Episode Transcript
[00:00:00] Speaker A: Hello and welcome everyone to the Annuity Straight Talk podcast. My name is Bryan Anderson, coming to you from the Annuity Straight Talk world headquarters on the shores of Flathead Lake, near the beautiful town of Polson, Montana.
Because bonuses are such a flashy part of annuities, sales pitches, all that stuff, I think anybody that's been around for a while kind of knows how I feel about them, but I'm going to try to add some rationale to my opinions and talk about where they're useful and why. Most of the time you should probably just stay away from them and ignore that. Because a lot of sales pitches focus only on that. With obviously everybody knows that rates have gone up a little bit. They're not close to matching inflations because inflation and interest rates are not necessarily correlated, very rarely are. But there's a lot of good deals for safe money. Now, bonds got clobbered when the rates rose, but you can, you can get good deals on bonds now if you're buying them fresh. Again, if you're going to buy bonds, buy the bond, not a bond fund. Bond funds fluctuate. If you expect rates to drop, then bond funds will increase in value and that can be a Good deal. But CDs are up. Even money market, I mean, somebody's, oh my, money market's paying 1.4% now. Woohoo. Really good money. But and including annuities, better deals and have been available for almost 10 years, honestly. So you got a wide variety of options to choose from and every one of those is different or works for a different purpose. And this could sound like me stating opinion as facts, but when it comes to retirement, most uses for safe money in retirement, annuities are by far better. And if you want me to go into all the reasoning and the individual explanations of those I have in the past, don't know that they're all on podcasts, but I'd be happy to do it. You want to engage in a debate, bring it on. I'd love to do it. And it could turn into a series, I guess if people find that interesting, go ahead and reach out and say, yeah, I want to know what the difference is between CDs and annuities. I mean, I think it's out there, but yeah, we'll stay on track. So I'm going to talk more about obviously about annuities, what's changed in the market and more specifically in relation to bonuses that you see on a lot of contracts. So everybody, this is what I say about bonuses. Everybody knows that nothing in the financial world comes for free.
Aside from the cheap gifts like the toaster or the camp chair that you get for opening a checking account or savings account at the local bank, bonuses exist to catch your attention and are used by novice salespeople and advisors as the most prominent part of the pitch. A lot of people call me and they say, they said, well, I'm wondering if you can tell me what you think about this annuity for me. Well, what do you know about it? Well, they told me it has a 30% bonus and I can get 4 to 5% a year. So if that's all they took from the sales pitch, it tells me that they probably didn't get a whole lot more information than that. It was simply just, hey, look, you're going to get a bonus for all this money, right? Or for buying the annuity.
And this goes way back to my very first year, my early days in this business. So we're talking more than 19 years ago. There was another guy who was a few years older than me that had just gotten a start and actually he was doing marketing for Medicare supplements. And he, and what he'd do is he'd help people get with Medicare supplemental insurance. You don't make a whole lot of money doing that, but it's a service you provide and you're trying to uncover what type of assets the people have. And that gives you the open door and the opportunity to gain a little bit of trust. And then the annuity pitch comes right after that. And so he was all proud of himself because he was getting a huge commission on a fixed annuity, a 10 year fixed annuity. And he said, this thing has a 10% bonus. And I said, what's the rate? He said, well, it was like 2 or 3%, right?
And I told him, I said, oh, why don't you sell this other one? It's got a 7% guaranteed rate for 10 years. And he said, well, yeah, but what does that pay? I said, I think it pays like two and a half percent commission, which I thought was pretty good. I was just out of college, so I wasn't making any money. You write a $50,000 annuity at 2 1/2 percent, $1,250 like in one pop. That's a big check for me back then.
Anyway. He said, oh, these guys are paying me 6%. Yeah, but it's not that great a deal. So a 10% bonus in 3% over 10 years, like you're going to average because you get the pop up front and you get the compounding, you're going to average a little bit over four. But he's focusing on that 10% up front. Get people really excited about, oh, free money and then it's really safe. And back then 20 years ago, CDs would beat that. I looked at that and I thought, okay, well yeah, he's making a bunch of money, but isn't wouldn't it be the right thing to do to sell him the better deal? I'll let you guys decide which one you think is better.
