Annuities Explained: Top Questions Answered
Covering Your Annuity Questions
Today's topic is about you, about the questions people have asked through comments on my YouTube channel. If you have put any questions on my YouTube videos, guess what? I answer them. Yes, I actually read them. I have no life. I've been married for 33 years. I have two grown daughters. I have no life. This is what I do. I'm Stan, The Annuity Man. We will discuss these questions today and answer them with the cold hard truth. We're not messing around. This isn't a hobby. This is what I do. I'm America's annuity agent.
Here we go, the first question. The question is from E Equals MC. Love that. "How can an annuity company give a better rate than a CD?" This comment was funny because they said, "You kind of covered it in a video, and you brought it up, and then you didn't answer the question." That occasionally happens because I'm rolling, riffing, and bringing it. I'm excited, and I'm passionate about the annuity space. But sometimes, like my CEO will say, "You know, that was a really good video, but you asked the question to yourself, and then you didn't answer it." So, I'm going to answer it now.
CD rates right now at the time of this blog, check the date, they're a little low. Low compared to, say, Jimmy Carter's rates. And Jimmy Carter, bless his heart, is building homes in Georgia somewhere. He's like 98. But MYGAs, Multi-Year Guarantee Annuities, or the Fixed Rate Annuity is what you want to call it. It's the annuity industry version of a CD. It has a specific guaranteed interest rate for a specific period of time that you choose. No moving parts and no annual fees. You don't have to annuitize it. You're buying an interest rate. But at the current time of this blog, Multi-Year Guarantee Annuities are much better from a yield standpoint than CDs. Will that change in the future? Maybe. But here's why Multi- Year Guarantee Annuities, which life insurance companies' issue, can offer a better yield than a CD. Because I get the call from Chester all the time, like, "Let me tell you something, I don't understand this because you know, I buy these CDs. Me and Martha love CDs. Go into the bank, they give us their toaster and stuff, and buy the CDs, and now they're not yielding crap." And I'm like, "I understand that." And he's like, "Why are these MYGAs so much higher? It's like you're forcing me to buy MYGAs."
I'm not forcing you to do anything, Chester, but MYGAs, are issued by life insurance companies. Life insurance companies have a dynamic pricing model, meaning that life insurance companies sell life insurance. They sell lifetime income products. They have bonds in their portfolio from Jimmy Carter, Barack Obama, Bill Clinton, and Bush and Trump, and all these people yield pretty good amounts. And then, they look at current interest rates. There are like four or five legs to that pricing stool. And from that, they can offer a higher rate because they're not trying to make a home run on the money. They're trying to make 50 basis points, half of 1%. So, if they're offering 3% or trying to make three and a half, to give you and guarantee the 3%, they're making that extra. I mean, it's really that simple.
Now you say, "Well, wait a minute. Life insurance companies are doing life insurance and lifetime income. How does that play into the pricing?" Well, as I always say, annuity companies have big buildings for a reason because they know when you're going to die. Life insurance companies, right? Nod your head. Those pricing mechanisms, with life insurance and lifetime income, are profitable. They know when we're going to die. They really do. It's a transfer of risk. And so, the MYGAs are beating the CDs right now because CDs are primarily pricing that yield on the current 10-year treasury note. There are some other factors, but that's the driving factor.
All right, next question from a valued viewer of the Stan The Annuity Man YouTube channel. Once again, put in your questions. You could be a superstar, and you could be on the Stan The Annuity Man YouTube channel. I could be reading your question. Okay, this next question is from a person named Flawless Victory, which I really like. That's actually a really good name for a band if you're doing band names like, "Ladies and gentlemen, like to introduce Flawless Victory." Never mind. So, Flawless Victory's question is, "What do you do if CPI, inflation Consumer Price Index, isn't accurate and inflation is 15% for the next four years?" asks Flawless Victory.
Inflation is that gorilla in the room. It's what our, at the time of this blog, the politicians are like, "Do we really have inflation? I don't know if we have inflation. Is it really...?" Yes, it's inflation. Go to the grocery store, go to the gas station. It's inflation. But Flawless Victory here is asking, he or she, what do we do? How do annuities address inflation? Well, you're going to hear a lot of really good sales pitches out there that "I got the annuity that can solve for inflation, Mr. Jones." They don't. Okay? Annuity companies have big buildings for a reason. They don't give anything away. Nod your head. They don't.
