Are Annuity Death Benefits Worth It?

Episode 127 March 02, 2024 00:14:23
Are Annuity Death Benefits Worth It?
Annuity Straight Talk
Are Annuity Death Benefits Worth It?

Mar 02 2024 | 00:14:23

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Show Notes

0:00 Are Annuity Death Benefits Worth it?

00:28 Annuity death benefits, including bonuses and enhancements, are a hot topic in the annuity world, sparking questions about their actual value and significance.

01:23 ️ Passing assets to beneficiaries is a key aspect of retirement legacy planning, with annuities offering advantages like avoiding probate for non-qualified funds.

02:45 Enhanced death benefits, often found in fixed index annuities, are designed to boost the value of the annuity and require a strategic approach aligned with specific goals.

05:03 Using an annuity for enhanced death benefits may not be optimal if the primary focus is on accessing funds or taking income, as these objectives can conflict and diminish the benefit.

07:35 There are numerous annuity products with death benefit enhancements on the market, offering various options and complexities that require careful consideration.

09:08 ⏳ The value of a death benefit diminishes over time, making immediate benefits more advantageous, especially for individuals in poor health or with shorter life expectancies.

11:43 Enhanced death benefits on annuities may appear lucrative but can be substantially reduced in value, especially when considering factors like discount rates and tax implications.

