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Annuity Illustration or Annuity Illusion?: Shootin' It Straight With Stan

Stan Haithcock
June 21, 2023
Annuity Illustration or Annuity Illusion?: Shootin' It Straight With Stan

Today's topic is a barn burner, as they would say in the South. I don't know where that comes from. I'm assuming they were burning barns for whatever reason, but this is a barn burner, and the topic is Annuity Illustration or Annuity Illusion. Now, right at this point, at the time of this blog, the annuity industry, the life insurance industry, and life insurance companies issue annuities. As you know, after watching all of my videos and reading my blogs, they have products that have potential returns, like Index Universal Life, which I don't sell, or Index Annuities, which I do sell. But I properly sell them as efficient delivery systems for Income Rider guarantees.

The Problem

They are CD products if someone wants to look at them for accumulation value. Let me repeat that. They are CD products. They are not market products. They were not put on the planet in 1995 when they were first introduced for market returns. "Market upside with no downside. Market participation with principal protection, sir." That's the crap that's being pitched out there. But in addition to that crap sales pitch, which I just did in a very good southern, kind of low IQ voice, they also do this: "Mr. Jones, Mrs. Jones, please look at this proposal. Please look at these numbers that if you'd had owned it 10 years ago, if you'd had owned it whatever, the eight years ago, these are the returns that you would've made." You've all seen that. Nod your head if you haven't, and you're going to be pitched that by somebody, and they'll say, "Look at this. If you had owned it like 10 years ago, you would have made 7%, 10%, 11%, 13%, 14%, and 6% returns with principal protection. And we're going to give you an upfront bonus, too." That is getting ready to be a big issue in this industry. Now, I have been pounding the table on this misleading pie in the sky, unicorn chasing the butterflies, too good to be true nonsense targeted at people in this country that are not sophisticated to understand that that doesn't exist or are so sophisticated that they think they're so smart that they've gotten something their neighbor doesn't know about. Either way, it's a problem. And now the lawyers, and I love lawyers; some of my best friends are lawyers. Dave, one of my best friends in the world, is a lawyer. So, I don't have anything against lawyers, but lawyers are capitalists, smell blood, and are like sharks in the water. And lawyers like suing big companies and big industries with big pockets. Can I get an annuity Amen and a hallelujah with that?

Current State of the Industry

So, what's been happening in the industry, and kudos to the annuity industry, they do not allow a lot of information and details to come out about this. And I'm sure they will say, I really wish Stan would shut up and stop talking about this. But I consider myself the annuity consumer advocate, the annuity whisperer, the top agent in the country, and licensed in all 50 states. But with that role, it's my duty to tell you what's going on. Right now, many states don't even allow the backtested numbers. "Well, sir, if you'd had owned it 10 years ago, look what you would've made." And there are many indices, indexes plural is what that is, that are made up out of thin air. Three months ago, you've never heard of it, and then they're going to show you, they, the agent advisor, what you would've made 10 years ago if you had owned it, but it's only been around three months. Please explain to me how that's rational. It's not rational. This is an easy fix. The annuity industry could do this easily. They could fix it. If my name were Stanaslov, The Annuity Czar, I would fix it. I would not allow it. But I think what's getting ready to come down the pike because the lawyers are sniffing blood, money blood, they have found out there are a lot of Americans, hardworking Americans, that put a lot of their retirement money into a product that they believed was going to get them market upside with no downside. They believed they would get market participation with principal protection. They believed they would get 9%, 10%, 11%, 13% return. They believed the sales pitch, and they believed the hypotheticals. And oh, by the way, what the lawyers have found out, those hypotheticals were in writing and were on the company issuing annuity company paper. Now, yes, to the annuity company's defense, and I will defend them because when they put out products, they're not trying to bamboozle anyone. The problem is that once the agent army gets ahold of it, the annuity company, the carrier, can't regulate what's being said or shown. Now, the way to combat that is don't show these hypothetical, theoretical numbers. And after these legal things coming down the pike, I'm not sure if they'll be around too much longer. Thank goodness. I've only been pounding the table on this for over a decade of please stop showing this. Please stop convincing people to buy potential. My saying is you own an annuity for what it will do, not what it might do, and the might do are these hypothetical, theoretical, projected, backtested, unicorns chasing the darn butterfly proposals that sound too good to be true because they are.

