Evaluating Annuity Income Increases: Are They Worth It?

Hi there. Stan The Annuity Man, America's annuity agent licensed in all 50 states with a very important topic. It's evaluating annuity income increases. The question is, are they worth it? The sales pitch sounds good. The sales pitch is, "Hey, Stan, this dude at the steak dinner seminar told me that every time the annuity increases in value, the Indexed Annuity increases in value, and the income increases by that amount as well. That sounds good, Stan. That's what I want. I want to combat inflation. I want my income to increase. I also heard about something called a COLA, Cost of Living Adjustment." That's what a COLA means, which can be attached to an Immediate Annuity or Deferred Income Annuity. You choose the percentage that you want the income to increase every single year by that percentage. "Stan, that sounds fantastic. That's exactly what me and the Mrs. are looking for. We want our income to increase just like Social Security does."

Let me stop there. Social Security is the best inflation annuity on the planet because it's political, not actuarial, okay? Our friends in D.C. Are voting to increase your payments in order to get you to vote for them. It's really that simple.

Cost of Living Adjustments

Annuity and life insurance companies that issue annuities when they have a product with either a COLA or a potential hypothetical increase with gains to your income stream don't give that away. Remember, annuity companies are for-profit. They have the big buildings for a reason. They have the logos on the plane for a reason. They have the marble floors for a reason. They are sponsoring baseball stadiums, football stadiums, and basketball stadiums for a reason, and that reason there are for-profit and life insurance companies who know when we're going to die. Most property and casualty companies don't have sports stadiums and logos on the plane because they don't know when the hurricane is going to hit. They don't know when the fire is going to hit.

This is how it works in the annuity industry. When you have an annuity without an increase, whether it's potential or a COLA, that's contractual without income, it starts here visually. Income begins here if you choose an annuity with a potential increase or a contractual increase like a COLA. In other words, the annuity company will severely and drastically lower that initial payment to make up for the increase or potential increase depending on what you're buying.

Sometimes it's as drastic as a 30 or 40% lowering of that payout rate with the same type of annuity. Do you really want that? What's the break-even point for you to get to the level of the one without the increase when you chose the one with? Because it sounded so darn good, Stan and that filet mignon medium rare was fantastic. If it sounds too good to be true, it is every single time with annuities. If it sounds too good to be true, it is every single time with increases to your income using annuities.

Social Security is the best inflation annuity on the planet. There is not a commercial annuity company version of that. They're just going to lower the payment for you to make up. And with that, and depending on your age, it can be a six to nine-year break-even point.

Understand What They Do

Does that mean you never buy those? No, but if you buy them, you must understand what they do. If you're purchasing a COLA, the Cost of Living Adjustment increases, which is contractual with an Immediate Annuity or Deferred Income Annuity. In other words, you can say, "Stan, I want a 3% increase," or "Stan, I want a 2% increase," or "Stan, I want a 4% increase." There are no ifs, ands, or buts. It's going to happen. It's contractual with Immediate Annuities.

Indexed Annuities

But again, without it, they're going to lower the payment. All right? But where the games are played and where the truth is being stretched is on the index side. We have nothing against Indexed Annuities, nothing. They were put on the planet in 1995 to compete with CD returns. That's exactly what they are. They are life insurance products. They are a Fixed Annuity. They are not a security; they are not a market product. They are not for market growth, but we use them as an efficient delivery system for Income Riders, okay? That's what we do, period.

So, the Indexed Annuity sales pitch sounds good because typically, there's this upfront bonus that you can get, which I call upfront bonuses, candy for the stupid. After all, if you believe there's a philanthropist at annuity companies, you've lost your mind. I mean the increase, and then they say, "Well, it's going to grow by this and it's going to increase."

Indexed Annuities are complicated products, and with a lot of the Indexed Annuities that have potential increases, the company can, with some of them, change the rules on how those gains are calculated at their discretion, period. So, the proposal looks good. The hypothetical and theoretical look great, but we don't do any of that. We only sell contractual guarantees. You should only buy an annuity for what it will do, not what it might do.

And if that agent's pounding the table and saying, "It's going to happen, it should happen, it will happen. I promise it'll happen," to get the sale. Then have them sign off on it. Write down exactly what you hear, including all the guarantees, and have them sign off on it and say, "If it doesn't happen, you make up the difference." That pen's going to weigh 1,000 pounds. I need you to be pragmatic out there.

Are there annuities that have increases to the income? Yes. Are they worth it? Stan The Annuity Man's opinion, the current inventory of annuities out there, I'm going to tell you, "No." Because I know what your goal is. Your goal is, "Well, we got to address inflation, Stan. Inflation is going to need blah, blah, blah, blah."

Fill the Gap

My opinion on how to address inflation is that this is the way to do it with annuities properly. Don't buy the COLA, don't buy the Indexed Annuity with the potential increase. Buy the static payment quoting all carriers for the highest contractual guarantee when you want that income to start, and then when you need to fill the gap for inflation or additional income that's needed, then reverse engineer the quote. You can do that at The Annuity Man by solving for that specific dollar amount using the least amount of money. Be pragmatic out there. Be smart out there. If it sounds too good to be true, it is. And in my opinion, I don't think those increases are worth it. I think you should maximize the payment and then fill in the gap in the future when you need to fill in the gap.

Inflation

Inflation affects us all differently. I love it when the pundits and the people on TV talk about inflation. They talk about it like it affects us all the same. "Well, it's inflation that's killing us. It's killing us." It might be for some people; it might not be for some people. Unfortunately, the lower end of the financial spectrum, that group is always getting killed by inflation.

But if you have hundreds and hundreds of thousands of dollars, and blah, blah, blah, don't be arrogant. I had a guy the other day calling, and he had about $3 million. He goes, "What are we going to do about inflation?" I said, "Player, you have $3 million. You're going to be fine. You're going to survive it, okay?" Let's not get caught up in what the pundits are saying. Put an income floor in place, put an income floor in place with Social Security, which you know that's going to increase. Some pensions with companies actually increase. But go into the annuities for income without the increase and then fill in the gap if needed.

Hey, I'm Stan The Annuity Man—America's annuity agent, the top agent out here. I've made more videos and written more books, and I don't know if that's a good thing. It just means I don't have that much of a life except annuities and trying to educate and edutain everybody out there.

I'm on a mission to get the annuity space and the annuity category put in a positive light because these are great products when you need them, if you need them, and if you're looking for contractual guarantees and to transfer risk, that's it.

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.