Fixed Index/Indexed Annuities

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Stan: Hi, I’m Stan The Annuity Man.

Gary: I’m Gary, from Cannex.

Stan: We’re here to talk about Fixed Index, or Indexed Annuities. They are also inappropriately called hybrid annuities. Don’t say hybrid around me.

Gary: Okay.

Stan: Because a hybrid’s a mattress, a hybrid’s a car, a hybrid’s a plant. A hybrid’s not an annuity, so let’s get that straight.

Gary: Sure.

Stan: Now, I like this product. It’s sold improperly, but I like it. It’s an enhanced CD. It was developed in 1995, the first one was available in 1995, but they’ve really become popular in recent history. It’s not a security.

Gary: Nope.

Stan: It’s a life insurance product that’s called a Fixed Annuity. What else do people need to understand about Indexed Annuities?

Gary: I think what they need to understand is it’s an enhancement to the CD structure. So, with the MYGA product and the Fixed Rate Annuities, you know what your return is going to be.

Stan: Right.

Gary: In this case, it’s an enhancement to that. You’re still getting that base CD-like return-

Stan: But it’s low.

Gary: Yes, it’s low. It’s low, but what you’re doing is you’re tracking a movement of a particular market, and you’re getting an additional enhancement to that fixed return, on top of that. You’re getting a little bit of additional juice, if you want to use that word, but you’re not participating in the market. In fact, you’re on the sidelines, you’re watching the market, and a formula determines how much additional $ you may get from that CD return.

Stan: A lot of the sales pitches out there are selling market upside with no downside, and it makes it sound like a security, a market product, but it’s really not. It’s a call option. Not to get caught in the weeds here, but it’s a call option. It’s a bet on where the market’s going, based on a specific index, and typically that’s the S&P 500, correct?

Gary: Right.

Stan: At Cannex, you have a system that breaks Indexed Annuities down to the base. It will strip everything down, it’s unbelievable! So let’s not focus on the details. Generally how many index option choices are out there, right now?

Gary: As far as applying a formula, the score keeping method, there’s probably over six to seven hundred different ways you can technically do it. It depends upon which combinations of the formula you want to apply to an index. Then choosing the index you want to apply increases the complexity, because there’s potentially a hundred of those too.

Stan: Yeah, there are indexes that we know about, like the S&P, and then in the index annuity world, they’re also making them up out of thin air. Companies are creating their own indices, or index, that they can track.

It’s an interesting, and oversold product, but I think it has its place. I really do. So where is that place in a portfolio for Indexed Annuities?

Gary: If you’re looking for a little higher return than you would typically get from a CD product, or a Fixed Rate Annuity, you’re going to probably want to go with a product like this. What’s really good about this product today, is that with an Income Benefit Rider attached it’s usually the most competitive income product that you can get. We have talked in the MYGA video about how you can take the return at the end of the term, and then move it into an income annuity. You can do the same after a certain period of time in this FIA product as well.

Stan: You’re talking about rolling it into an Immediate Annuity (SPIA).

Gary: Yes, an Immediate Annuity if you want to turn on the income, but for these growth products (Fixed Index Annuities, or FIAs), you have the option to attach a Living Benefit Rider, or Income Option, that you can turn on while you’re still holding this contract. In today’s world, these Income Riders are just as competitive as a Deferred Income Annuity. In some cases, they’re on par.

Stan: Right. Indexed Annuities are a very efficient delivery system for that Income Rider guarantee. When people come to me saying, “Stan, I need income later guarantees.” We show both Income Riders and we show Deferred Income Annuities. Why? Because they both provide that guarantee for Income Later, but they just take two different contractual roads to get there.

Gary: Right.

Stan: We’re not going to get caught up in the caps, and the spreads, and the limitation on the upside of FIAs. I just think people need to understand it’s a CD-type product, and regardless of what dart you throw at that index option, you need to expect that level of returns. If someone’s trying to convince you you’re going to get market returns from a Fixed Index Annuity, please don’t buy it for that. Buy it knowing you’ll get a CD-type return. If you decide to attach an Income Rider to a Fixed Index Annuity, buy it for that guarantee, and use Cannex to shop that for you.

There are limitations on this product. Other than the misleading market upside sales pitch used to sell a CD-type product, what are the other limitations that you’ve run into out there?

Gary: If you’re looking to bolt on that extra income option it comes with fees, so it could be seen as a little bit more expensive. Those types of options create a situation where you’re kind of trying to have your cake and eat it too.

Stan: Right.

Gary: In other words, you have access to your money, and you’re also going to get guaranteed income. You need to know full well what the actual costs of that additional income option will be.

Stan: Right. A lot of Indexed Annuities are sold with Upfront Bonuses. It seems like if you give the carrier the premium amount required, they will simply add money to the contract, but let’s just get something clear, Gary: If I’m not mistaken, there’s no philanthropist at annuity companies figuring out how to give money away, correct?

Gary: I don’t think so.

Stan: So they’re not giving money away for free. Nobody is getting up in the morning thinking, “You know what? I want to give money away for free, using bonuses.” There’s a catch. There’s 100 pennies in the dollar. Bonuses aren’t bad, and they aren’t just free money. They’re just part of the calculation that determines contractually guaranteed payments.

Gary: Right.