Client Example

So, is it an annuity illustration or an annuity illusion? Most of the time, it's an illusion. There's a very smart lady in the annuity business who I have tons of respect for, and she focuses on the Index Annuity space. She said a long time ago that she's never seen one of those proposals come true. She's never seen that hypothetical or theoretical illustration come true. When I read that from her, that was it for me because she is the source. And I was like, okay, she said it, I'm done. I'm done because all of this stuff makes no sense. I got a call the other day, and a gentleman's like, "Well, Stan, I'm looking at the MYGAs because those are guaranteed interest rates. And I'm looking at this Index Annuity that was presented to me, but they tell me I'm getting 7%, 9%, 10%." I'm like, "What's your goal?" "Well, I'd like to get 9% to 10%." I'm like, "I don't want to call you an idiot, but you're delusional. It's not going to happen." And all of the agents and advisors out there, please don't send me that thing that your mom, you, or your brother owns. By the way, if any agent goes, "You know, you really should buy this because look, my mom owns this. My Uncle Bob owns this." Stop. If they have to sell that to their mom and their Uncle Bob, they need to get out of the business, period. For all the agents and advisors out there, don't do business with family. I don't do business with family. I don't want to talk to family at the family reunion about annuities or money. I want to talk about the deviled eggs and the potato salad. Mayonnaise based, of course, not mustard based, if you know what I mean.

But the point is this; these annuity illustrations are really annuity illusions in most cases. Whether it's Index Universal Life, which is pitched out there like, "Well, you can get this, and you get a tax-free income." No, you can't because it's a loan on the policy, and all loans are tax-free. Why? Good question. Because they're loans, and there's a fee for the loan. "Well, I'm getting tax-free income," no, you're not. You're getting a loan, and congratulations on the loan, and maybe the loan works out, but I'm telling you it's not tax-free income.

Cleaning up the Industry

I believe that the annuity industry could really clean this up and do themselves a favor from the PR standpoint. Again, if my name was Stanaslov and I was annuities Czar, I would clean this up. I would say we're not showing backtested numbers. We're not going to show all of that. Listen, the world would be perfect if we could all go back and make decisions back in the day knowing the answers. It's like Back to the Future part II when the bully guy had the book of all the scores and was making money as a gambler. Watch it; I love Back to the Future. But the point is if the annuity industry with Index Universal Life, Indexed Annuities and Buffer Annuities, or whatever, we cannot show backtested numbers, but here are the cap spreads and participation rates. And for all of you out there, those are the levers that limit the upside that the annuity company controls and can change and gives you multiple choices. And at the time of this blog, there are over 700 Indexed Annuity, Index Option choices.

Spoiler alert, they're all pretty much designed to give you the same type of return. And when Index Annuities were put on the planet in 1995, they were to compete with CDs. CD returns, not market returns. And if you attach an Income Rider to an Indexed Annuity, then that fee for the Income Rider will be deducted from the accumulation value. But if the annuity industry would disallow the backtested numbers and just show, okay, here are the cap spreads and participation rates for this first year. Here's the carrier's renewal rate history because they can change the rules, but here's how they've performed, and if they pulled the contractual rug out from under people, show that. Then have the people go, well, there's a 7% cap this year, and historically they have been fair to the client, then make your decision there. But don't make your decision on the illustration because it's an illusion.

Stan's Way

I really wish the annuity industry would beat the lawyers to the punch on this. It would be the best PR ever if they came out as an industry, the National Association of Insurance Commissioners, I love those people; they need to be proactive. They need to hold the press conference and say, we have looked at these backtested numbers. We have looked at the hypotheticals, theoreticals, and unicorns chasing the butterfly stuff out there, and no more is that allowed. You cannot show that as an agent, and if you do, you will lose your license immediately and be fined $10,000. That would solve it, period. And then you would base your decision on what's in place contractually moving forward and the way that the annuity company changes those caps and spreads, their historical nature on that.

