Annuity Companies Aren't Smarter Than Banks: Shootin' It Straight With Stan
Today's topic is Annuity Companies Aren't Smarter Than Banks. They're not, just more regulated. Let me tell you a little story. A long time ago, a few years ago, there was this pandemic. Some say it came from a wet market where turtles were making out with bats, who were loving on ducks, who were then kissing the snakes. I didn't know what was going on. And then some say it went from a lab in China over here. Regardless, it was a mess. Can we say, "Mm-hmm? It was a mess." It was a mess for the world. It's a mess for this country. Our politicians, on both sides, decided to print money to keep people home, to keep the grease on the skids going, as they say, and that caused inflation. So inflation is taking off, and our FED, Chairman Powell, and his friends are at the big marble table where they have donuts and bagels we pay for. They raised interest rates drastically. What happened with that? Well, as you know, or if you don't, then I'm getting ready to tell you bond prices are like a seesaw. Interest rates go up, bond prices go down, and vice versa.
Some of those banks had to fire sale the bonds, which leaked out to the internet. We're in a global 24/7 nature right here with the social media, and there was a panic, and all hell braked loose. It got ugly and scary, and there was a run on the banks. Now, of course, the banks in question, I need to learn more about the details, but from what I've read from people that I trust in the news, it should have been managed better. Hindsight is 20/20, like back-tested returns. Don't buy back-tested return numbers. But the bottom line is there was a run, and there were issues, and there are still issues. One of my former employers, UBS, bought Credit Suisse. No, they didn't. It was a shotgun wedding. They were forced to buy Credit Suisse. I mean, all kinds of things are happening right now that when the government comes out, and they say, "All is well, all is well, all is well." When I hear that, I envision the Animal House movie where the guy's at the parade, and he is saying, "All is well," and people are just trampling him. When the government says, "All is well." I'm like, "Really?" When it gets to the topic that annuities aren't smarter than banks, they're more regulated. You'll say, "Wait a minute, explain." I'm going to do it in English.
The good news is I did it at a very high level with my podcast Fun With Annuities. If you go to that, you can pull it up on all major podcast platforms and listen/watch all of the Fun With Annuities episodes. On this specific episode, I had John Lenz on, I call him the annuity architect, but it's 40 years of absolute smartness in the annuity industry. We broke it down. Banks versus annuity companies. I'm not saying one's better than the other; I'm just saying that annuity companies are more regulated. Also, they put things in place so there can't be a run on the annuity company. Let's take the example of MYGAs, Indexed Annuities, Variable Annuities, or Deferred Annuities. You hold them for a term, so there's a surrender charge. If there's a run on them, you'll have to pay the surrender charge to get out of it. Many of these Multi-Year Guarantee Annuities also have Market Value Adjustments. If you buy a MYGA and interest rates go up after you buy it, the sales charges will increase if you try to liquidate it. The bottom line is that the annuity industry has put in place features to protect you, the consumer, which is their ultimate goal, period, and to protect the industry as well. See, as you know, there's a window with banks, and you'd say, "I want my money. I want my money, I want my money." I can just hear my mom. "I want my money. I want my money right now." With annuity companies, life insurance companies issue annuities, and there's no window.
Let's get back to the bonds. Remember I talked about the banks having to sell the bonds in some cases for whatever those ratios are with banks that they have to hit from a solvency issue, etc.? Annuity companies are buying the same investment-grade bonds and don't have to sell them. They're going to hold them to term, and they're going to hold the coupon.
It's really that simple. The other thing, too, is lifetime income products. Let's go over those real quick. Single Premium Immediate Annuities, SPIAs, Deferred Income Annuities, DIAs, which is the same thing as a SPIA; you just defer it. Qualified Longevity Annuity Contracts, QLACs, which is a DIA that you can use in an IRA, and then Income Riders attached to an Index Annuity, Variable Annuity, etc. Those are the four ways to get lifetime income contractually.
