the life of the policy. So, that's a lot.

With that being said, Variable Annuities do have their place, they were put on the planet in the 1950s for tax deferred growth, which is a good thing. This means you can move those mutual funds around and not incur any taxes on the gains, etc. But there are limitations to Variable Annuities just because you're limited on the separate account i.e. mutual fund choices internal. So, that's the first potential return product. I'm not saying it's bad, but you should look at all products for your specific situation.

Fixed Index Annuities

The other potential one is called Fixed Index Annuities. Now, a Fixed Index Annuity is not a security. A Variable Annuity is a security. You have to have a series seven license. FINRA oversees it, and so does the SEC. It's a security. It's looked upon as a stock, an ETF, a mutual fund, whatever. However, with Fixed Index Annuities, which is a life insurance product, it is not a security. You have to have a life insurance license at the state level to sell it. It is regulated at the state level, not the national level, but it's promoted as a market return product. It is not; it was put on the planet in 1995 to compete with CD returns. And in the world of annuities, they are called enhanced CD returns. All that means is, maybe we'll get a little bit better than CD returns, but that's what Fixed Annuities do.

Now, the internal component, how the gears work on the return potential part of it, is a call option on an index. Typically, it's the S&P 500, but that does not include dividends. Why is that important? Because over 50% of the returns of the S&P historically have been from dividends. So, what you're doing with an Indexed Annuity is, in essence, you're taking a contract anniversary date this year to a contract anniversary date to a later year, and whatever that index grows by, you get a portion of that. The annuity company limits the upside, but that's a non-guarantee return. The good news is if you do get an upside, a little bit, and you get to share in that potential, and it's a CD-type return, it locks in permanently.

Income Riders

The other good news is if the market goes in the tank, you don't lose any money. Why? It's a Fixed Annuity. But you're not going to get consistent market returns. I always tell people that the way it's promoted is like the best thing since sliced bread; you'll get the market upside with no downside. You get market participation and don't lose any money. If that were really true, the FED would just buy Indexed Annuities. It's a good product, but it's a CD product. It's also an excellent product to attach Income Riders, an attached benefit for future income. The same thing applies to Variable Annuities; you can attach those benefits.

I'm not putting down potential products, but what I am encouraging you to do, imploring you to do, pounding the table for you to do, is don't fall for the hype. Don't make a decision on the hypothetical theoretical back-tested, projected, hopeful agent return scenarios. I know I said a lot, but don't buy the dreams. Don't buy the unicorns chasing the butterflies. The planets will not align themselves.

Does It Come True?

I got a call the other day from one of the foremost experts in Indexed Annuities. She's fantastic, but she gets mad at me sometimes because I'm not a huge fan of them. I mean, I use them, and I sell more than most anybody just for the Income Rider attachment. I use them as a delivery system for the Income Rider, but she wants me to be a little bit fairer on the accumulation value side. But she did say to me, which I respect everything she says, she goes, "I've never seen an Index Annuity proposal come true." And I went, "That's true."

In other words, that proposal that person is showing you about the potential returns is that if you'd owned it 10 years ago, you'd have made this. Well, if you have done sit-ups every day for the last 10 years, you'd have six-pack abs. That didn't happen either. But what she said is, "Hey, the proposals aren't really worth the paper they're printed on. You should look at it and say, okay, it's a CD-type product, Fixed Index Annuities, and understand that." That's the potential side.

The Contractual Side

Let's talk about the contractual side. Most annuities that are out there, most annuity types are completely contractual. There are no moving parts. You're going to get what the contract says. There's no potential involved, including Single Premium Immediate Annuities, which are pension products that you start the income between 30 days from the policy being issued to a year.

Qualified Longevity Annuity Contracts, which are Deferred Income Annuities that you can use inside of your IRA. Deferred Income Annuities are, in essence, Single Premium Immediate Annuities that you can start income from 13 months out up to 40 months out.

Those are all contractually guaranteed products. The other contractually guaranteed product is a Multi-Year Guarantee Annuity, which is the annuity industry version of a CD. Everyone has a Certificate of Deposit; they've probably bought one, their mom's bought one, or their dad's bought one. In essence, it is a guaranteed annual interest rate for a specific period of time that you choose. All four of those products are contractual. I love those products because what you see is what you get. You can't juice the numbers. The contract is the contract. When you run the quotes or show the proposal, it's really not a proposal, it's a quote. This is what you're going to get. This is what you're going to make the decision on. There are no moving parts. There are no 'market attachments' to them.

They are straight transfer of risk contract. In conclusion, are potential annuities, those potential type annuities, indexed annuities, or variable annuities bad? No, of course not. They're not. And if used properly, you can attach contractual guarantees to them to circumvent that potential. But in my world, I really like people to decide on the contractual guarantees. Annuities are the only product that can provide a lifetime income string guarantee, and most of the time, people use annuities for two things. Lifetime income, which is a monopoly that only annuities can provide. And principal protection. Both of them are contractual. Both are will do, not the might do products.

Hey, I encourage you to go to The Annuity Man. I've written many books; you can download them for free and under no obligation. They're on all types of products: SPIAs, QLACs, DIAs, MYGAs, and Income Riders. I've written them all.

The other thing I encourage you to do is to go to The Annuity Man to use our annuity calculators. They're proprietary, and they shop for every single carrier out there. We also have a live fixed-rate feed, and you can go there and shop at your leisure. I want you to be educated. I want you to understand how these annuities work so you can make a decision on your terms and your timeframe. We represent almost every carrier out there, so there's no steering toward products; we just want you to find the highest contractual guarantee for your situation. And with that, I'll see you on the following blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.