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.
[00:00:46] Speaker B: Hello and welcome everyone to the Annuity Straight Talk podcast, episode number 113.
My name is Brian Anderson, founder and creator of AnnuityStraightTalk.com.
Happy to share the information that I have gathered over the past 20 years.
Question it by all means. I can justify it and tell you how I figured it out. I would not be doing this if I did not believe in it. I would not believe it in it unless I had tested it. Today I have the special honor of announcing some things have been part of the website for a month, but I haven't talked about it yet. And I know I've made mention of doing this. I talked about through the summer how I was working on it and all those things. Let me take you to my web page for anybody who's watching the video. If you're just listening to this, you can visit annuitystraytalk.com tell you how to get there, but the top bar on the page has a section about indexed annuities. When the idea came up, I thought we would be able to take all the information that was already on the website, repurpose it, and build this giant new center of content for people who want to learn about the products. But it turned out that it was best if I recreated that from scratch. So 15 to 20 different articles dang near a book about it by the time it's all finished and I'm going to share it with you. And over the next three or four weeks, I'm going to roll out the parts that are frequently asked questions that people have prior to purchasing one of these things. Now, if you follow this for a long time, you'll realize I sell probably 75 80% of what I sell is multi year guaranteed fixed annuities and guaranteed income products. That's a result of rising rates over time. Going back into the fixed indexed annuities, I only started using them about nine or ten years ago.
One was because you could find higher. In a lot of cases you can find higher guaranteed income payments for those people that want income.
And then when we go into the flex strategy and all the stuff I've done with that, it was when rates were really low or they got really low, like 2010 1112 13 in order to keep. I was a fixed annuity guy when I started, so just selling mygas and the rates went down, or the rates went so low that the insurance company had to start peeling back benefits in order to keep the rates at a justifiable level justify a purchase. And we're talking like these things were ranging between two and 3% for a long term lockup. Not a lot of people wanted to do it. The biggest thing they did is they took away the 10% free withdrawal provision on a lot of the top contracts.
So it wasn't really any better than a bond. That's a big thing about annuities, that you have interest rate, risk free withdrawals. You sell a bond if the rates are rising. And of course that stung people in the last year. But a 10% free withdrawal on a fixed or indexed annuity doesn't have that risk.
So that was a big edge for people. We started using indexed annuities, and I say, like, I held my nose and signed the paper, we'll see how this goes. One client who'd done a bunch of other stuff with me said, let's give it a shot. And then it just steamrolled. They did fine. The company didn't screw them over. The rates didn't drop to the floor, made 5% or 6% the first year, five or 6% the second year. It's like, oh, wait, hold on a second. Fixed annuities are still only paying two. This ain't a bad idea. So I centered planning around it based on a free withdrawal, to be honest with you. And then it worked. But you guys, again, frequent listeners might remember six or seven episodes ago, I did something about Annuity.org and misinformation.
I've got some guys that are working on the website and cleaning it up, organizing it. And the reason I found out about Annuity.org, I don't get in a habit of reading through other people's information.
Again, I give them the benefit of the doubt that there's probably some good stuff in whatever they have to say. I'm going to probably have to do more of it. So put that on the list of things to do, because AI has proliferated and a lot of people are taking a shortcut and AI is generating it. Now I've been looking at this for long enough that I can spot AI in the written word and the spoken word if you hear audio or something like that. I heard one the other day that was like somebody was selling a product, but like a preparedness deal product. And it was like an AI version of Joe Rogan. It was weird, but I looked at it, I was like, that's fake. Joe Rogan's not pitching this product.
It was really weird.
Anyway, so I got to combat that as much as I can and I got to step out and see it. But anyway, when we saw Annuity.org and I read through it and there was so much information, I'm not convinced that wasn't written by AI, because it's just, again, if you've been looking at this stuff for 20 years, like, hey, that sentence references three different things. One existed eight years ago, 115, 120 years ago, mashed together to explain one concept. It's very confusing. And I've talked to people that a couple of advisors got a hold of me after that and they said, you know, we've been buying leads from Annuity.org, and people come with the craziest questions that make no sense.
So they knew exactly what I was talking about. And again, this is all for you guys to benefit from so that you know what type of information you can trust and you actually get answers to your questions. So the guys that are working on the website, they don't know a lot about annuities, and they're going to learn more as they do more of this. But they said the structure of how things were built is like, this is how you need to build it, and this is how it needs to be organized so that the search engines are able to show your website as a result for different questions. And when we looked at all the things that were in there, realized that even including the topics were good, but the explanations were awful. And we decided to recreate the whole thing again for Annuitystraytalk.com. And here it is. I'm going to introduce this in a broad area, and then I'm going to go through and talk about different parts of this on separate episodes just to explain little things that are applicable to all annuities.
