Annuity Returns Potential vs. Contractual
Today, we're talking about annuity returns potential versus contractual unicorns chasing the butterflies or the contractual realities. Which one's better? I can tell you right now one's better. Annuities are contracts. So we're going to talk about how agents pitch potential and what you need to be aware of. And the reason you might want to veer toward contractual is that annuities are contracts.
So let's talk about potential hypothetical, theoretical back-tested, hopeful agent return scenarios. Gosh, I hope they come true because these proposal numbers look so good. Anybody can juice numbers, okay? But most annuities that you can buy are contractual. There are only two primary types you can buy that are not contractual, but the return part is hypothetical non-guaranteed. Let's talk about the first one, which I do not sell because I only sell contracts. I will do, not might do. I sell things that don't lose value? That doesn't mean this product is terrible; it just means that that's not what I do. They're variable annuities, and variable annuities are an essence. There are mutual funds. The annuity industry calls them separate accounts, but they’re mutual funds for you, the public, on my YouTube channel, and in life. So mutual funds are inside of a policy, So of course, you get to choose those mutual funds, but mutual funds can go up and down, right?
I mean, they can. So, and in volatile markets, they certainly do. Can you attach guarantees to variable annuities with writers or attached benefits? Indeed, you can do that, but a variable annuity is going to get these market returns. Now, the good news about variable annuities is there are some no-load variable annuities and what that means in English is that there are no fees and no agents involved. Yes, there are no agents involved. And there's 100% liquidity on day one, which is good because most variable annuities have a surrender charge period. And the average annual fee on a variable annuity is around 2 to 3% for the life of the policy. So that's a lot. With that being said, variable annuities do have their place. They were put on the planet in the 1950s for tax-deferred growth, which means that you can move those mutual funds around and not incur any taxes on the gains, et cetera.
But there are limitations to variable annuities just because you’re limited on a separate account. So, that’s the first potential return product. Not saying it’s terrible. You should look at all products for your specific situation, but I don’t sell potential. The other potential one is called fixed indexed annuities. Now a fixed index annuity is not a security. A variable annuity is security. You have to have a series seven license. It’s looked upon the same as a stock or an ETF or mutual fund, whatever. Fixed index annuities are life insurance products. That is not security. You have to have a life insurance license at the state level to sell it. It is regulated at the state level, not the national level, but it’s promoted as a market return product. It is not.
But there are limitations to variable annuities just because you’re limited on a separate account.
Fixed Index Annuities were put on the planet in 1995 to compete with CD returns. All that means is maybe we’ll get a little bit better than CD returns, but that’s what fixed annuities do. Now, the internal component, how the gears work on the return potential part, is a call option on an index. Typically, it’s the S and P 500, but that does not include dividends. Why is that important? Because over 50% of the returns of the S and P historically have been from the dividends. So what you’re doing with an indexed annuity is an essence. You’re taking a contract anniversary date this year to a contract anniversary date. And whatever that indices index grows by, you get a portion of that. They, the annuity company, limit the upside, but that’s a non-guaranteed return.
The good news is if you get an upside a little bit and you get to share in that potential, and it’s CD-type return, it locks in permanently. The other good news is if the market goes in the tank, you don’t lose any money. That’s why it’s a fixed annuity, but you’re not going to get consistent market returns. I always tell people the way it’s promoted; it’s like the best thing since sliced bread. If that were true, the fed would just buy index annuities. I mean, it’s a good product, but it’s a CD product. It’s also excellent to attach income riders, attached benefits for future income. And he’s the same thing goes for the variable annuity. You can attach those benefits.
So I’m not putting down potential products, but what I am encouraged to do, imploring you to d, pounding the table for you to do is don’t fall for the hype. Don’t decide on the hypothetical, theoretical back-tested, projected hopeful agent return scenarios.
Now, let's talk about the contractual side. Most annuity types are entirely contracted where there are no moving parts. Therefore, you're going to get what the contract says. There, there's no potential involved. And that includes single premium immediate annuities, which are pension products that you start the income between 30 days from the policy being issued to a year, and qualified longevity annuity contracts, which are deferred income annuities that you can use inside of your IRA. Deferred income annuities are, in essence, single premium, immediate annuities that you can start income from 13 months out up to 40 months out. Those are all contractually guaranteed products. The other contractually guaranteed product is a multi-year guarantee annuity, the annuity industry version of a CD. Everyone has a certificate of deposit; probably they bought one, their moms bought one, or their dads bought one.
In essence, it is a guaranteed annual interest rate for a specific period that you choose; all four of those are contractual. I love those products because what you see is what you get. You can't juice it’s. The apologetic is the contract. When you’re the proposal with the show, it's not a proposal. It's a quote. There are no moving parts. There are no quote market attachments to them. They are the straight transfer of risk contract.
In conclusion, are potential annuities, indexed annuities, or variable annuities bad? No, of course not. They're not. And if used correctly, you can attach contractual guarantees to them to circumvent that potential. But in my world, I like people to decide on contractual guarantees. Annuities are the only product that can provide a lifetime income stream guarantee. And most of the time, people use annuities for two things, lifetime income, which is a monopoly that only annuities can provide, and principal protection. Both of them are contractual. Both of them will do what they say they do.
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.