The Annuity Truth About Bonuses Rates Caps Spreads: Shootin’ It Straight With Stan

Welcome to Shootin' It Straight With Stan. I'm your host Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic is the annuity truth about bonuses, caps, spreads, and participation rates, all attached to Indexed Annuities. We get lots of calls about this because, unfortunately, most annuity agents are just trying to sell Indexed Annuities.

We have absolutely nothing against Indexed Annuities, but they do happen to be the highest commission-paying product to the agent and advisor on the board right now, which is the reason that when you go to the bad chicken dinner seminar, the expensive steak dinner seminar, that's what you're hearing, which is scary. I always tell agents that ask, or if I'm speaking in front of them, and the tomatoes are whizzing by my head, I'm like, "You can't offer the same product to everybody." It'd be like a doctor giving a seminar with 100 people in the room, and he's talking about one type of pharmaceutical and then trying to prescribe and sell it to every single person in the room.

I'm sure there are doctors like that when the opioid thing happened, but you see what I'm talking about. It makes absolutely no sense. So, when you have agents that just choose an Indexed Annuity, it pays them a huge commission, and that's what they sell to you regardless of if you need it, have a sore throat, a sprained ankle, it doesn't matter. It's a one-size-fits-all.

The 2 Questions

That's where the annuity industry gets a bad reputation. A little bit about Indexed Annuities, we have nothing against them. If you go to The Annuity Man, you can run Income Rider quotes attached to Indexed Annuities, and that's how we typically recommend them if you need income in the future. We always ask two questions, "What do you want the money to contractually do?" And "When do you want those contractual guarantees to start?"

If you need income in the future, we're quoting Deferred Income Annuities and Indexed Annuities with riders and using the Indexed Annuities as nothing more than an efficient and cost-effective delivery system for the Income Rider guarantee. We only sell contractual guarantees, and you, as the consumer, should only buy annuities for what they will do, not what they might do. The will do is the contractual guarantees.

Indexed Annuities were put on the point in 1995 to compete with CD returns, and the hope is that they will outperform CDs by 1% or 2% if all the planets align themselves. But often, it doesn't, and you'd probably be better off buying a MYGA, which is the annuity industry version of a CD, a Multi-Year Guarantee Annuity. You can go to The Annuity Man and look at a live feed for your state because those annual percentages are guaranteed.

Sales Pitches

Let's break down some of the sales pitches that are a little scary. The easiest one to shoot down like a wounded duck is the upfront bonus. The upfront bonus is what I call candy for the stupid. You should never buy an Indexed Annuity for the upfront bonus. I don't care how big it is. I don't care if it's 20%, 30%, 40%. There's not a philanthropist waking up at the annuity or life insurance company that issues the annuity and wants to give money away to the public.

No. That person doesn't exist. They're not politicians. They're capitalists. They're running for-profit businesses. It's a shiny thing to attract you.

But remember, there are 100 pennies in the dollar. If you look at annuities, whether they're Indexed Annuities or whatever type, they're commodity products, meaning you have to shop all carriers for the highest contractual, underline that, capitalize that, contractual guarantee for your specific situation.

No one can say, "This is the best one." It might be the best one for them, and they might go on a trip to Bora Bora, Italy, or whatever with their boyfriend, girlfriend, wife, or whatever applies. Still, I'm just saying, "The one-size-fits-all nature of the Indexed Annuity pitch is disturbing." It is not a one-size-fits-all.

Upfront Bonuses

The upfront bonus, typically, is applied to the Income Rider side of the ledger, which is a phantom account of Monopoly money, meaning you can't cash it in, transfer it, you could only use it for lifetime income, but the spoiler alert is if you go to The Annuity Man, and run Income Rider quotes, we're quoting both with bonus, without bonus, everything on the planet, and most of the time, we see the products that don't have the bonus, most of the time, finish higher from a contractual payout standpoint than the ones with the bonus, which means that they're playing games a little bit with that bonus. They're trying to get the shiny thing. Right? They want you to think you're getting something better than your neighbor.

So, the bonuses are part of the overall contractual guarantee. Please don't put any weight on it. I always tell people, "Buying an annuity for the upfront bonus is like buying a brand-new car for the stereo system. It makes no sense at all." It feels good, but it makes no sense.

Instead of looking at the transmission, you're walking through the light, and going, "Yeah. I know that's a good car, but I need to see the stereo system." That's dumb. That's the upfront bonus.

The Other Components

As for the other components of the Indexed Annuity, that can be very confusing are the three levers that determine what gains, if any, you get with the accumulation value, i.e., walk away amount, and that's the caps, the spreads, and the participation rates. Lots of games are being played here by the carriers, depending on the option strategy you choose, and there are tons. Probably more like 800 at the time of this blog, but there are 800 different option strategies to choose from. What I don't like going on in the industry is a lot of carriers are trying to run algorithms, and then finding a return, and then creating an index you've never heard of out of thin air, and then promoting the Indexed Annuity, saying, "If you'd owned it 10 years ago, you'd have gotten this," and the index was just created three months ago.

I don't like that. I think that's not pro-consumer, in my opinion, and you shouldn't be buying anything on past performance, hypothetical, theoretical, unicorns chasing the butterflies.

Now, index options can be very, very complicated, and most of them out there with Indexed Annuities are one year in length. This means that the rules change every year, some of them are two, some of them are three, and some of them are five years in length, but the vast majority, at the time of this blog, is one year in length, and the caps and spreads and participation rates, are limiting the upside. Those are the levers that the annuity company, life insurance company issuing the annuity uses to limit the upside. There's no, "You get all the upside." These companies are in business for a reason: to make profits.

