Fixed Annuity vs. Variable Annuity (TAM Classic)

Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic: Annuities Explained. People are like, "Explain this to us, Stan The Annuity Man." Fixed Annuity versus Variable Annuities, which I love to talk about. Now, disclaimer, I don't sell Variable Annuities. I just don't. You say, "Well, why?" That is an excellent question. The reason is I don't sell anything that has the potential to go down. I sell contractual guarantees on an annuity for what it will do, not what it might do. I know there's a lot of my brethren and sistren (is that what it's called?) out there that sell Variable Annuities, going, "Stan, you don't know what you're talking about because Variable Annuities are very, very good." We will talk about Variable Annuities a little because I know a bit about them because I used to work with Dean Witter, Morgan Stanley, Paine Webber, and UBS. And oh, by the way, I worked at the World Trade Center, South Tower, too, for a while, which is kind of sad if you think about it. No, I was not there, obviously. Since I mentioned September 11th, let's have a moment of silence for the friends and the families. Five seconds for 9/11. Thank you.

All right, I'm going to explain annuities. Annuities explained by Stan The Annuity Man, America's annuity agent. Who better to explain annuities than America's annuity agent, Stan The Annuity Man, who doesn't have a last name, it's Annuity Man. On a side note, a couple of years back, I loved the whole Stan the Annuity Man thing, and I went to my wife, and I'm like, "Is there a way that we could legally change our name to The Annuity Man?" That didn't go well. She did not want to be called Christine The Annuity Man. Now, I'm like, "That makes total sense from a marketing standpoint." She didn't buy it, but I still go by Stan The Annuity Man, last name.

Mutual Funds

Let's talk about Variable Annuities. Variable Annuities, in essence, in English and Southern, are mutual funds wrapped with an insurance wrapper. And for whatever reason, they don't call them mutual funds in the annuity industry. They call them separate accounts. You and I are going to call them mutual funds because guess what? They're mutual funds. That's what they are. One of the most popular types of annuities sold out in the hinterlands is Variable Annuities. Now, variable annuities were put on the planet in the '50s for tax-deferred growth, and that's fantastic. But what they've turned into, unfortunately, is very high-fee products.

The typical Variable Annuity that an agent sells could have fees ranging from one to four percent, in that range, and every carrier is different. I know you're saying, "That's a big range." I understand, but I would say between two to three percent typically is what you're going to find with a Variable Annuity fee for the life of the policy. Every year, you're stuck starting at minus-two or minus-three, whatever all of those expenses are, and a lot of the expenses are hidden. Now, they're not horrible products. I mean, you can attach Income Riders to Variable Annuities. We have found that the Income Riders that can be attached to Fixed Annuities usually offer a higher contractual guarantee. But Variable Annuities, it's that too-good-to-be-true sales pitch. Market growth, and you can attach guarantees, etc.

No-Load Variable Annuities

There are such things as no-load Variable Annuities, and once again, disclaimer: I don't sell Variable Annuities, but I know a lot about them from my previous life. But there are no-load Variable Annuities, which means that your liquid day one and you pay a low, low, low fee. Typically, you manage it yourself. There are some no-load Variable Annuities out there that advisors can manage for a fee, and those are fine. If you're going to say, "Stan, I have to buy a Variable Annuity," I would say, "Go buy a no-load Variable Annuity and have a professional money manager manage those separate accounts internally for you." But once again, there are limitations on the choices. There are limitations on the choices of mutual funds, i.e., separate accounts. Any time there are limitations, then that's not real growth, in my opinion. If you really want market growth, go buy non-annuity products and go for it. Knock yourself out. But that's my take on Variable Annuities.

Fixed Annuities

Now, Fixed Annuities versus Variable Annuities. Variable Annuities are what they are, but Fixed Annuities really fall into a few categories. Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts are Fixed Annuities, but those are for lifetime income. Then you have Fixed Annuities for principal protection, like Indexed Annuities, and then Multi-Year Guarantee Annuities, i.e., Fixed Annuities. I mean, those are the different types. So, it's hard to compare one, like a Fixed Annuity or Immediate Annuity, to a Variable Annuity because an Immediate Annuity is for lifetime income; a Variable Annuity could be for growth or should be for growth, supposed growth or limited growth.

