The facts about Variable Annuities

Read transcript

Stan: Hi, I’m Stan The Annuity Man

Gary: I’m Gary from Cannex

Stan: We’re talking about Variable Annuities, which are really, the most popular annuity product out there.

Gary: Right.

Stan: They are used when we’re talking about controlling the asset. We’ve talked about Multi Year Guarantee Annuities, which are Fixed Rate Annuities, and Index Annuities, which are an off shoot of Fixed Rate Annuities in this series about annuities. Now we are going to cover how a Variable Annuity is a little bit different, because it’s a security. Gary, what do I mean by that?

Gary: With a Variable Annuity, you’re essentially buying mutual funds within an annuity contract.

Stan: In the annuity industry we call those mutual funds Separate Accounts, for whatever reason, but they’re mutual funds.

Gary: We’ll call them mutual funds.

Stan: Okay.

Gary: So, anybody who offers mutual funds or acts as a financial advisor has to be registered with FINRA to be able to offer them or stocks, bonds, or a mutual fund.

Stan: You have to pass a hard test, okay. So the sale of these types of financial products is regulated, heavily regulated. Tell us about the mutual funds. When you say mutual funds, do you have multiple choices or do the options depend on the Variable Annuity that you buy?

Gary: It depends on the Variable Annuity. So, the insurance company will essentially pick and choose from the thousands of funds available on the market choosing the ones they feel would be appropriate for that particular contract, given the objectives of that contract.

Stan: Variable Annuities were developed in the 1950’s, and were primarily designed for tax deferred growth. One of the good things about a Variable Annuity is to have these mutual funds inside. You don’t have to make decisions based upon taxation. You can make decisions based upon pure investment, because taxation is deferred until you pull the money out.

Stan: TIAA-CREF, now called TIAA, were the originators of the Variable Annuity. It has become really popular in the last decade, because you can attach benefits to the policy. We call them riders, but they’re Attached Benefits to the policy. Most of these are Income Riders. Gary, talk a little bit about an Income Rider attached to a Variable Annuity.

Gary: It’s essentially a growth product. So, you want to maintain access to your account value, or your funds as they growth in the account. If you want to start initiating guaranteed income, then you would initiate what we typically call a Guaranteed Withdrawal Benefit, if you will. While the withdrawal benefit is guaranteeing your income for a lifetime, you essentially still have access to the money, or your account value, left in that account. If you do change your mind, depending upon your financial circumstances, you can cash out and move on to the next plan.

Stan: Now that comes with a fee. I mean, you know insurance companies have the big buildings for a reason. They’re going to charge a fee for that guarantee, and that fee is deducted from the mutual fund side. So, draw a line down the middle of a page and you’ve got the income benefit calculation on one side, with the accumulation value calculation, the mutual fund, on the other. That fee comes out of the mutual fund side which is used in the income later calculation.

When you say, “Hey, I need Income Later,” you’re going to choose a Deferred Income Annuity, or an Income Rider attached to either an Index Annuity or a Variable Annuity. What’s the difference between Income Riders attached to Variable Annuities and Index Annuities when Cannex looks at it?

Gary: With an Index Annuity, you base the guarantee off of a fixed or CD-like return. It maybe will have a little upside, but it’s pretty predictable based upon the contractual guarantee. That accumulation value, or your shadow account, or sometimes you call it your Monopoly money, that’s what helps determine the withdrawal benefit. That amount stays pretty constant. You don’t get much variation.

With a Variable Annuity, you can adjust your risk tolerance within that account. You may want to choose riskier assets or maybe not so risky, but that shadow account has the ability to grow much higher. So, when you want to turn on that income benefit, your monthly payment could, in fact, be much higher.

Stan: So, you’re the master of the universe? So if you are a market maven and you want the possibility to maybe increase income benefits, you don’t choose a static annuity like an Index Annuity which has a static guaranteed benefit amount; you choose a Variable Annuity, because you’re the market maven and you hope you can make that happen. Or, you might have a market maven managing your money, and believe that they can make it happen, right?