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Episode Transcript

[00:00:05] Speaker A: This is annuity straight talk. Since 2008, your host, Brian Anderson, has helped clients nationwide navigate the complex market for annuities. With Brian's assistance, hundreds of clients have achieved a profitable and secure retirement. You I would know because Brian has answered many of my questions concerning annuities and retirement planning so that you can benefit as well. Let's get started. Here's Brian. [00:00:47] Speaker B: Hello, everyone, and welcome to the Annuity Straight Talk podcast, episode number 127. Looks like I got a little bit of a late start today because the sun is actually coming up. Not about to. I really thought I had it time perfectly, but I think I can see my screen well enough and we're going to go for it. So today I want to talk about something that's more of a general topic. And we did a lot of deeper dives into case studies over the past several weeks, and this time this relates directly to a couple of questions I've had. It's kind of a buzz out in the annuity world. The death benefits that come with annuities, big bonuses, enhancements and all that stuff, what do they actually mean and how do you look at those, if it is at all appropriate? So share the screen. Visual aid for those who watch the video. I'm going to go through the newsletter, which I'll probably touch up a little bit, and I'm going to do another one on legacy as well. But we'll get to that later. So before we get going, please like subscribe or comment on any of your favorite podcast platforms or on YouTube. Share it with your friends. I'm tired of people saying, why don't you have more followers? I don't know. Maybe that's. I don't know. Maybe I don't know what I'm doing. And maybe you're the only person that thinks it's good. So here we go. Passing assets to beneficiaries. That's a key of retirement legacy. Lots of different ways to do it, lots of different assets to use. If you want to develop a specific strategy, you can get as particular dig into the details of anything that you want. Annuities of a non qualified nature, meaning after tax, have a big advantage because they don't require probate. They avoid probate for anybody who doesn't want to do detailed estate planning, set up a trust. I know a lot of people. I don't want to do that. Okay. You don't have to. Annuities are a big advantage there. Stuff like stocks, you get a stepped up basis for capital appreciation on stocks. A lot of different ways you can look at, hey, is this good too? But when you put in an enhanced death benefit on an annuity, that's a specific attempt to enhance the value of that. And if that's your goal, then it's more of a strategy than a fundamental fact about taxation or something like that. So income annuities, obviously, if you pass away before the income stops, and this is very general, the payments will continue for a certain period of time to your beneficiaries. Or if it's a deferred annuity, there's a full account value, there's no surrender charges paid on it. That's how the annuities work. But it's a full account value goes. But death benefit enhancements come as an additional rider to a lot of indexed, fixed, indexed and variable annuities. I'm going to focus on the fixed index annuities. That's where you find some pretty enticing stuff. And a lot of the, I won't say misleading, but a lot of the flashy, catchy things. If you want to look at death benefit options on a variable annuity, those are pretty straightforward. And I've got that on the newsletter page. There's a link to a simple guide to variable annuities, which is really an extended report on the products. But I do cover the available death benefit enhancements on variable annuities. Okay. So yeah, you can pass annuity payments or account values to beneficiary. It's not the best asset for enhanced death benefit. The idea being like, say life insurance, you put a little bit of money in and if you die, you get a bunch out. That's kind of what I'm talking about. But using an annuity for an enhanced death benefit is good alternative for anyone who can't get life insurance. Or sometimes at certain ages, the life insurance is just too expensive and doesn't make sense. It's always worth looking at if that is your goal. The guy I'm talking about, he kind of declared himself, hey, I don't want to mess with it, I don't think I'm insurable. And he's used these contracts for several years and he wants to add a couple more, maybe switch out some old fixed contracts and get an enhancement. And I'll say that is where it's going to work really well, I guess I can get to that a little bit later. So there's two types of enhancements on index annuities for death benefit. You got one is just a guaranteed annual increase and the second is a bonus and a performance based payout, stuff like alliance two two, Athene agility ten, and then this company Silak that everybody's all hot and bothered about. Never mind. It's not about that. So let's talk about the guaranteed death benefit enhancement right off the bat. It's kind of like an income rider, but it's a death benefit and it's guaranteed to increase annually. You guys know that fixed indexed annuities are guaranteed to not lose money, but they're not guaranteed to grow. And with the death benefit addition on there, you're guaranteed. Your death benefit increases a certain percentage every year. You will pay a fee for this, and most of the contracts are not built to grow, so you have to have a singular focus on legacy with these assets. It can't be something where, hey, well, I might need the money or I might want to take the income and I want the death benefit. Those two benefits are going to cannibalize each other. They don't work. It doesn't work with money from an IRA because you got to take rmds and you're paying a fee only to lose the enhancement on the money you pull out. So it defeats the purpose. It's a waste of money. Even though I've had seen people do that, kind of expect a call from one guy a few years ago, oh, I got to have this, but had to take his RMD. So what benefit is there? You're paying money for nothing. So I'm going to give you an example. Assume a fee of 1%. Now, anybody out there, this is not a quote of, this is based on generally a specific product. I looked at a couple of them. It's not a rate shopping deal. I'm not doing a product review. I'm just giving you a general example of something that is about what you might see. 1% fee, initial purchase of $100,000. 