But it's going to rest on this page because that's where you got a lot of the aggressive sales. Fixed index annuities require a lot more explanation. So I spend a lot of time, even though I don't sell as many of them, I spend more time explaining them because we got to make sure that people that are getting hit with other stuff have an opportunity to come get real information and can talk to someone who would gladly sell them something else if that's what's better for them. And that's me I like indexed annuities. I think they work just fine. But it's a matter of personal preference and you need to see, I guess, what four or five episodes ago talked about. Hey, why you should buy an annuity for me, because I'm going to show you all the options. I don't just have an objective to sell this. So you're looking at the page, and this is the head page here. So if you roll over this just clicked on indexed annuities. So for anybody who's not listening to this, it's just the top bar. So there's the annuity newsletter about, if you want to read about my story a little bit. And then indexed annuities, and there's a drop down menu.
So this is the fixed indexed Annuity guide may eventually replace that piece of paper I used to send out for download because a lot of people call, oh, the date is 2021. That's the same. I just forgot to change the COVID Updated what I needed to anyway.
But we're looking at the fixed indexed annuity guide, and then we'll go into individual topics that are going to be very important down the road. So what this does is it just tells you everything about how a fixed index annuity works. What is it? How it works, how it grows, how the company makes money.
Now, nobody wants the company to take advantage of them, but I urge you to hope that they do make money, because if they do make money, they're going to be around to honor their promises. That's what insurance companies do, and the pros and cons plus, and then wrap it all up in the conclusions. But this was a tremendous amount of writing, took a lot of time. I guess I could publish a book if I needed to. How does it work? Insurance Company invests the premium in bonds, produces a yield from the bonds, takes a spread, so they earn 5%. They're going to give you four, their profit is 1%. That's it. And then you get the 4%, goes into the annuity. That's a fixed annuity. And then the fixed index annuity is the same thing, except that they go buy option in the market. Of course, the index is positive. You make money if it's negative. They just lost the interest. They didn't lose the $100,000. This is going to help a lot of people because people do a ton of research and they still come back to me and they have the basics they miss. And we've covered all this for anybody who's bored with it. But I'm sorry, it has to be out there for people to find. Principal is not at risk. There's no base fees on the contract.
So go through all that stuff and of course pictures and organized, but it's going to tell you step by step what it does, how it works.
The thing I want to mention is something I don't have a lot of Information on.
And we're going to talk about surrender penalties, why they exist, how they work, why you shouldn't be afraid of them so long as you plan appropriately and the product fits within the context of your goals.
Guaranteed minimum surrender value. That's the value in the contract. What the insurance company is going to guarantee, what it means when a contract matures. It's not at the end of the surrender period. You can keep that contract longer. I know a lot of people who have, and then all the additional writers and benefits. So you go to surrender penalties and it's interesting you have those because there's no fees on the base contract.
100% of the money you dedicate to the contract goes to work. But the insurance company has costs associated. They're going to pay me to sell it. They've got a big back office that does all the processing, all the management sends out notices on contract anniversaries, all those things.
And they got to project these things out for a long time. The company loses money when you buy, so they have to make sure that you hold it there long enough that they can make their money back.
That's it. Now you have fee based products that don't have those costs on there, but then you've got a fee deducted from your account value every year. So that comes out of your pocket. That's why I say it's so important to fit it within the context of your goals. If the contract works, it's not going to cost you anything to own it. You get something a little shorter term.
It may still work within the context of your goals, but you're going to pay half a percent, three quarters of a percent to an investment manager to take that contract. That's actually going to come out of your pocket.
Surrender terms, three to 16 years. Most contracts issued have ten year term is the standard.
There's some good five ones and seven ones, stuff like that. Usually the longer the surrender term, the more options you get, more variability. So between a seven and a ten year, the surrender charges are actually really low. Go with the seven and it makes you feel better, but that's just how they work. Market value adjustments. If you surrender early now, you get a penalty free withdrawal that isn't subjected to that. But if you do that insurance company, if you surrender early, the insurance company has got to liquidate that portion of their bond portfolio in a potentially unfavorable interest environment. So the only time that you suffer interest rate risk is if you surrender the entire contract before the end of the term. If the rates go up, have gone up since the time you bought it, then you're going to have a negative adjustment. If the rates go down since you bought it, you'll have a positive adjustment. In years past, there are a lot of people that were able to take a positive market value adjustment that wiped out the surrender penalties plus a little bit of profit.
The problem with that then is you're taking a higher yielding contract. You're replacing with a lower yielding contract. Unless you just want to go out and do something else like invest in the stock market or buy a CD, I don't know.
But still, you got a high yielding contract and you get a positive market value adjustment because rates have dropped. Your alternatives with that money, if you want to remain safe, are not going to be very good. So it's usually not a good idea. And then the guaranteed minimum surrender value. So it's going to take the maximum surrender charges and negative market value adjustment, and they're going to set a limit on it. The states have come in and said, even if there's a negative market value adjustment and a surrender fee, we're going to limit you to X amount. So that guaranteed minimum surrender value, there's a newsletter on that specifically, it's called guaranteed minimum, or it's a podcast as well, guaranteed minimum annuity value. So 87 and a half percent of the premium show you right here, compounded at 1% percent to three annually. So if you have a 10% surrender charge and a negative market value adjustment, put in $100,000, it starts as 87.5%. So you get 87,500 back even though your surrender charge was only 10,000. You're going to pay 12,500. If it goes the other way. You might have a 10% surrender penalty, but you're going to get 95,000 back and that 87 and a half percent. So the 87,500 compounds at that 1% annual, it's set at the contract issue right now, they're close to 3%. So you can wipe out surrender fees in four or five years with that guaranteed minimum surrender value and then contract maturity. The contract does not end at the end of the surrender term. The contract continues annually, renewable. So they declare new rates. Every year you keep doing the same thing. You just have no penalty for moving the money. Maturity date is when the contract ends, when it's all over, and that's when the owner or annuitant is aged 95 to 120, depending on the company.