Gary: Your dream could come true.

Stan: Okay. Variable Annuities also come in no load formats.

Gary: Yes.

Stan: Which means that you could do Variable Annuity to, what we always say, a VA to a SPIA.

Gary: Sure.

Stan: You can buy an Immediate Annuity and create that lifetime income stream and shop for that using the Cannex system, but most people with Variable Annuities now, are buying them, well a vast majority, with these attached benefit riders. What’s some of the misconceptions people talk about? I know that Variable Annuities lead the way in creating the bad reputation of annuities. But, it’s ridiculous to say, “I hate all annuities,” it’s like saying, “I hate all restaurants.” What’s the common misconception out there that leads people into that annuity hate zone?

Gary: Well, I think one size fits all.

Stan: Okay.

Gary: In other words, there’s a lot of flexibility in this contract. So, again, depending upon your risk tolerance, maybe how you want to deploy some of those options, you have a lot more flexibility.

Stan: Okay.

Gary: But, you have to know what you’re doing. You probably need a lot of guidance, too, as far as choosing the right options on those as well. So-

Stan: So you can get real market returns, though. I mean that’s the benefit, right?

Gary: Right.

Stan: Limitations, though. Tell me about the expenses. It could be ugly, right?

Gary: Well, if you consider the actual additional benefit of that income rider.

Stan: It’s a trade-off, Gary, right?

Gary: Yeah, it’s a trade-off.

Stan: But, the expenses could be high?

Gary: Could be.

Stan: And those expenses come out of that mutual fund side. So you have to be aware of that.

Gary: Right, adding some of these additional options costs. There’s also even long term care riders that you can attach.

Stan: Confinement care is what they call them, I believe. There are some variations. There are death benefit riders as well.

Gary: Sure.

Stan: So, at the time of application, just like with an index annuity, you don’t have to attach the rider. If you want to attach the rider regardless of what happens to your mutual funds (separate accounts), you will know what that income stream is going to be, correct?

Gary: Right.

Stan: At a minimum-

Gary: At a minimum.

Stan: And with a Variable Annuity there’s a possibility that your market may have been able to make that even better.

Gary: Right.

Stan: Okay, so that’s the dream of the Variable Annuity and it can be a reality as well.

Gary: Sure.

Stan: Okay. So, let’s talk about maintaining control over your assets. It really comes down to three products:

It comes down to Multi Year Guarantee Annuities, which are fixed rate annuities. Index annuities which are an offshoot to a fixed rate. You can control your money in that third way by your investments with a Variable Annuity. Gary: Right.

Stan: Okay, what if you need income? What are the options for setting up Income Later? Let’s look at Income Riders attached to Variable Annuities and compare them to the other Income Later choices. I’m not saying any one product is better than the other, but let’s look at it to understand the options. Then everyone out there can say, “Okay, if I’m going to go set up income for later, this is how I can go do this.” We use the Cannex system, which I love and we use exclusively. It filters all the annuity world products to show all the contractual guarantees available, based on the specific situation and information a person enters. So, it’s not a one size fits all system, it’s customized. Hey, Cannex can break down the situation. So, let’s create some friends from Texas and let’s run some numbers.

Gary: Sure. Okay let’s say I’m Robert from Texas. I’m 65 years old, and I have a hundred thousand dollars. In five years I want a turnaround income. So, we take a basic income product, like a DIA (Deferred Income Annuity), put my hundred thousand dollars in, and I wait five years. It cooks at the insurance company, and it looks like one of the better rates I can get is about $680 a month.

Stan: Is that a lifetime payment?

Gary: Lifetime payment. I know when I purchase that contract it’s going to be $680.

Stan: We don’t know the ROI (Return On Investment) until you die, but that’s the guarantee.

