Guaranteed Indexed Annuity Rates

Episode 129 March 15, 2024 00:14:37
Guaranteed Indexed Annuity Rates
Annuity Straight Talk
Guaranteed Indexed Annuity Rates

Mar 15 2024 | 00:14:37

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Show Notes

Today, we're diving into cap and participation rates on fixed indexed annuities. 

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Episode Transcript

[00:00:00] Speaker A: Hello and welcome everyone to the Annuity Straight Talk podcast, episode number 129. My name is Brian Anderson, founder and creator of Annuity Straight talk, welcoming you guys back for the 129th time. I'm still on location in Tucson until somebody gives me a good reason to go back to Montana. I'm thinking that reason could be may, but we don't know. Enjoy doing it here. A lot of great feedback on the past few podcasts. Again, I say for good reason, like subscribe, comment, or share on any of your favorite podcast platforms or on YouTube. A lot of people enjoy the information. Helps everybody out, and you might know somebody who can use it. So, been deep in the weeds a little bit with some case studies and all that stuff in the past few weeks. Going to go back to a functional structural topic, I guess I would call it go and share my screen. This is something everybody asks about, and so I figured I'd address it right now. So this is going to be something like a three part series, maybe two, I'm not sure. I wrote a couple of newsletters three or four years ago before I was doing the podcast to address this topic, because it's something everybody's concerned about. So guaranteed indexed annuity rates of all the objections that hold people back from buying indexed annuities. And this is not saying you got to buy an index annuity. You go back to all the other podcasts, I talk about all the options. This fits for a certain purpose and person, but this is one of the hardest things for people to understand. So cap and participation rates, the growth potential in an index annuity can change on an annual basis. And there's a reason for that. People who don't trust insurance companies don't really like that. And a lot of people, oh, they're just going to screw. If they want to, they can just change it. I'm going to address that specifically next week. But this is something I plan on doing for a while, something kind of a product review that came up last year. I thought, wait a second, these products are coming out and it's pretty interesting, maybe ought to do that. This is also something that people kind of seem to think makes people think that index annuities are complicated. That is not really the case. You look at this little feature that we have, and you can realize, I always say, if you look at them in simple form, they're easy to understand. And this is something that makes it really easy to understand. And then branching out from there is just taking individual steps to the larger variety of topics that you can discuss. Really, a fixed index annuity is nothing more than an enhanced fixed annuity or a myga. Everybody's called mygos. Multi year guaranteed annuities. Some people that can't do acronyms call them magas. It has nothing to do with Donald Trump or politics. This is financial stuff. We don't do politics here because it's a waste of time. But yeah, two newsletters a couple of years ago talked about changes in rates. I'll cover those next week and talk about the fundamentals that cause it. What you need to understand, however, is although on most index annuities, the rates are not guaranteed, there's a handful of contracts that have been around for a while where they will guarantee rates for the entire surrender term. Not all rates, some rates. We're going to talk about that in specifics to two products down below. If you get that, you never have to worry about adjusting expectations. One of the issues with projections, and especially the long term ones, when we talk about participating income and the alliance products. Wow. Oh my goodness. They're going to quintuple my income because of the indexes. Well, those rates can adjust. If you really look at it. You have to think about the potential for adjusting rates and say, well, how likely is that to work if the insurance company can move the rates, if potential is reduced, it's going to change your projection. And if you're really planning on it, then it could cause some problems. Now, with good companies and contracts, it's not something you really need to worry about. And I'm going to explain that again more next week when we talk about the fundamental reasons for it. Cap and participation rates on index annuities. Important topic. Absolutely. For a lot of reasons. I have talked a fair bit about rate shopping with micas fixed annuities. Hey, these guys have 5.45. These guys have 5.5. There's a difference between contracts. There's credit rating in the assurance company, terms of the contract, withdrawals, renewal provisions, all sorts of things that might cause you to choose one over the other. And it's relevant here as well, because people are like, wow, the cap rate there is so much higher. So I keep an eye on the general pricing for the market, and by pricing mean, let's just talk about a cap rate. So if one company in particular has a way higher cap rate than everybody else, then a reasonable person might wonder why that's the case. Does this company know something that other insurance companies know, that they have a secret? Probably not. Are they taking greater investment risks than other companies in some cases, maybe, yes, but most likely not. In the first case, it's not likely that insurance company is doing something different and they certainly don't have a secret second case, it's not common, but I think in some situations there are companies that are taking greater risks. In most instances I call it a teaser rate, and this happens a lot. A higher cap rate, for instance, is going to look good on paper, but the fine print clearly indicates that it can be adjusted each year. Ignoring the fine print makes for an easy sales pitch. And a lot of guys do this. Oh, you don't need to worry about that. It gets a lot of people to buy a contract with a little bit of a surprise later. After the first year or two, the rate is adjusted down to what's more normal in the market, or maybe even a bit lower to recover costs for pricing it so high. That's a good reason why you shouldn't rate shop index annuities. If most of the markets pay a 9% or 10% cap rate and one company's got twelve or 13, it's not going to stay there. What's the point? And a lot of times it's an A minus B plus company. Why are you wasting your time? There's at least one company I know of in the past year that stated in marketing materials that we have way higher cap rates and they're only good for the first year. After that they're going to revert to market normal. So stick with good companies. Industry averages, solid track records. That's why I slowly work my way into using index annuities. I have data on that. So I have the companies I'm comfortable recommending. So for several years, going back at least five or six, maybe longer, there's a few companies that have offered a guaranteed cap rate on say the S and P 500. That's the most common, you'll see. And it's obvious, the first contract that would offer this, they would give you a solid, like an adjustable cap rate, or you can lock it at this lower rate so you can get a higher rate and they're going to say it's adjustable or you could take a lower rate and they'll guarantee they will never move it. So I never really jumped on it because the contracts