Can you handle the annuity truth?
We all are familiar with the classic movie “A Few Good Men” where Tom Cruise and Jack Nicholson have one of the most heated and memorable interactions in film history.
Nicholson’s ” you can’t handle the truth ” verbal attack toward Cruise is a phrase that many people have adopted as part of their personal verbal lexicon.
The loosely regulated world of annuity sales and over-hyped misrepresentations constantly produces potential annuity buyers contacting me about the dream that was pitched to them. It happens so frequently that I now start every conversation and inquiry with the phrase, “Can you handle the annuity truth?”
From that basic start, it’s important to explain why annuity truths always win out in the end.
Contractual realities will reveal themselves
I always tell people to make the decision to purchase an annuity on the contractual guarantees only. My saying is, own an annuity for what it will do, not what it might do. With both variable and indexed annuities, the agent has the opportunity to show you a product proposal where they can plug in an annual projected growth number for what the accumulation value could potentially be if all the planets aligned themselves. Back tested, projected, hypothetical, and theoretical growth numbers shown in proposal form aren’t guaranteed and represent nothing more than a dart throw at a market growth dream. In my opinion, annuities should not be considered as a part of the growth portion of your portfolio due to the contractual limitations in place within the policy.
Deferred annuities can also be over hyped with upfront bonus and income rider percentages that sound too good to be true. In most cases, they are, and you should know that these contractual additions come with annual fees for the life of the policy. Sometimes the contractual math works in your favor, but a lot of times it doesn’t. Always remember that the contractual realities of every annuity policy will eventually reveal themselves, so in my opinion, why not just start and finish there.
Interest rate guessing game
I know that it’s cavalier to just say that rates have to go up soon, but none of us know the long-term impact that the Yellen/Bernanke easing policy will have on interest rates. Because a primary pricing mechanism for annuities is the 10-year Treasury, every annuity buying decision has to take into account the reality of possible stagnate interest rates.
It’s common sense that if interest rates rise, then annuity pricing and corresponding guarantees will improve as well. Also remember that annuity lifetime income streams are based on your life expectancy at the time you decide to start the payments. The longer you wait, the higher the payments.
Transferring risk isn’t a static decision
Annuities are transfer of risk products, and some people don’t have the luxury to wait to turn on a lifetime income stream. Life and lifestyle realities may force you to permanently lock in current interest rates to achieve your specific goals now. There never is a perfect time or answer to make an annuity buying decision, but there are some unique financial theories and calculations that can help with your Benjamin Franklin good/bad list . Let’s take a look at a few of these, and the theories behind them.
Implied longevity yield
Different from Internal Rate of Return (IRR), Implied Longevity Yield (ILY) calculates what yield you would have to achieve from a non annuity product that would match the lifetime income guarantees of an income annuity. This calculation was developed and trademarked by well known financial thinker Moshe Milevsky, and can help you decide whether it makes sense to own an income annuity right now or wait till a later date.
When lifetime income payments are created by annuitizing a policy, there is no longer an accumulation value or surrender value. Income Value is a method of calculating the “value” of an asset that technically has no value beyond the income it provides. That specific number is called the Income value.
Income annuity yield curve
This is similar to the U.S. Treasury Curve that most are familiar with, but this data reflects the pricing and credit experience of the companies in the annuity industry that provide guaranteed lifetime income solutions. Published on a daily basis, some use a comparison analysis of the Income Annuity Yield Curve and the U.S. Treasury Curve data to help in their annuity buying decision.
It’s probably a shock to most of you that there is actually some high level financial thought behind annuity strategies. Unfortunately, the dumbed down and unregulated Internet, TV, and radio annuity ads have framed these effective strategies in a negative light.
New research on retirement and legacy is bringing more sophisticated investors to the annuity product category, and a deeper understanding and appreciation for the value proposition that annuities can provide. Defining your Retirement Sustainability Quotient (RSQ) and Expected Financial Legacy (EFL) and the trade-offs between legacy and sustainability are just a sample of some of the current research being done by forward thinking companies like QWeMA and CANNEX.
Someone will tell you what you want to hear
The vast majority of annuity agents I believe are good people and have the clients best interest in mind. However, if you talk to enough agents, you will eventually find someone to tell you exactly what you want to hear. In other words, if you are searching for that dream annuity product that is too good to be true, there are agents that will unfortunately validate that dream to achieve a sale. Look no further than the annuity Internet promoters that pitch double digit returns that contractually have no chance of happening. As they say in the south, “That dog won’t hunt.”
Demand the truth
As Tom Cruise evoked Jack Nicholson’s timeless response by demanding, “I want the truth”, you need to also demand the annuity truth before moving forward with any strategy. Let the agent know that you CAN handle the annuity truth because that is the contractual guarantees that you are going to own and depend on for the rest of your life.
Originally publish 2.18.14 by MarketWatch.com – http://www.marketwatch.com/story/can-you-handle-the-annuity-truth-2014-02-18