Gary: So, now let’s go up a ladder and look at an index annuity. It’s a CD type product with some CD enhanced returns, if you will. The income rider on top of that is something that will associate itself with stable growth, if you will, of that type of product. So, with a fixed index annuity, if I were to take that income benefit rider, I will have some additional access to that money. I’ll have some additional control. If I turn those income payments on in five years, using that same hundred thousand dollar investment example, I’m at $670 a month, which is about the same.

Stan: What was the Deferred Income Annuity amount?-

Gary: 680, so it’s about the same.

Stan: Isn’t that amazing.

Gary: Well, again, so again, it’s more of a choice of your preference of contract as opposed to the outcome.

Stan: It’s a control line.

Gary: It’s control, and so that’s the guaranteed payout.

Stan: It’s the Armageddon, or worst case scenario. That’s what you’re going to get.

Gary: Right. Now let’s run the same parameters looking at a Variable Annuity, okay? So I’m going to look at the Variable Annuity, and again I’m going to wait for five years using that same hundred thousand dollar amount. The guaranteed payout if Armageddon were to hit, is only $600 a month.

Stan: That doesn’t make it a bad choice, though, why?

Gary: Because, if I actually look at the average returns, or a variety of scenarios and a bunch of upmarkets, I see that average payout could be as high as $720. So, if you assume that Armageddon is not going to hit, and decide to diversify the portfolio. There might be some equity returns.

Stan: Real returns. Real market returns?

Gary: I’m participating in the market-

Stan: Fully.

Gary: Not only is my account value growing, but the shadow account is growing as well. That’s going to help determine what that income benefit is.

Stan: Got it.

Gary: So, if I get that market upside, on average, across thousands of different market scenarios, my average payout could be as high as 620 bucks. I’m sorry, 720.

Stan: So, like any annuities, you can’t say Variables are better than Index Annuities. You can’t say that. Or MYGAs are better than Index. It really comes down to what your specific goals are for the asset, and, how you want to control that money. If you want a pension and you say, “I want the best pension and I’m going to relinquish control.” In some cases it makes sense to use an Immediate Annuity (SPIA), Deferred Income Annuity (DIA) or a QLAC (Qualified Longevity Annuity Contract). Great. Go do it.

If instead you say, “You know what? I want to control it, but I also want a guarantee that I won’t lose any money.” Then you have your MYGAs and Fixed Index Annuities.

Gary: Right.

Stan: If you say, “You know what, I really want some market participation.”

Gary: I’m going to let it ride.

Stan: I’m going to let it ride. I’m going to manage it or have someone manage it for me, and I’m also going to attach that benefit. Then maybe a Variable Annuity fits.

Gary, let’s wrap up Variable Annuities. It’s a popular product out there. A lot of people are buying them, and that’s a good thing because they do have their positives. Unfortunately, they get a bad rap out there because people don’t know the details. I think what we’ve done here in this video is tell people the good & the bad, the limitations & the benefits, and described how they fit in a portfolio. You might have true market upside because this is a security. This is not an insurance product. If people want market upside, they can get it, and they can also attach that Income Rider for future income guarantees. There is also the option to buy a no load Variable Annuity (a Variable Annuity without a rider), then at the end of that policy use the Cannex system to shop for an Immediate Annuity to deliver income payments.

I like what Cannex has done with Variable Annuities. You’ve taken that contract and stripped it down so that the people can make an informed decision. What do you want people to know about Variable Annuities, so that they can make that informed decision? What does the product really do?

Gary: I think there’s a lot of flexibility with these contracts.

You can certainly get income floor guarantees associated with it, based on your best tolerance levels. You can allocate your money in a variety of ways. When you attach the income riders on top of them, then you really have the ability to grow your income potential. Either way you can get that floor or the guarantee of some of those embedded guarantees, even if you want to let it ride and you want to go with the market You have the opportunity for some good upside. Stan: That’s Variable Annuity Truth! Thanks for joining us-I’m Stan The Annuity Man.

Gary: And I’m Gary from Cannex. We’ll catch you next time.