And hopefully the people that call me and the people that want to do business with me are of the thinking type and realize that maybe the bonus isn't all it's cracked up to be. So he, he was more successful. He is not still in the business. I think he only lasts lasted a couple of years. Don't know what path he was on. He's a nice guy. I liked him. But he's not in the business anymore at all. So he did some more than annuities than me. But he had kind of had flashier bait, I could say stinkier bait. When you're fishing, the stinkiest bait does the best. Anyways, go any further into that, I like there. Like everybody needs to know there's two different types of bonus. There's a true bonus which actually goes to the accumulation value of your contract and there's what I call a phantom bonus. Now it's not really called a phantom bonus, but a lot of people understand what that means where it simply affects an additional part of the contract, an additional rider on the contract like guaranteed income. So you got a cash value and you got a bonus that maybe only enhances the guaranteed income value. When you have one of the phantom bonuses, then it's going to pull something. Well, any bonus will pull something away from the contract. We'll get into that a little bit later. But you're going to have like with the, you're going to have a lower growth rate, a lower income payout rate if it happens and higher or higher fees. One of those three or all three depends. So but I'm going to show you and this is all written in a quick little story on the newsletter. Again, some people like to read it. You can read it in about five to seven minutes max or you can listen to me talk about and add a little bit more detail. Here's a line and I've shared this probably before in years past when I did product specific stuff. But I'm not doing that right now. So on the company website it says because this is a bonus annuity, it may include higher surrender charges, longer surrender charge periods, lower caps, higher spreads or other restrictions that are not included in similar annuities that don't offer a bonus that is directly from the insurance company. And every contract with a bonus will state something similar if they're honest. And that's one of those things where the company's honest.
So you got no recourse if the agent lied to you. Unless you want to go to his E and O insurance. But he's probably in the Caribbean by now and you can't find him. There are no exceptions to this. A true bonus that only increases a cash value will come with lower growth potential. Just like the story above. You could get 7% guaranteed or you could get a 10% bonus with a 3% guaranteed rate. It's pretty simple. Now, I don't know if those are the exact numbers. I remember the 10% bonus. I remember I was selling something that six and a half, seven percent. I don't remember the baseline rate. It might have been two. It could have been worse than that. And it doesn't matter if it's fixed annuities or fixed index annuities. It's the same. You can look at. There are companies will offer a contract with or without a bonus. Without a bonus, your growth potential is higher.
It's as objective as it can be. You can just look at the opportunity and you decide which you like better. In some cases, a true bonus is available for free withdrawal, so it's added to your cash value. You can actually say $100,000 and a 10% bonus. You've got 110. It means your free withdrawal would be $11,000. They'll only back that out if you surrender the contract early. Okay, but other ones have a vesting schedule, meaning that you can't. So when the vesting schedule. So a true bonus or a pure bonus is vested from day one. Right. If you got a vesting schedule, then it means a portion of that becomes yours truly becomes yours over time. So I have a client of mine, a good friend who bought a 10 year index annuity from me 12 years, almost 12 years ago. This is before we did any business. And he still has that annuity because the bonus that he got had a 16 year vesting schedule. So he's not fully vested in his bonus. Although he does not have surrender charges, they are still recapturing at this point after 12 years, about 25% of that bonus. I don't remember what it was at the time, but he still loses about 4% of his account value. So he's kind of stuck. It added six years to his surrender term. So that goes back to what that insurance company said about longer surrender charge periods. And it's not a surrender charge, but he wanted to replace it with fixed annuity. And we've talked about that. But no, like the insurance companies that I recommended would not take the money because it had to demonstrate, be honest about it, like he was going to take a quote unquote loss for moving the money. Right? So buyer beware. There's always something more to an annuity that includes a bonus.