That's not backtested; that's saying, have they been fair to the client? Have they been fair to the policyholder? Let's say you have a one-year call option on the Index Annuity, and the surrender charge is a 10-year surrender charge. Essentially, you are buying a one-year guarantee with a 10-year surrender charge. Because in years two through 10, the annuity company, at their discretion, can change the rules on the caps, spreads, and participation rates. Yes, a handful don't at this point in time, but you still need to do your homework on that. Do not believe the sales pitch. We can solve this in a couple of ways in the annuity industry, but it will get solved. This, in the future, the backtested numbers, my prediction as Stan The Annuity Man, America's annuity agent, licensed in all 50 states, the brutal, factual truth-teller, the walking middle finger of annuity truth out here. I know I love that. Someone called me that when they introduced me once, and I've hung onto that.

Here's the point; eventually, it's going to go away. Either the lawyers will force that through a class action lawsuit, or the annuity industry will be proactive and say no more. We're not doing that. From a PR standpoint, we're not going to do that. We're not going to mislead in any way the public. Now, the carriers aren't trying to mislead, but how it's being presented is misleading. I'm on the carrier's side here. The agents are the ones that are taking the message and just ramping it up. "This Ford Pinto will go 140 miles an hour, sir, I'm just telling you. 0 to 60 in two seconds." I mean, it's that kind of sales pitch.

But it's going to get solved. It's either going to get solved by the lawyers, or it's going to get solved by the industry. Here's the twist to the whole thing, which is insanity when I read this. I'm not going to mention any names, and you can dig if you want to, but I've got no beef against anybody. I'm Stan The Annuity Man, a lovable, huggable figure up here. Warm fuzzball, right? Didn't Rush say that like harmless fuzzball Rush Limbaugh one time? I'm not a Rush Limbaugh fan, but he was talented. We all have to agree with that. I was a fan of his talent; how about that? I'm just not political. I don't care either way. I'm just a capitalist who tries to play guitar.

The Agent Twist

Here's the twist. Some agents are now suing the carriers that gave them the hypothetical and theoretical proposals to show to their clients. They're saying, "Well, they should have never provided that hypothetical for me to show voluntarily." Okay, I'm going to sue Krispy Kreme donuts for the gut. That's like me saying Krispy Kreme put that in front of me, and that's just not fair. And they shouldn't do that because they know I'm from the South and suffer from the sugars. Sugars, you know, that's pre-diabetes for all you people not from the South. And I'm going to sue Krispy Kreme donuts because of that. That's the stupidity of what I'm reading. Agents are suing the carriers because they were given this, and then they presented it, and now they're suing the carriers because they gave it to them?

That's a weird one. That's the best legal pivot I've ever seen in my life. But here's the bottom line and the takeaway, refrain from putting any faith, credence, or credibility in any backtested number shown to you. Any number. "Mr. Jones, if you'd owned it 10 years ago, you would've got this. Why wouldn't you own it for the next 10 years because of those past 10 years?" If that's you, you are dumb as a box of hair, you're stupid, and you get what you deserve. And if you've bought it under that premise, you made a mistake. And if you can get out, get out, period. I know that's harsh, but all those backtested numbers don't come true, ever.

You know, I'm working on my breathing to get my blood pressure down, but this topic, annuity illustration or annuity illusion, yeah, I had to wear the red Stan the Annuity Man cap for a reason, to match my face, which is beet red. Because this one drives me crazy because consumers are making big-time mistakes based on these misleading representations. Be careful out there. Watch the news; this is going to get interesting. Stay safe, stay happy, stay healthy, stay positive, and stay tuned in to Shootin' It Straight With Stan blog. I'm Stan The Annuity Man. I'll see you next week.

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