7% annual growth on the death benefit if the index annuity doesn't grow. This is a hypothetical. In the first year, the fee comes out of the contract to leave you with $99,000 in cash and a death benefit of $107,000. Simple. So it's a guaranteed increase for your heirs, no matter what happens with the contract. This is just one single product I look at, and in this case, the 7% is simple interest compounding, and they give you a maximum term of 15 years. There's always a cap on it. So the initial purchase is capped at 205% for the death benefit. That would be $205,000 in this case. As with all insurance it'd be most beneficial in terms of money for the contracted owner to die well before the end of that 15 year term. If you think about it, doubling your money over a 15 year period creates an actual yield of less than 5%. So it may not be as good as it seems. Would be good if death is expected in that three to five year term. Maybe that's better when talk about when it's good to die. But if that's why you're buying it, that's where the value is. In that case, maybe just use a myga, don't pay the fee. Then you can do other stuff with it and you get as good a death benefit. So that's why I consider these to be kind of obscure and I don't understand. I never really push for people to buy them because we're trying to do other stuff. It's like income, rmds, taxes, stuff like that. I mean, if you really want to park your money somewhere, you got to look at some other options too. So there are 125 of these products with a death benefit enhancement that are on the market. I'm not quoting the best deal. I didn't have the appetite to go dig through them and see which one's best. I suppose if anybody really wants to look at it, give me a call. I'll look at five or six of them instead of just two. Okay, here's the one everybody knows about. Bonus with performance based death benefit, it's a selling point for a lot of big bonus products. We are going to poke a hole in it a little bit. You got free income, riders, huge bonuses, sell a lot of annuities. Alliance Athene people call 40% 45% free money. Right? So this guy's done it before. He knows the game. He's actually had an alliance two, two for ten years. And he's so so on it. He's not going to get scammed because he's going to look at this the right way. The way it works is you can take the cash value of the contract as a lump sum, or you can take the enhanced death benefit. That includes the bonuses in equal annual payments over five years. As an example, this is very basic. If the contract owner dies when the contract is worth 120,000 and the death benefit base is 150,000, the beneficiary can take 120,000 right away, or 30,000 annually over five years. It would actually be four years, like one now. And at the end of year 1234, you don't get the 150, you get 30,000. A year for five years. There's a lot of people that buy these contracts for this purpose, but it doesn't mean your beneficiary will elect the larger payout. And if I'm being really cynical, is the insurance company really going to push them to, oh, hey, think about this. So you have to have some sort of trust and a trustee that's not related to it to actually enforce it, if that's really what you want to do. But is it worthwhile if there are two or more beneficiaries? Each can select a different option. There it goes. So long term projections are difficult because a lot of things can change with an index annuity. Any death benefit is most valuable immediately after it is purchased and becomes less valuable as every year passes. So if I've got a 78 year old, 79 year old that's not in very good health, that can get one of these contracts and put 40% on a death benefit that's payable over five years, probably not a bad deal, because you might capitalize on it. I talked to somebody that was 50 years old that wanted the same thing for the same reason you're going to live 35 years. It's not going to be worth anything. At that point, it really would have only added about 1% a year. So death benefit, most valuable immediately after it's purchased, life insurance, pay one premium, get hit by a car, million bucks comes in the door. That's the best return. Also, paying it over five years in this case, reduces the current value of the death benefit. He asked, and I had done it before, I did it again, and I was kind of surprised. So the example above, 30,000 per year for five years is only worth 135,000 today, using a 5% discount rate. So it's not as valuable as it seems. If we use current money market rates, 5% essentially. So it's a $15,000 bump. It cuts that buffer in half, or cuts that bonus in half, really, as far as current value. And you have to think about the beneficiaries. Sometimes they need the money, sometimes they don't need the money, all that stuff. And if it's a non qualified annuity, somebody who really doesn't need the money, if your kids are successful, they don't need the money. They could do a lifetime stretch where they take payments over their life expectancy. They're not going to cash in that five paid death benefit because they don't want to pay that many much in taxes. They don't need the money, and so they want to stretch the payments out over a longer period of time. So I say, by all means, go for the enhanced death benefit if that's what you want. But realize it's a much smaller benefit than it looks. And the longer it goes before you actually die, the less it's actually worth. That's a general look at the numbers and something haven't done. We could do product review and really dig into it, but I'm not interested in that. If anybody wants to look at products for this guy that I'm talking about, we are going to look at a few different products. I appreciate you guys stopping by. If you want to talk about death benefits on annuity contracts, I'd love to dig into deeper numbers with you. Specifically, if you're being sold something that doesn't make sense, if you don't think they're being honest with you, I will tell you the truth. This has been episode 127, Annuity Death benefits my name is Brian Anderson. Please like, subscribe or comment on any of your favorite podcast platforms or on YouTube. Share it with your friends or anybody you think might be saved by this information. Make an appointment if you want to chat. Top right corner any page annuitystraighttalk.com schedule a call. Look forward to seeing you guys next week with a follow up on this that's going to talk about some real legacy planning. You guys have a great day. Thanks so much and I'll see you next week. Okay, bye. [00:13:26] Speaker A: You have been listening to annuity straight talk. The precision information is for informational and educational purposes only and does not represent tax, legal or investment advice. The views expressed by guests on this program are their own and do not necessarily reflect the views of annoyed straight talk or its partners. No information presented today should be acted upon without meeting with a qualified and licensed professional. It is important that you read all insurance contract disclosures carefully before making a purchase decision. Guarantees are based on the financial strength and claims paying ability of the insurance company.

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