I had sold in the past came with good renewal rates. And I'm going to show examples of contracts that pretty much held their rates through the surrender term and did really well. So I didn't jump on it because the lock rate was lower. So now that we have higher rates it's kind of a compelling story and it completely eliminates a major objection people have because you got one less moving part, then if all you're talking about is a cap rate that will never change and a shot on the S and P 500, that's an easy difference between that and Amiga. You just have to decide what you like better. So there are a number of companies that have this available. I'm going to talk about two specifically. The other ones may be just fine. And I say this to a lot of people, if there's not a material difference between a new contract, I'm going to stick with the companies I know. The companies I know that provide good service, have good products. Midland national has got a five year index annuity with guaranteed participation rates. They got a guaranteed fixed account and three different index options with a guaranteed participation rate. No cap. A lot of people would like that. It's a five year contract. Cute little deal. It's easy. Allocate the money to whatever indexes, lock in the rates, let it ride. You're not going to lose anything. Still have the potential for some really nice returns. Nothing is going to change as far as rates go or potential. You just have the performance of the indexes that exist for the entire five year term. The indexes that are available are blended and risk controlled, so it's hard to do a straight up analysis of this contract. We have to do hypotheticals, interest rate adjustments and stuff like that. A couple of their indexes have performed extremely well into the double digits. Participation rates are, I don't even know what they are, close to 100%. So, yeah, you can get some really big returns, but it takes a specific market scenario to do that. So mass mutual ascend, kind of the contract that I would say is probably my top recommendation here. Formerly great American Life five and seven year index annuity with a guaranteed cap on the S and P 500, it's the most well known index we can easily project decent expectations. Everybody knows it, knows where to find it. It's reported daily on several major news networks, if not all of them. So on the seven year contract, the guaranteed cap rate is 10%, meaning that's the maximum you can earn no matter how much the market goes up. If you look at the guaranteed rate, you can have a solid comparison to myga. So what's the guaranteed rate? The potential is not going to be reduced, so you just have to win a handful of times and you're going to beat the fixed rate of the contract. So straight up comparison to a mica top micas for seven years, paying about five and a half percent right now. I built a little table below to compare to the mass mutual index annuity to this miga. You can see that you only have to hit the cap four out of seven times in order to beat the accumulation of the fixed contract. So we got 4%. It's a simple Excel spreadsheet. Plugged it in there. If it's guaranteed, you got no objection to it. You got to hit it four times. You beat the fixed annuity by a little bit. If you beat it more than four times, you're going to beat it by a lot. Now, the index annuity is not always going to cap out because the market might rise something like 6% in a given year in which you'll get the full 6%, but it's not going to cap out to ten. It's quite possible, however, to have a positive return in five or six of the years. So the potential to beat the fixed annuity is quite real and it's just a matter of a decision. Do I want the guaranteed rate or do I want to take a shot at this? It's kind of a fun game to play, and you don't have to worry about the company reducing rates. Not that it's likely if you pick a good company talking about it next week. So I tell a lot of people the difference between my and fixed index annuities is just deciding what game you want to play. In my history of doing this, I can tell you that in hindsight, about 25% the Myga would have won, about 50 or 60% of times the index annuity won, and a number of times it won by a good margin. And then up to a quarter of the time, maybe, whatever those percentages add up to, they're about the so. But if you want to play the game, this is a pretty solid bet. So the one catch you have in any of the contracts that I know about, if you choose to take the guaranteed cap rate, then you have to elect it at contract issue. Midlands contract is like that. I know, at least in part. If you take it, you got to keep it the entire time, so you can't change it. Every one of these contracts with guaranteed rates has other index options available that may yield better in certain years. If you decide to get out of that guaranteed rate and go chase another index for one year, then you can't get back into the guaranteed cap rate. You don't have to stay there, but if you don't stay, you're not going to get that guaranteed rate back and it doesn't have to be all the money. Again, you could put 25% in the guarantee and the other 75 in a blend of the other indexes. So there's the example. You can calculate half the money to the guaranteed rate and select additional options with the adjustable rates on the other indexes. So this is just an example of how contracts have been built to be a little more user friendly. It's not meant to be complicated. But if your concern is everybody likes to track the S and P because it's easy to understand, you get into those blended indexes. Goes back to that podcast last year, crazy annuity indexes, guys projecting average 12% 13%. It's ridiculous. BS annuity, illustrations, all that stuff. But again, a lot of people have started to put them into this contract and they're okay. Leave it alone. Don't overthink it. It's not complicated. I'm going to bet on the market and we'll see how the chips fall when the five, seven years is up, whatever it is. So it's just more assurance of one thing that's been a sticking point for a lot of people. So if you're interested in this, go ahead and get on my calendar, we'll talk about it. Go ahead and send it to anybody who has had that objection. You're going to hear it. Investment managers are going to do it. Guys that don't like it, oh, they can change the rates. So can't wait to talk about that next week, why it's something you shouldn't be concerned about and why you're likely to see it in some places more than others. But anyway, this has been episode 129. Please like, subscribe or comment any of your favorite podcast platforms or on YouTube. On YouTube. Hit the little bell in the top right corner. That way you're notified when they come out or get on the newsletter on my website, annuitystraytalk.com if you want to talk to me, top right corner of any page on AST. Schedule a call, name, phone number, time zone time, write some notes and we'll figure it out. So thank you for joining me. Look forward to being back next week with more of this index annuity rate information so you guys know that you can make the best decisions for the products you own in retirement. Brian Anderson signing off from Tucson, Arizona. You guys have a great day. I'll see you next week. [00:13:40] Speaker B: 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 annuity, 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 the purchase decision. Guarantees are based on the financial strength and claims paying ability of the insurance company.

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