Why the 1% loves annuities
Class envy is currently in vogue, and it’s politically correct to be against what some politicians refer to as the “evil rich.”
Recent studies reveal that the top 1% in this country earn over $380,000 annually, and the top 10th of 1% bring in more than $1.7 million in yearly earnings. Good for them in my capitalistic opinion.
That’s pretty lofty income air to be in for sure, but do these 1%-ers even look at annuities? The answer is a resounding yes and their view on these transfer-of-risk strategies should be a blueprint on how everyone should use annuities within their own portfolio.
I can do my own growth
Annuities aren’t market growth products and that includes the over-hyped agent favorites, indexed and variable annuities. The “evil rich” know how to make money in and out of the markets — and understand that annuities are just non-correlated assets within a portfolio.
They typically make their money with their career or with pure market-growth investments. Ongoing fees and contractual upside limitations legitimately eliminate annuities from any growth discussion.
You shoulder my risk
Annuities are nothing more than contractually guaranteed transfer-of-risk products, and 1%-ers use annuities as a way to transfer risk to the annuity carrier. They don’t view annuities as, or compare them to, true investments because they understand that annuities aren’t in the investment category.
The 1%-ers usually have enough risk on their plate with their jobs and outside investments, so they look to annuities as a way to take risk off the table.
Good luck creditors and predators
In some states like Florida and Texas, annuities are fully protected and shielded from creditors and frivolous lawsuits. For 1%-ers, this is a big deal since they are constant targets. Annuities can provide the legal safety net needed to fully protect their assets.
For example, 1%-ers that have a thriving business model, like high paid surgeons, executives, and entrepreneurs, are only looking for principal and creditor protection. Fixed annuities are the only product on the planet that provide both of these benefits.
Less taxes the better
Even though 1%-ers pay a ton of taxes, annuities do provide efficient strategies to lower their tax exposure. Tax deferral and exclusion ratios on annuitized payouts are examples of how annuities are used by big money. Fixed deferred annuities can guarantee an annual percentage yield with as short as a three-year surrender period. Laddering three-, four- and five-year fixed-annuity paper is a common “treading water” strategy for 1%-ers.
Guarantees are good
Annuity guarantees are only as good as the companies backing them, so 1%-ers love placing their money with high COMDEX-ranked carriers. They are not interested in hedge-fund-owned indexed-annuity companies or complicated lock in call option or separate account strategies. They only want the contractual guarantees, and if they want to invest in hedge funds, then will invest directly in those offerings.
Who cares about interest rates
Most annuity buyers are fixated on current interest rate levels and are trying to perfectly time their annuity purchase. When 1%-ers contact me to purchase annuities, interest rates are never mentioned because the contractual transfer-of-risk guarantee is all they care about. Their simplistic view is the correct one in my opinion.
It’s all about family
Even though annuity proceeds don’t transfer tax-free like life insurance, they do efficiently pass outside of probate and can be easily structured for legacy planning. Annuities are considered a life insurance product but don’t carry the same tax-free benefits.
Contractually-guaranteed legacy strategies are how 1%-ers implement annuities within their estate plan.
Fly over America
Pure numbers dictate who the annuity industry targets as prospects for their product. Baby boomers, retirees, the middle class, and the pre-retirement working class are who dictates the one size fits all product designs that are pushed by the annuity agent army.
Unfortunately, the sales pitches at the local seminar or on TV and radio don’t reflect how the rich buy annuities. Too many indexed- and variable-annuity products are positioned as the dream of getting both market growth and guarantees. The 1%-ers would never be swayed by this too-good-to-be-true sales message and the other 99% should heed that realistic view.
Not everyone is going to achieve the top 1% status but they can learn a valuable lesson from them when it comes to the possible purchase of an annuity. Make your transfer of risk decision solely on the contractual guarantees, and place your money with quality carriers.
Originally published 3.24.16 by MarketWatch.com – http://www.marketwatch.com/story/why-the-1-loves-annuities-2015-03-23