Every company's got a different policy at maturity. The contract must be surrendered or taken as a series of income payments. This is what makes the contract an annuity. I always tell people, we get it, within three years of that, we'll start talking about it. So it's not material to 99.9% of people that use these things, maybe even a higher percentage.
Okay, additional riders and benefits. This is where you find fees. Again, fees are like benefit matching. If you want, the base contract protects your principal and it gives you growth potential. If you want guaranteed income on top of that, you might be paying a fee. If you want long term care on top of that, you'll be paying a fee. And if you want a guaranteed increase in a death benefit, you might be paying a fee. A lot of times those are all wrapped into one. It's about 1%, something like that. Only do that if you get maximum income. But anyway, so those are the fees. The base contract does not have fees. That's why it's irresponsible of some other professional to say, oh, what about the hidden fees? There are no hidden fees. Remember, the insurance company is getting 5% and they're taking a 1% spread. You get four. That happens whether you buy an annuity or not. Only if you add an additional one of these will you pay an additional fee. So we got guaranteed lifetime income. Most common reason to do it. Long term care enhancements, which is usually part of the income rider, not always beneficial. I don't really love it, but it's there. I'm going to explain it. Don't fall for that. Just as a way to do long term care, that's not the right way to do it. You got a guaranteed death benefit. So with all fixed indexed annuities, the death benefit is the full account value, what it's accumulated to at the time of death. An enhanced death benefit offers a guaranteed annual increase to the death benefit each year. So it'll say regardless of what the account does, we're going to increase this death benefit by 5% per year, for instance. So that comes at an additional fee. There's a few products that have that, not a ton, and I've never really found those to be very exciting for a lot of people. It's not nearly as powerful as life insurance. They have what they call return of premium writers gives the contract owner the option to exit the contract early without penalty, without paying surrender penalties or market value adjustments. In most cases, the return of premium is available after the third, 4th, maybe fifth year. So you got a ten year contract. You want to slap a 1% fee on it because you want that option for early liquidity or to move it if you need to. I've never been a big fan of these because the minimum guaranteed value kind of wipes a lot of that out. Plus you usually have growth that will wipe that out. But some people have bought them. I know a lot of people in the past, they didn't buy them from me, but they bought them and they're almost through their surrender period. They never used. They've just been paying the fee the whole time. And then they got fees for enhanced performance. So each contract has got a list of index options available for allocation of the premium. In addition, many contracts offer higher growth potential. It's very popular now on each of the index options, should you get a higher cap rate or more participation rate if you pay an additional fee. So the choice to use enhanced growth potential is left to the contract owner and can be changed at each contract anniversary so you're not stuck into it. All right, so those are like the basics.
We talk about how the insurance company covers the risk. There's not a lot of risk in it for them. They've got it managed really well. Talk about how it grows. And I'm going to get into some of these later as well. But there's a lot of information on this and I just want to introduce the topic. It's been an incredible amount of work and I'm glad to have it done, but I hope that it helps a lot of people and maybe regular listeners, people I've had conversations with already know this stuff, but it's out there to help anyone else. If you want to take a look at it, I'd appreciate your feedback or if you would tell me anything you'd like to see added, any other questions you have that aren't answered in it, but I'm going to roll these out over the next few weeks. I'll be on the road. I'm headed to Kansas, then Arizona. My calendar is open. It's not a full on vacation. I'm just going to be working from the road and doing something a little bit different. So I'm going for Whitetails in Kansas. I'm going for Elk in northern Arizona. I'm really excited about it and wish me luck. Give me a call. Tell me how you're doing. Schedule an appointment. Top right corner of Annuitystraytalk.com says schedule a call. Click the button, type your name, email, phone number, and what you want to talk about. I will give you a call, the time you ask if it's available, take it and let's go. So here it is, the fixed indexed Annuity guide. I'm excited to have this out there, just to have a resource for people. If you get a chance, please like comment or subscribe or all three on YouTube or your favorite podcast platform. Share it with your friends. Help other people out. This is a community where we're trying to better each other and make sure we all make good decisions going forward. I appreciate your time back with an element of this that deserves some clarification. It's been a frequently asked question and I'm going to talk about that in episode 114 that's coming up next week. You guys all have a great day. Thanks so much for joining me. Okay, goodbye.
[00:21:04] Speaker A: You have been listening to annuity Stray Talk.
The preceding 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 properly before making the purchase decision.
Guarantees are based on the financial strength and claims paying ability of the insurance company.