Stan: There is another thing that I see people misunderstanding out there, too, so let’s go back a little bit to talk about Income Riders. An Income Rider is an attachment to a policy that you do not have to add. You can add it to provide a lifetime income guarantee.

I’ll try to make this visual. If you draw a line down the middle of a page, one side shows the index option, and the other side is the Income Rider calculation. The Income Rider side is always going to be designed to calculate higher than just the index option alone, and your income levels are going to come from that calculation. Sometimes the problem we see, is it shows a percentage of growth on that income rider side, and people think they’re getting Jimmy Carter CD rates. They actually think, “I’m getting 8%.” No! Your Income Rider is growing by 8%, which is good, but it’s not yield. You can’t peel off the interest, get to the lump sum, or transfer that calculated amount anywhere. You can use that Income Rider amount only for guaranteed income payments.

This is a great way to control your asset, but always know to the penny, what that income stream is going to be. Control the money, and get a little bit better than CD returns on that accumulation value side. If Armageddon arrives, know what that guaranteed income stream is going to be

Let’s look at a rider quote using our imaginary friends from Texas, Robert and Mary, as an example. Let’s suppose that Robert attached an Income Rider to an Indexed Annuity.

Gary: Okay, Robert, as in our other video examples, is 65 years old. He puts $100,000 into an Indexed Annuity contract on a Single Life basis. Let’s say he also added on an Income Rider with deferred income kicking in at age 70.He purchases that attached Income Rider, and there’s additional extra costs to purchase that option. He wants to turn on guaranteed income at the very minimum, that’s what that contractual guarantee is for. Probably that Income Rider (on the $100K policy) would come out to about $670 per month, one of the better rates out there today.

Stan: Okay, so that’s $670, per month, for the rest of his life, regardless of how long he lives?

Gary: Right.

Stan: When he dies, whatever’s left in that accumulation account goes in full to beneficiaries?

Gary: That’s correct.

Stan: So, Income Riders attached to Indexed Annuities are pretty much a guaranteed Cash Refund, right?

Gary: Sure.

Stan: We have talked about Cash Refunds on Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts, so these Income Riders attached to Fixed Indexed Annuities provide for Cash Refunds.

Gary: That’s right. The obligation of the insurance company as you’re taking that money out for income, is that if the account value goes to zero, the insurance company then is on the hook to continue that monthly payout.

Stan: So you get your money back with interest, just like all income coming from annuities?

Gary: Right.

Stan: As with the other income annuities, this product transferred the risk of outliving your money to the annuity carrier, right?

Gary: Right.

Stan: Any other scenarios you want to run, Gary?

Gary: Say Robert wants to go buy a Deferred Income Annuity, instead. Let’s show a comparison here.

Stan: Let’s compare. Okay, say Robert comes to me and he says, “I need income later.” So, we run an Income Rider attached to a Fixed Index Annuity, and we run a Deferred Income Annuity, because they both guarantee income later.

Gary: Right.

Stan: They both have benefits and limitations, and they both get to that finish line in a different contractual way, so we’ve got to compare them. There are also some taxes on that income steam to consider, so let’s look at it.

Gary: Using that same $100,000 premium amount, if we run a Deferred Income Annuity quote for Robert at 65, and defer that first payment for five years, one of the better rates available is going to be about $680 a month.

Stan: Okay.

Gary: Compare that to the FIA quote we just ran where payments came in at 670, and you’re talking about approximately the same payment level. The decision then is based also on access control. Start looking at how they compare regarding liquidity.

Stan: Can these Fixed Index Annuities be purchased using both IRA and non-IRA money?

Gary: Sure, absolutely.

Stan: So, Non-IRA money in a Deferred Income Annuity has some tax preferential income, because part of that income, the principal, is not taxable. Only the interest is taxable, so you might want to consider that, but I think what you said is correct: It really comes down to controlling the asset. You have control of your asset within an Indexed Annuity with that Income Rider attached.

Gary: Right.

Stan: Gary, let’s wrap up Indexed Annuities, knowing that Cannex can provide the best guarantees, based on individual situations.

They’re a little bit mis-sold out there. There’s a lot of hype, because it’s a neat story. They were first introduced in 1995, and designed to have a little bit better than CD returns. They are an enhanced CD, for lack of a better term. You still control your money If you are going to use an Indexed Annuity for income in the future, you can do it a couple of ways. You can say,

 

 

—“Hey, I’m going to hold this Indexed Annuity, and then shop for an Immediate Annuity on the back-end.” The good news is you’re not going to lose money, because it’s a Fixed Annuity, right?

 

 

—You can also attach an Income Rider, which is an attached benefit for income, if you need income in the future.

In your opinion, what do people need to take away about Indexed Annuities, so that they can make a qualified decision? Knowing that Cannex can provide the best guarantees based on their particular situation.

Gary: Like you said:

It’s going to give you a little bit better return than a typical CD, or MYGA-type of a product return. The additional Income Rider option available with the contract, gives you a pretty decent return for that guaranteed income, based upon the structure of this contract. When you’re looking for more control over your asset, compared to say a Deferred Income Annuity, then this might be the right product for you. Stan: Well said. I’m Stan, the Annuity Man.

Gary: I’m Gary, from Cannex, and we’ll catch you next time.