BS Annuity Illustrations

Episode 81 March 23, 2023 00:19:32
BS Annuity Illustrations
Annuity Straight Talk
BS Annuity Illustrations

Mar 23 2023 | 00:19:32


Show Notes

Annuity illustrations can be complex and difficult to understand, particularly for individuals who are not well-versed in financial matters. It's important to carefully review any annuity illustration before making a decision, as some may be misleading or deceptive. Otherwise you’ll find it BS. 

If you believe that an annuity illustration is misleading or inaccurate, it's important to speak with a financial professional to get a second opinion. Make sure you fully understand all the terms and conditions of the annuity before signing any contracts, and always do your own research and due diligence to ensure that you are making an informed decision.

What You’ll Learn from This Episode:

[1:53] An annuity offers protection in exchange for yield, making it a safe asset.

[5:45] One-year options are less risky than two-year options.

[9:00] Understanding compound interest and how rates operate.

[9:17] The guaranteed minimum's upside potential.

[12:12] The impact of rate changes.

[14:30] Bryan recommends these top companies for accumulation contracts.

[17:17] Deceptive annuity illustrations are prevalent.

Key Quotes:

[1:50] “An annuity is a safe asset you'll get some protection in exchange for some yield.”


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Episode Transcript

Speaker 1 00:00:05 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. 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. Speaker 2 00:00:49 Hello and welcome everyone to the Annuity Straight Talk podcast episode number 81. I'm filming on location in Northern Arizona. By the time you guys see this, I'll be in southern Arizona, going to visit a friend of mine right now that needs some visitors, not doing too well, and I love the guys who've been a great friend of me and figured I'd get outta Montana and do some sunshine. Hold the camper down. Not the best backdrop, it's not very warm here in Northern Arizona. So hopefully the other podcasts I do on the road, I'll get you a little bit better backdrop. I would love to have like one of the big Saguaro cactus, but we'll see. Uh, I don't know what I'm gonna be able to do. Play it by ear. Episode 81, something I wanna do for a few weeks needs to be said. It should have been covered a long time ago. Speaker 2 00:01:32 BS annuity illustrations, numbers that look like a total load of bull. This is episode number 81. I'm gonna share my screen and show you one of these illustrations. I ran into it a few weeks ago. I've seen it hundreds of times and it's just, you guys have to remember before you get started, an annuity is a safe asset. You get to protection in exchange for some yield, you're not gonna get top line yield because you're taking the protection side, right? There's a lot of annuity illustrations, A lot of guys, and I, I use annuities and I can illustrate big numbers, but sometimes you look at those things, it just defies logic, all right? I usually use conservative numbers. We talk about the benefits of using annuities, of strategies we're going to employ with the annuity. And we like to look shoot for reasonable yield. So if I set it kind of like a conservative yield, if you exceed expectations, you're gonna be happy. Speaker 2 00:02:20 But if you go into it thinking that contract, Hey man, that thing's illustrating 10, 12%. If it doesn't happen, then you're gonna be unhappy. So I know that a lot of other agents will lead with those illustrations. I, however, do not, sometimes I'll look at 'em anyway. I'll look at 'em and say, show like, Hey look. Look at all the potential. It's nice to know that you do have that top line potential, but it's definitely not. So I don't send it home with people essentially. So I had a conversation with a guy a few weeks ago, quick meeting, only talked to him once, exchanged a couple emails. He said, what do you think of this product not wanting to run into a whole lot? It's an Aons contract. Of course I picked on them all the time. I'm gonna do it again. But there's enough companies, there's a lot of other companies to do this too. Speaker 2 00:03:02 And not just about every annuity out there. Everyone I've seen some of the biggest companies you'll see like Clac, um, puke, it's garbage. I'm not gonna sell it. My lot seems like a sold by guys are like, we sell a lot of annuities. Oh yeah, like wait till that thing goes upside down. <laugh>. Look up Conseco. The insurance company, the guy that ran that into the ground is running that new company. Anyway, that's out at the top of this podcast. So yeah, I'm not gonna do that. You see these giant numbers, high flying index returns, right? So I'm looking at my newsletter here. You guys can go read it. There's gonna be a little more detail. It's gonna be easier. So in this one, you know, my first concern in this illustration is that the advisor who ever showed this to him, told him to put all his money into it. Speaker 2 00:03:43 I think if you come right off, uh, right out of the gate and do that, then it kind of invalidates every other recommendation you might make. Okay? Like if somebody lies to you or steals from you, you don't trust em ever again. Doesn't matter how many times they don't lie or steal from you, you're always gonna have that in the back of your