Let's talk about SPIAs, DIAs, and QLACs for a second. Those are irrevocable. You're ripping the knob off a water faucet when you buy them. In this case, it's an income faucet. Income's going to flow. We can structure it however you want to structure it. There are 40 different ways at least, but most people structure it so you get a lifetime income as long as you are breathing. When you die, 100% of any unused money goes to the beneficiaries because the income stream amount is a combination of return of principal plus interest, but there's no run on that. There's no run on lifetime income. In other words, if you say, "I want my lifetime income back. I want my Immediate Annuity money back." Nope! Same thing with DIAs and QLACs, nope! So the annuity industry, from a product design standpoint, and what they offer from a limited product standpoint, prevents runs, people panicking and running and getting their money out. It prevents that. Doesn't that make them smarter than banks? It just is what it is. They're also not making car loans and all that stuff. They're not doing any of that. There are stringent rules for annuity companies to put 100% or more of your money in investment-grade bonds from day one when you buy a Fixed Annuity. We can go down the rabbit hole. "Well, then China really runs investment grade bonds, and they're brothers in Russia and also UFOs." We could talk about that all day long if you want to, but those are the rules. Investment grade bonds.
Someone asked me the other day, "Well, what happens, Stan The Annuity Man, if these AA plus carriers, these AAA carriers go out of business?" I'll tell you what happens. Me and you are in the grocery store fighting for bread, and I'm going to win because I'm going to kick you in the knee first and then punch you in the throat and then take it nicely, of course, not really hurt you, and then take the bread from you. In other words, there's no power. It's anarchy. Don't even go down the rabbit hole, period. I'll let you split it up under the state guarantee fund rules if you want to, and wear belt and suspenders as my Uncle Chester does at the family reunion. You know what I'm talking about over there. I mean, he's seen it. Here's the other thing about banks and annuity companies, annuity companies and their actuaries, they're always running stress tests and what-if scenarios and worst-case scenarios all the time. They're not waiting for things to happen for them to do that. Now, the bank situation that just happened, did that send the actuarial analytical group at life insurance companies into a tizzy? Yeah, they all ran out of the closet, went, "Ah," and then ran back in and did their mathematical calculations. I love those guys. They took math classes in which I would've walked in the first day of college and just seen the first syllabus, and I'd say, "Okay, it's time for me to leave now. Come on. Come on, Chester, bring your cowboy hat. We're going out of here. We're going to go take basket weaving." But seriously, once again, annuity companies show consumers that you might hate all annuities. Like the guy on TV said, "You're an idiot if you do because you already own one; it's called social security." You might say, "All annuities are expensive." That's not too smart as well. You might want to stop talking because you're making a fool out of yourself. But what the annuity companies are showing right here, the rules that are in place are strong, and the National Association of Insurance Commissioners, NAIC, each state has a commissioner that oversees Annuities, Fixed Annuities, etc. Those cats and catettes are doing a great job because their job is to protect the consumer. Their job is to ensure that these carriers they approve for their state are solvent, following the rules, etc. What happens if somebody doesn't follow the rules and lies on the financial paperwork? They will absorb them. That's what the state guarantee fund is all about. Or a larger company will come in and buy that smaller company, and so the golden goose of confidence is in place.
Banks are not smarter than annuity companies. Annuity companies are just handcuffed not to do stupid things because if they were given the reins to do stupid things, they would do stupid things. They just don't. And that's a good thing, and I applaud the National Association of Insurance Commissioners, who are probably wincing at this. Like, "Oh, Stan, he complimented us. Oh, we didn't need that." They're doing a good job. They're doing a good job overseeing and making sure, and I'm going to tell you this right now. This banking thing that just happened is gold for the annuity industry, not from the standpoint of money flowing in, but what it's going to do is ramp up the NAIC to oversee more stringently and to make sure that the carriers are just and everything's in order. Not that it wasn't before, but I'm telling you, whatever fine tooth comb they had, they got a bigger comb. And that's a good thing because there are 11,000 baby boomers hitting age 65 every day looking for guarantees, looking for the promise and the guarantee contractually that they're going to get income for life or they're going to get the principal protected. That's a good thing.
I love this country, and I'm going to tell you why. Situations like this that are happening with the banking industry make us stronger. We don't just sit back and go, "Man, that stunk, that hurt. That's going to leave a mark." It's like Chris Farley in the movie when he got hit by the two-by-four. He goes, "It doesn't hurt here or here. It hurts right here." The scars from something like this will help the consumer. The scars from lessons learned will make us better. It always does. That's why we are who we are, the United States of America, and I am proud to be America's annuity agent. My name is Stan The Annuity man. See you next time.
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