It is the same with the Deferred Income Annuity and Qualified Longevity Annuity Contract. Those are annuitized products for lifetime income. Those are pension products. Those are transfer-risk products that are going to pay you or pay you and a spouse for as long as you are breathing. But I think that the better correlation for me to compare is looking at the Fixed Index Annuity and the Multi-Year Guarantee Annuity, which, by the way, are issued at the state level, and those are CD-type products in everyday CD worlds. In that two to four percent range, you have Variable Annuities, for which we don't know the guarantees. We just know that you're buying these mutual funds, i.e., separate accounts for possible growth. If you're going to compare Index Annuities to Variable Annuities, Variable Annuities have a downside and an upside. With Fixed Indexed Annuities and Multi-Year Guarantee Annuities there is no downside and limited upside.

What's Your Goal?

It really comes down to what you're trying to achieve. The problem that we're running into in the industry is that the Indexed Annuity sales pitch sounds eerily like the Variable Annuity sales pitch but with principal protection. And you're out there going, "Wait, that's exactly what I want, Stan The Annuity Man. That's exactly the product I was looking for. Market growth, principal protection, locked-in gains. That's what I want, Stan The Annuity Man. And oh, by the way, Stan The Annuity Man, that's what I heard on the radio and from my advisor and at the bad chicken dinner seminar that I just went to." Indexed Annuities are CD products issued at the state level. Period, end of story. They were put on the planet in 1995 to compete with normal CD rates and in this world, normal MYGA fixed rates. That's the kind of two to four percent world that you're looking at.

Client Example

And many people call me, and I got a call the other day; this is a great example. Guy calls me and says, "I bought the Indexed Annuity sales pitch. The guy said I was going to get six to nine percent returns. I'm in year three and I've averaged 1.9% in a raging bull market." And I'm like, "Well, the good news is you're never going to lose money. And that 1.9% was locked in every year and it's never going to go below that, etc." And he was mad. I was going to use the P word, but I'm not going to use that because my wife doesn't like it when I say that. He was really mad, let's just say that. And so, I was like, there's not much you can do because it was a ten-year product on the Indexed Annuity, which means there's surrender charges.

And I always tell people with Indexed Annuities that have the one-year call option that if you buy a ten-year surrender charge product, you're really buying a one-year guarantee with a ten-year surrender charge. So, in this case, you're talking about market growth. The Variable Annuity has got to win because you can change those mutual funds with most of these variable annuities at your discretion, or they give you some pretty good flexibility to change those mutual funds, i.e., separate accounts around. So, Indexed Annuities versus Variable, one's a CD-type product, one's growth, even though the Indexed Annuity is mis-sold as kind of a variable, no. Now, Multi-Year Guarantee Annuities, the annuity industry's version of a CD compared to a Variable Annuity, there's really no comparison. A MYGA is a principal protection product that pays a specific interest rate for a specific period of time. A Variable Annuity is a Variable Annuity. It's not a MYGA, so you really can't compare the two.

The 2 Questions

It comes down to the two questions I always ask people. "What do you want the money to contractually do? And when do you want those contractual guarantees to start?" That's where Fixed annuities come in. We are talking about contracts. If you say I want market growth, some people are going to funnel you over there to that variable annuity side. I'm going to tell you that in most cases, most, not all, you should not be buying an annuity if you're looking for market growth. Do Variable Annuities fit in a five to six percent solution-type world where 95% of the people don't need it, but maybe there are five that do under a specific circumstance? Yeah, that's a yes in Southern, yeah, but I'm not a huge, huge fan right now of Variable Annuities. Hopefully that will change because hopefully the industry will make some changes out there.

I do see some innovative products coming for the registered investment advisor in the Variable Annuity world, and I'm going to wait and see how that all shakes out. And maybe I'll do a video in the future where I go, "Hey, I really like this type of Variable Annuity." But with the current offerings right now, I think you're better off in the marketplace, and with Fixed Annuities, it's all about contractual guarantees.

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