mind. But anyway, it's your choice who you work with. I do know people, I have some clients that have most of, or maybe even all of their money in annuities. That's a choice they make and a plan that they developed over years. It's not something I propose or told 'em, Hey, this is how you gotta do it, right? You start with something sensible, either to meet a need or to hit a goal. And then, you know, if you like it, you can always buy more. Speaker 2 00:04:23 And that's what a lot of people have done. But it's not, that's not where you start. Not for a first time annuity buyer, right? Let's see, okay, we're gonna use the numbers. I'm gonna share my screen. Okay? So I pick on Allons all the time. This is just an easy target, man. This shows some crazy stuff, all right? It's a big number. It doesn't matter if you got 50,000, 5 million numbers are the same. I'm just gonna use what I got from the guy. I redacted personal information. So I'm not gonna tell you where he is, who the, the advisor's name is on there. I don't know the guy I never heard of him. Probably will never talk to him, but he sends out some crazy stuff. All right? So the first thing I see is a 1.6 million. Here you go. This is great. Bloomberg, US dynamic balance, two excess return, multiyear point, point with participation rate five year. Speaker 2 00:05:09 You see that guys right there. Five year indexing option means you gotta, it's crediting option. Crediting period. You gotta wait five years till you figure it out. He's got half of the money going in there. Let's see if that's obviously, and then he uses the Bloomberg. This contract also has s and p cap, which is typically like first time buyers to explain how the contract works. I like to use an index that everybody knows. Everybody knows the s and p 500. We're gonna use that instead. You got the Bloomberg dynamic, which is probably three, four years old. There's no back tested performance. We don't know how it's gonna turn out. Okay? So he is got half of it in the one year, half of it in the five year. So, uh, note on that, I've seen like two year options are riskier than one year options cuz you got a longer run period, a better chance for a decrease that's gonna wipe out your gains, right? Speaker 2 00:05:53 Three years, even more risky five years. I don't know if I'd ever do that. Maybe with like 10% of the money a little bit. Do you want that top side? Cuz it's gonna give you really healthy potential but you don't. I like sitting there half of your money five years, that's a quarter your retirement before you even know if you made any money. Ouch. So I don't, I don't necessarily like that, but whatever it is, we're gonna use the numbers. Okay? So here's most recent 10 calendar year period. So I don't know the situation in the plan, cuz again, I talked to him once for 25 minutes. I don't know how this relates. We're gonna look at it. 1,600,000 going in waits five years takes 112,000 a year. 10 times after that he lets it go look at that five year option there in uh, year five hits 62.74. Speaker 2 00:06:40 Wow. Right? And then the, the second time it hit is 11.27. There's a big difference between those two. So one of 'em is about 12% year, the other one's about 2%. Which one do you want? Which one are you gonna get? Maybe neither. Well I'll bet you never, you don't get either one or higher or lower than either one of those. But there's a giant, giant difference between those two and they're gonna roll that 10 year period over again. So every other five year period's gonna have 65%, right? 67% in the 25th year. Anyway, what's crazy is you look at the bottom here, he put 1.6 in, it has like 18 million left when he's 92. So this illustration runs for 30 years, right? So he's total premium, he's out 480,000 cause he took out 1,120,000, okay? So four 80 of his original money and there's 18 million. Speaker 2 00:07:28 Wow, that's crazy numbers, right? 60% absolutely nuts. If it happens, great. It's not gonna happen. Like that's right, that's huge. The 65% in this illustration, he gets it six times, right? 30 years of every other he gets it. When is one two he gets it three times. But anyway, I mean right here what like 67% on half of 8 million I guess and that's a giant return. He goes from eight to he makes 5 million in one year. No way believed if you want to, okay? So it's interesting, some contracts, some insurance companies will post the rates. It'll say here's your internal rate return. If they don't, then this one doesn't. Then you gotta work with somebody who knows how to calculate it. Now I've been doing this since I was in college cuz I took finance degree. We used to have to do it longhand. Now I've got tables or I've got calculator. Speaker 2 00:08:18 So this is a calculator, right? 1.6 million in 112,000 annual payments, 10 annual payments starting in five years. 