But rising interest rate is where this really gets interesting. Because of rising rates, fixed annuities have better guarantees. We have really nice deals out there and a lot of people are choosing to go with the multi year guaranteed fixed annuities. Nothing wrong with that. It's all about your preference and kind of your hunch and gut feeling of what you're comfortable with. Okay. And the index annuities, I talked about it a few weeks ago. Because of that, you've got fixed rates that are equivalent to the fixed annuities and that's going to buy you so much more potential. So. So I think the index annuities have a tremendous amount of opportunity right now. But again, I'm not going to try to sell you something that you don't want. If you want a fixed annuity, just go for it. And a lot of people, what they do is they say, well, take some of the guaranteed fixed and I'll put some in the index annuity. So that's always an option as well. You split the contract. So I say, like when these rates go up, you're going to see a lot of tomfoolery in this business.
It gives companies the money to add those extra enhancements to a contract. And one of the way those ways you're going to see it is with bigger bonuses, income or otherwise phantom or true bonuses. And a lot of people will debate it with me, but to be honest with you, because some people say, hey, I really like that annuity that you showed me or that one that you had that you talked about on your podcast. I really like the sound of that. Could you show it to me? And then, and once you get around to if it's appropriate, you show them the contract and they say, okay, well, is there anything like this with a bonus? Okay, now then all of a sudden it becomes the contract. I wasn't talking about. Okay. And when you go back, we're Going back to that, what the company said is longer surrender charge periods, lower caps, higher spreads or the restrictions, those are all the reasons why people don't like annuities. Those are all the reason, the things that we try to solve, the problems we try to eliminate. And they're saying that you get the bonus and it's going to come with all these things that nobody likes.
So got to think about it, I guess. I don't know. I hesitate to say, take my word for it. I'm trying to explain it as well as I can, but I learned this all a long time ago, remember? So I, this is why I say I was very skeptical about annuities in the first place because I knew I had a guy who was kind of a buddy of mine initially and he was selling something for the commission that wasn't as good for the client. And I was selling something that was really good for the client. So I was always very skeptical of bonuses. I was always skeptical of annuities in general because when I got a database and I looked at all of them, I realized that most of them are not that. I mean, some insurance companies are not trying that hard to offer a great deal. So you have to know how to shop the market. But here's an example of one of those conversations and I've been told something similar in the past month or two. And somebody I've called and said, you said the best five year fixed rate is around 4%.
But I had some guy came over to my house, I went to dinner and he came over to my house and he showed me a contract with a 10% bonus and guarantee, a 7% guaranteed every year. Now that's a big ball of garbage. They think they're getting 7%. And I'm telling you, I have talked to hundreds of people who finally figured it out three or four years after buying the contract. So you want to listen to pay attention. Now if you don't want to make that same mistake, doesn't mean you have to buy an annuity for me. Maybe put some pressure on the guy and say, hey, be creative, think of something else that's not going to work. Make him actually work for the money. I'm not afraid to do it. Those are phantom rates. He's talking about a bonus, he's talking about an income rider roll up. Then again the income, the 7%. It's kind of like Social Security. Everybody understands the longer you wait to collect, the more you get. That is the same thing, but they're being a little more transparent with the guaranteed income projection and saying, well, every year you wait, we'll increase it by 7%. Now, if an agent calls out a 10% bonus and a 7% rate, I don't know how many people have come to me and said, well, I read your newsletter or I saw your podcast and I didn't realize this, and I went and asked the agent and the agent said, yeah, but now you have guaranteed income and it's fine if that's your goal. But all these people that come and say, I had no idea what this was, they were just looking for a safe place to park money and they got the contract that's only worth something if they take guaranteed income. Maybe it's bad for your tax situation. Maybe it's not the optimal money to get or optimal way to get money out of the market. Maybe you were going to leave that money to your kids or your grandkids and there's not as much money there because it never grew. There was a fee on it and all this stuff came right. It has real consequences. And you could go to a lot of people, a lot of, A lot of advisors. Financial planners and CFPs are as bad