Cost of Living Adjustment (COLA)
Suppose you want to attach a COLA, Cost of Living Adjustment increase, to an income stream, a lifetime income stream. In that case, the annuity company lowers the initial payment compared to the same annuity without that increase. In the past, back in the day, when I was a little bit skinnier and had less gray up top on the roof here, annuities did offer what's called CPIU, a Consumer Price Index for Urban consumers. They provided that as an increase to an income stream. That no longer exists at the time of this blog, but it really doesn't matter anyway. What you have to put in the back of your head, put it back there, and lock the door. Regardless of the sales pitch nonsense, annuities of any type do not solve inflation. Yes, they can increase the payments, but typically, if you run the number compared to an annuity that does not have that increase, it could be a six-to-nine-year break-even point from the time to make up for that increase. Now, the question is, then, and this is the question in your head, and you're yelling at the screen, "Great, Stan. What's the solution to inflation? You're talking about all this stuff. What?" Okay, stop. Stop yelling. I'm going to tell you.
With annuities and those for lifetime income, if there is inflation, let's say you have an income floor and social security. Yes, you have an annuity. Social security. Social Security, a pension if you're so fortunate, dividend stocks, whatever. That money that's coming in every single month that's hitting your bank account, and you're saying, "Wait a minute. We need like 500 additional dollars. It was fine three years ago, but now we need 500 additional dollars, Stan The Annuity Man. What do we do?" Here's what you do. We do a reverse-engineered quote.
What does that mean, Stan? Were you an engineering major? No, no, no. I played basketball in college. I was not an engineering major. I engineered in free throw shooting. Okay? I could shoot free throws. Reverse engineering means that you need $500 to start now. Then you can run the quote to find out how much money is needed to solve for that $500. I always tell people, "Use as little money as humanly possible to solve for the solution contractually that you need with annuities." I know the annuity guys are like, "Shut up, Stan. Stan, you again undermine the annuity industry from getting all the money." No, I'm telling the truth. Use as little money as humanly possible. If you're saying, "How do we address inflation?" That's how to address it. When you need more money added to that income floor, we do a reverse-engineered quote to use as little money as humanly possible to solve for that contractual guarantee. Next question you're asking. Okay, that's great, Stan The Annuity Man. What happens when inflation increases again? Spoiler alert, we do a reverse engineer quote again. That's the best way to address inflation.
Here's the last question for this video. Man, this is fun, right? I mean, these people are superstars. The next superstar to enter the Stan The Annuity Man studio is a person named K McNitt. Still trying to figure out what the letter K stands for, but the question is, how does the state backing work for MYGAs, Multi-Year Guarantee Annuities, and why do you not consider that? It's a good question. Each state has a state guarantee fund that backs annuity purchases up to a specific amount. In my opinion, Stan The Annuity Man, America's annuity agent, I think your sole decision-making on the purchase of the MYGA should be on the Claims-Paying Ability of the carrier. Now, that state guarantee fund could serve as a nice warm safety blanket for you, and you can go to that site at www.NOLHGA.com and check out your state guarantee fund.
A gentleman recently called me, and he was so concerned about the state guarantee fund. I kept telling him, "It's not FDIC. It's not FDIC. It's not FDIC. It's not FDIC." FDIC covers CDs, right? That's the coverage for CDs. It's not that. I mean, that's the best coverage. I really believe, regardless of the annuity type, and MYGAs fall into that, you're looking at the Claims-Paying Ability of the carrier. Now, if you go to our live MYGA rates, we have a live feed of the best- fixed rates, the MYGA rates, for your specific state. You go there, and you punch in your state. It's a dropdown, pick your state, then pick the duration you want to see. Five-years, three-years, seven years, two years, whatever. If that company's showing up on my list, on my MYGA feed at The Annuity Man, then I have looked at them. I have looked at their Claims-Paying Ability. And remember, with Multi-Year Guarantee Annuities, we're not marrying the company for life. We're marrying the company for that specific duration. So, my analysis is can they back up those claims? Can they guarantee that percentage for that specific period of time? And if it's made my list, then I have approved it.
Now you can ask me a question. Do you really like XYZ company? I'll tell you, "I've looked at it, blah, blah, blah." And I am responsible for telling you if you shouldn't put your money there. My rear end, my big rear end, is on the line with that, and I take that seriously. I'm Stan The Annuity Man. I'm not going to sell you something with a crap carrier. I'm just not going to do it. That's not what I do. I put myself in your situation. You're putting money into an annuity company. I take that seriously because you're sending them money on my recommendation. That's the reason that I don't go into the state guarantee fund. If that's where you want to go, and you say, "Stan, I want to split it up underneath the state guarantee fund," I respect that. I respect your decision. It's your money, and you're going to decide on your terms and timeframe.
I encourage you to comment and ask questions on our YouTube videos. Type them in. It could be as long as you want. I don't care. I'm going to read them. Because remember, I have no life. And I'm going to answer them. And maybe you'll be on the next Stan The Annuity Man blog.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.