20, 28, 18 million 1 98 and 31 bucks, right? Insane. So you figure that and then we solve for the rate and it turns out to the effective yield. So the nominal 9.329, that's a monthly compounding. It's just how the rate works. We could do annual, it's actually is an annual compounding. So it's probably, but we'll say 9.739, okay? All right. Not way out there, but the numbers just, and it's also like you've got a long credit it, you've got got 30 years that you're looking at it. So it's, you know, compound interest. It's an exponential curve. It's 30 year deal, 9.7%. Pretty impressive, right? Okay. Now the last thing I wanna talk to you about, here you go. No, I i, I didn't do this in the newsletter but we're gonna have to look at this, right? Speaker 2 00:09:11 Here's the guaranteed minimum. So that's what you first wanna do. What's the top side? What's the guaranteed minimum? All right? And a lot of these guys that say index annuities, now the base index annuity cannot lose money. But I talked to a pretty astute guy yesterday who understands that there's some fees on it that if, you know, if doesn't perform and there's a fee it can lose money. So a lot of these can lose money. This is one of those that can, and I'll get into it, okay, guaranteed values zero index interest in a fixed allocation earns a minimum manual fix rate of 0.1% in all years. Accumulation value reflects the maximum allocation charge. I'm coming to that as shown in your illustration assumptions. Okay? So the same thing. 1.6 million in 112 out after 30 years. This is the minimum rate, right? Four 80 net. Speaker 2 00:09:58 So he lost uh uh $235,000 in that contract. So 2 45 left on the guaranteed minimum. That's a cost and that's a big, big deal. Okay? How I wrap this up is gonna relate to that. So your guaranteed minimum, so what I say 245,000 versus 18 million take the average right? Average puts you at 9 million. It's still not bad, but it ain't gonna be 9%, that's gonna be more about five, right? Oh, okay, well then maybe that's your expectation. Okay, so the next big deal, and I skipped over this when I talked far right over here, 2.5% maximum allocation charge. So on certain indexes, including these ones shown, so it's 0% but they can arbitrarily put it up to as high as two and a half. And I'm gonna tell you why that makes a difference. It's an extra lever the company has to pull and so you're giving them more control. Speaker 2 00:10:50 Most people don't like the fact that the rates will adjust and they do after crediting periods, they declare new rates. You know the good companies, a solid contract that's priced well is you don't see rates fluctuate a whole lot. I've got contracts that are 7, 8, 9 years old where we've had very minimal changes over time. I don't do business with ions. I'm not really sure. I do have a couple of people that share their statements with me. I've seen reductions, but most of those are maybe only a few years old. So we don't know what the real long term is, but people don't like that they can adjust rates, right? These guys can adjust rates and they can also slap a charge on it. Okay? So that guaranteed minimum takes into account the charge and on the baseline that costs, you know, $235,000 in the guaranteed minimum scenario. Speaker 2 00:11:33 Two and a half percent, it's gonna be even more in the maximum scenario, right? Okay, so now I'm gonna go back to this one, the 18 million and I'm gonna pull my amortization schedule up again. So we had 9.739, I'm gonna stick with uh, effective but this is actually as nominal cuz it's only credited once per year. This assumes monthly compounding and it's not, that's not how the annuity works. I'll fix that other stuff but I just wanna let everybody know now. So what we do is, let's see what happens when we change the rate. Okay, what if it doesn't get 9.739? What if it gets nine? Let's just do nine. Okay? So we change that rate and then we solve for the remainder. Holy cow, it went from 18.1 million to 14.4, it's almost 4 million reduction in the total outcome at the end by just the seven tenths of a percent adjustment to the yield. Speaker 2 00:12:27 Okay? And let's say 8%, which would be a fantastic outcome, right? 8% goes down to 10.5 million. Still a great outcome. But you see the problem is like that's where I'd shoot, I'd sit there and I'd probably try to find a way to illustrate five or 6%. So 6% and that's your what I would consider your top line outcome right there. Okay? So 5.4 million left at a 6% effective yield and then you look at those numbers and say hey, this is cool, there's more potential, we'll get it. But you don't static illustrate that from the beginning because you gotta know, you make it work on something realistic. I mean these things are built to do five, 6% period. And I don't like that extra pricing lever of the allocation charge cuz if you do this thing could easily turn out to be three 4%. What if you get 5% performance but they slap an allocation charge on it down the road makes a big difference, right? Speaker 2 00:13:20 I don't like those levers. So take it for what it's worth. I think this illustration is total baloney and that's why I'm talking about it. It's worth the podcast, right? And this is not the only one. So Allons is a good strong company, right? They're very popular guys like selling 'em. I should love, oh yeah, this is all I saw. Oh really? Okay. So I guess like, I mean I wouldn't say this is a terrible contract but there's too much variability in it and I do not trust like that top line figure. You gotta look at the likelihood of that happening and the likelihood of it is very low, maybe non-existent. Okay? So you look at the five to 6% projection, maybe seven, well it just depends. It's, it takes to, the market's gotta perform, the index has to perform and in this case we, we got one, we got three or four years of real performance on that one, we don't even know. Speaker 2 00:14:09 So if we'd use this s and p 