as anyone else. And so you ask me, people ask me why I don't get a CFP designation because I've run into a lot of them that don't know anything. They know how to pass a test and that's about it. I've seen them do some of the dumbest things in my life. And so I don't feel like I have to put that badge on myself because I don't have as, I don't have all that much faith and, oh, are you a cfp? Well, I will only talk to a cfp, so go ahead, good luck. Because they're about as competent as the average advisor, period. And so it's again, just listen if you want, take the advice if you want. You don't have to buy annuities from me. I'm not here to sell to everyone. I'm here to provide information. And I will say that bonuses do enhance annuities and are appropriate at times. But the advantages for one contractor, so specifically that one contract only works best in unique circumstances. It's not always a custom fit to you. Now when the bonuses work and all this stuff. So like an income annuity, a bonus, it's going to come with. If one has a 20% bonus and one has a 10% bonus, you can't just look at that because the one with a 20% bonus might pay out at 4%, where the one with 10% bonus might pay out at 5%, so you get more income from the one with the lower bonus. Now, one's going to be good for the first few years if you defer 1, 2, 3 years, and the other one's probably going to be good if you defer four, five, six years, right? So that's different. And so you can't tell me someone who needs income within a year is not the same as someone who needs income in four years. And I guarantee if you want the bonus and you want the guaranteed income, if that's the right solution for you, those two people are going to end up with two different contracts, okay? Simple and easy. That's why my solutions are fairly creative, because they come in the context of financial planning and with flexibility and liquidity to do all the other stuff you need. So you need the highest growth potential possible and you need no fees and good free withdrawal provisions. The right term that fits, fits with your plans. And so I've always said, you know what? It all comes down to how much you're going to get out of it. So I asked two questions, like how do you want to get your money back and when do you want to get your money back? So you get a guaranteed income route. And this kind of going off topic, guaranteed income route. You got 18 to 22 years before you get all your money back. You go to deferred contract, say, I'm just going to grow as much as possible. That money is always yours.
So it's right there. But anyway, I mean, just like any other topic, I kind of keep this general and I'm touching the edges of it because I'm not going to sit here and talk for two hours about bonuses. I try to keep it so that you guys don't fall asleep. And I'm trying to be as efficient as possible. If you want to nitpick one detail or another, if there's an advisor that has some objection to me, by all means, come at me, I will take it. I'll have a civil conversation with you. I'll tell you and explain in detail if there's something that I didn't put in there that probably deserves to be discussed. You can always respond to the email that this goes out by, or you can comment below the newsletter or the podcast on the website. And I want to remind everyone, you can put a pseudonym in there. When you comment on the website, it asks for your name and your email address. Only your name is published. So if you want to, if you want to write it like Bill Jones? I don't know, maybe I have a Bill Jones on the list. So I'm not talking to you Bill Jones. But you don't have to put your name there. Email is only visible on the administrative back end, so it's not publicly available. I would never do that. Do not put personal information in there. I've had a couple people and I'll always screen them so I have to approve the comments and I'll approve everyone. The only ones I don't approve of the spam. I will approve. If somebody says, hey, I've got $250,000 in my 401k and 100,000 cash in the bank and all this stuff. I'm not. I do not post those, so don't bother writing those. If you want to, you send me an email and you can tell me all about that stuff. But I'm not going to make that public. So you can write Bill Jones or Susie Q. Doesn't matter. And it won't. Your name will not be shared with anyone. So you put your email in there. That way if I reply to you then you'll get a notice saying hey, he replied to your comment. But I'm happy to take comments or questions discussions regarding this. Again, I'm not trying to be too abrasive on this stuff. I understand we can go into more detail on other stuff. So that's why I invite you to make an appointment on the Annuity Straight Talk website. Upper right corner button says schedule a call. Pretty simple and easy. Set your time zone, write your name, make some notes about what you want to talk about. Easy to do. Reach out any way you need to and I'll be here to help. I will see you guys next week. Thank you so much and have a great day. Okay, bye.
[00:18:44] Speaker B: You have been listening to Annuity Straight Talk.
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