At Their Discretion

The one thing you have to be careful of is that every year, the annuity company can change those caps, spreads, and participation percentage rates at their discretion. You might have a really preferable teaser rate that first year on a 10-year surrender product, and then they stick it to you. They're not trying to stick it to the consumer, but it feels like it when your rates change.

I always tell people, "Be careful when you buy an accumulation value product, Indexed Annuity, just for the accumulation value, and it's a 10-year surrender charge." What you have is a one-year guarantee; if it's a one-year option, with nine years, you're floating in the breeze, and you're at their discretion on what they can attach those caps, spreads, and participation percentages at their discretion.

That's the reason that The Annuity Man works only with contractual guarantees. We're using the Indexed Annuity as an efficient, and cost-effective delivery system for that Income Rider contractual guarantee. Now, I'm open in the future for that whizzbang, brand-new, pro-consumer accumulation value story from the Indexed Annuity companies. If there is such a thing, those carriers are welcome to approach us, but I think they know better because they know better than to pitch us. After all, we'll look straight through it and say, "Yeah, but how about this?"

MYGA

There has to be, in the future, an Indexed Annuity that we sign off on. If we do, you're going to know it's pro-consumer, and you're going to know it's in your favor, and you're going to know that it's taken me decades to get there. But, at this point, we do not do that. We do not sign off as an accumulation product. We sign off on it as a delivery system for the Income Rider and sell a ton. If you're saying, "I want a Fixed Annuity for accumulation," in our opinion, you'll do better with a contractually guaranteed, Multi-Year Guarantee Annuity because those percentages annually are guaranteed contractually.

The returns on an Indexed Annuity are not guaranteed. Now, some Indexed Annuities will have a separate ledger that if you had it for 10 years, and everything went wrong, you'd get 1% or 2%. It'd be like owning a horrible CD. They do have those types of things in some, but again, if you're looking for market returns, don't buy an annuity.

Variable Annuities

My apologies to the Variable Annuity people out there that love Variable Annuities, but the problem with Variable Annuities, in my opinion, having come from Dean Witter, Paine Webber, Morgan Stanley, and UBS on that side of the ledger with markets, and understand them backward and forward, when I became Stan The Annuity Man, I could not believe people were selling annuities for market growth, because I've seen market growth. It has nothing to do with annuities.

It just doesn't. Variable Annuities are the closest you'll get, but the problem is you're limited on the mutual funds you choose. In the business, they call them separate accounts for some reason, but they're mutual funds, and you're limited.

Variable Annuities were put on the planet in 1954 for tax-deferred growth. But you can get tax-deferred growth on a MYGA, in a non-qualified account. And remember, you can use annuities in all types of accounts: Roth, traditional IRA, some 401Ks, and non-qualified non-IRA.

That's my take on the index bonuses, caps, spreads, and participation rates. Just remember, bonuses came before the stupid. There are 100 pennies to the dollar. Don't put any weight on it. Just remember the analogy I gave you walking through a car dealership and buying a car for the stereo system. If someone's pushing a bonus, they're either really young in the business or don't understand the product. No offense to them.

As for the caps, spreads, and participation rate, just think of those as levers that limit the upside. Levers that limit the upside and the option strategies are complicated with many of these products. Some are pretty simple. I'm waiting for the really, really simple one that's pro-consumer.

Client Example

A gentleman called me the other day, and we sent him the specimen policy. He's interested and goes, "Why does this math problem have letters in it?" I said, "That's all the calculus." I don't know.

The point is it doesn't have to be that difficult, and I always tell people with annuities, "If you can't explain it to a nine-year-old, never buy the annuity." No offense to nine-year-olds.

Don't Fall For It

This is the key point with Indexed Annuities: if you're looking for market growth, do not fall for market upsell with no downside. Do not fall for market participation with principal protection. If that was the case, that's all Goldman Sachs and JP Morgan and Morgan Stanley, that's all they'd buy. Right? If that's true, that's all they'd buy, and they're not buying them.

The other thing is if you want market growth, then go buy it. Do not buy an annuity for market growth. Buy stocks. Buy mutual funds. Buy ETFs. Buy whatever you think will go up, that's 100% liquid, and you can come in and out of, manage, etc. That's market growth.

Regardless of the type, annuities are transfer of risk, contractual guarantee products. It's a contract between you and the life insurance company. So, if someone's pitching market growth, go, "Wait a minute. How's that possible that I'm doing a market growth contractual guarantee with a life insurance company?" You're not. It's a dream scenario.

Sometimes, the planets align themselves, and you'll get a good year, and a lot of times, you'll be very, very, very disappointed. Still, you won't be disappointed if you attach that Income Rider for lifetime income, and that's why you're buying it. You're not buying it for the accumulation value. You're buying it for the lifetime income.

People always ask me, and I'll close with this, they always say, "Well, you sell a ton of Indexed Annuities with Income Riders. What happens if people ask about the accumulation value on the other side?" Even though you bought it for the right reason, which is the Income Rider contractual guarantee, I always say, "We just throw a dart at the other." Whatever, man. Just throw a dart. It doesn't matter. We're buying it for the income. We're not buying it for hopes and dreams. We're buying it for the contractual guarantees. We're not buying it for the might do. We're buying it for the will do, and the will do are the contractual guarantees.

That's my current take on Indexed Annuities. I'm eagerly waiting for the carriers to approach us and show us that pro-consumer, standalone, accumulation value-only Indexed Annuity. We're waiting. We'd love to be able to say, "Stan The Annuity Man signs off on this." I've been waiting a couple of decades. So, we'll see what happens. I have hope, though. A lot of smart people out there.

My name is Stan The Annuity Man. That's Shootin' It Straight With Stan. See you next time.

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.