500 on, you know on their cap rate, you're probably gonna end up with a five to 6% yield, right? Anyway, so this is undoubtedly where someone says, well don't tell us like Beverly's like, well I know you like to tell us what doesn't work. Why don't you tell us what does work? Okay, my top companies for accumulation contracts, all right? And I like it when you send me stuff cuz if you give me something that's really good, I promise I will probably change what I'm doing. If there's a material reason to do so, okay? I know how to look at the pricing of it. I know how to look at the cap rates and tell you what's realistic and what's a teaser, what's out there. This is a teaser contract because they're dangling out that big number. Speaker 2 00:14:48 That's all it is, right? Top companies in this order, Midland National, mass Mutual Ascend, great company, they were formerly Great American but a lot of happy people with those contracts. And Athen, I don't really love working with Athen, but they've got some decent products and I think they're fairly competitive. I did have somebody just choosing Athen and I have no problem with that contract. I ran the same scenario with each of those carriers. So this is the thing we know, I know and probably everybody else does. I know what allocations gonna produce the biggest results. I'm responsible by explaining all the other ways that it could work out. And we don't touch that until we know that it works out at a really reasonable level, right? I ran the same assumptions to the top indexes in the, in other contracts, the remainder in Allans was 18 million. Speaker 2 00:15:31 Midland Nationals remainder was 27 million. Athe remainder was 26 million. And Great Americans was, or Mass Mutual Ascend, sorry, I still call 'em Great American. I think it was 21 million. So we can shoot pie in this guy numbers all day long and I could certainly do it as well, but that's not how I do business and that's why I'm calling bullshit on this one because that's not a at all what we're gonna do. And I'm never gonna present a Midland contract to this guy saying, oh it's 27 million. Now the guy's not, I don't even know if he's gonna buy an annuity. Usually this kind of turns people off when you got some idiot that's slinging numbers. Oh look at this, dig into it a little bit. That's what I showed you, right? You got allocation charge, you got a five year reset, you got an unproven index. Speaker 2 00:16:11 Yeah. Um, good luck. Anyhow. So there's a lot of different options for doing it. And I'm gonna take, so all those other three companies beat it. None of them have mandatory allocation charges. All of them have optional allocation charges and allons they say only some index. Cause I think it's a lot of their indexes where they have that. But I don't like a company being able to just change it. Right? And if you could get it with, if you can get something similar like every other component in this contract that's not the Bloomberg index and that allocation charge is nearly identical on all the other contracts, but does it have that bs? Why wouldn't you do that if you can get one without it? So there we are. If it's not disclaimed appropriately, then that's a very irresponsible action by any advisor. So I see this all the time, gives me an opportunity to educate you guys, tell you what you're looking at, help you kind of figure out how to analyze these things. Speaker 2 00:17:03 Cuz not everybody's gonna work with me, right? And that's fine. I don't have time for everyone and not everybody even likes me. You know, maybe I'm not very likable guy. So anyway, this has been episode 81 of the podcast BS annuity illustrations. It's garbage and there's a bunch of scumbags out there doing it and it, they're stupid, right? I'm sorry, but eh, I've been doing this long enough. I don't have to be nice about it. Do you give 'em the benefit of the doubt and say they're just stupid? Maybe they're not dishonest, they're just, they're dumb. All right? And when you're looking for quality financial advice, do not seek advice from a dumb person. There it is. There's my hit for the day. So anyway, thank you for joining me. Subscribe to the podcast on your favorite platform or on YouTube if you'd like to watch the videos, like share, comment, uh, let everybody know, subscribe if you want to get notified when it comes out. Speaker 2 00:17:50 These all get, uh, released on Thursday. I sent 'em out to my email list on Saturday. I will be in Tucson, Arizona next week and I'm really looking forward to a little bit of sunshine, seeing a good buddy and, uh, to I can meet up a couple clients and I'm sorry to anybody that I'm not gonna get to see. I had planned on doing a two month trip and hitting a couple other states, but just things, the way they are life happens. I didn't have the time to do it. So anyway, I'm here. I'll be back for episode 82 next week. Thank you so much for joining me, you guys have a great day and I will talk to you soon. Okay, bye. Speaker 1 00:18:35 You have been listening to annuity Talk. The information is for information educational purposes represent nice. The views expressed by guests on this program are their own and do not necessarily reflect the views or his partners. No information presented today should be acted upon. It is important. All insurance disclosure based insurance.

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