How Do Annuity Payouts Work? (TAM Classic)

Hi there. Stan The Annuity Man, American's annuity agent licensed in all 50 states. Today's question is a great one: How do annuity payouts work? Hey, Stan, I thought all annuities were the same. Hey, Stan, this guy on television said, "I hate all annuities." Hey, Stan, my broker advisor, Master of the Universe, said, "Never look at annuities."

‌Hating and grouping all annuities is like saying, "I hate all restaurants, I hate all trucks, I hate all socks, I hate all shoes, I hate all shirts." It's stupid. There are so many different types of annuities, but we're going to talk about the ones that create payouts and then tell you some things that agents say that aren't true when it comes to payouts. Of course, I'm going to do that. I'm the walking middle finger of annuity truth. And you know that, and you love that about me because you know you're going to get the brutal facts about this crazy topic called annuities because I'm Stan The Annuity Man. Nod your head. Virtual high five.

‌Annuitization

‌So, how do annuity payouts work? Let's go through the three types, and then I'm going to dig in. You can peel off interests from, say, a Fixed Rate Annuity or MYGA; you can annuitize, and there are three specific lifetime income products that do annuitization. Think of annuitization in how you have the water spigot in the back of the house. If you rip the knob off the water spigot, the water's just coming; you can't shut it off. It's the same thing when you annuitize and create a lifetime income stream. Income's coming, and you can't shut it off. It's over; it's coming. The only way to shut it off is to die. And by the way, that's not a good strategy. Just kidding.

‌Income Riders

‌Another way is what's called Income Riders. Income Riders have been very popular since 2008, when we had that little hiccup in the markets. Income Riders have become very popular. They're not annuitization, meaning you're not ripping the knob off the water faucet and incomes flowing; you can't stop it. Lifetime income is still the guarantee, and it's still contractual, and as long as you're breathing with Income Riders, but it's not annuitization, you still control the asset. A lot of people like that. That doesn't make it better than annuitized products. It's just a different way to get to that lifetime income contractual guarantee.

‌So, there are only three, but let me bring up one that agents tout as income, and it's not. They'll say, "Well, if you buy this annuity, you can take out 10% penalty-free annually from the policy." That's not income. That's taking your own money out. That's like saying, "Well, you put your money in the bank, and you take your money out of the bank. That's income." No, that's taking your money out of the bank. It's the same thing with these sales pitches.

‌Client Example

‌I had a call the other day. He goes, "Well, this guy pitched me an annuity. It's got a 35% upfront bonus, and I get to take 10% out per year." I'm like, "Stop. You're killing me. Number one, the upfront bonus is candy for the stupid. Don't be stupid. Number two, 10% free withdrawal is not, I mean, who cares? Great, you have liquidity, but it's only for liquidity if you need it. It's not a strategy."

‌Interest

‌Let's get back to the three types of annuity payouts. Let's talk about the interest. Let's say you're buying Multi-Year Guarantee Annuities. Yes, you can go to my site and see the best live feed of the best fixed rates for your specific state, but it's like buying a CD. Or if you own a bond, peeling off the coupon of a bond. Let's say you purchased a five-year, Multi-Year Guarantee Annuity, Fixed Rate Annuity, and it's three or three-and-a-half percent, whatever it is at the time of this blog. Hopefully, it's higher if you're reading this down the road. With many carriers, you can just peel off that interest; never touch the principal, and peel off the interest. Sound familiar? Like a CD? Remember that? You could do that with the Jimmy Carter CD. Same thing, okay? You can peel off that interest, and in some people's world, that's a payout.

‌People say, "Well, I never want to touch the principal, but I want to know that the principal's there. I don't want to annuitize it. I don't want to turn off for a lifetime income stream, but I want to peel off the interest as a form of a payout to me and the wife and the spouse or whoever." I'm like, "Perfect. Then buy a Multi-Year Guarantee Annuity and peel off the interest."

‌Annuitization Products

‌The second way for payout is what I was talking about: the annuitization products. Single Premium Immediate Annuities, Deferred Income Annuities, and another type of Deferred Income Annuity called a Qualified Longevity Annuity Contract that can be used inside your traditional IRA. So, if you have someone go, "Never, ever, ever, ever, ever bought an annuity and thought of an IRA. Never, never, never, never, never." They're stupid, and they're not informed. They need to read more and watch more Stan The Annuity Man videos because QLACs were put on the planet for use with your traditional IRA, and the IRS and the Department of the Treasury were the ones that introduced it, not Stan The Annuity Man.

When you hear stuff that sounds really stupid, when people comment about annuities, and they're making this broad-brush view, "I hate all annuities. Never buy an annuity. Annuities are all expensive. Never put an annuity instead of an IRA," those people are dumb, and they need to stop talking. It'd be like me being a color commentator for ballerinas; it makes no sense. But annuitization products come down to when you need the income to start. I always ask two questions. What do you want the money to contractually do? When do you want those contractual guarantees to start? Let's take a couple of examples.

‌Let's say income is the first answer, but the second answer determines what you will use as a product. If you say, "I need income to start immediately or within one year," that's a Single Premium Immediate Annuity. Period. We shop all carriers, use my calculators and see what the contractual guarantees are, and then contact us for customization quotes.

‌If you say, "Well, you know, I might need it like a year and a half from now, two years from now, seven years from now, five years from now," whatever that is, that income later type thought, then that could be a Deferred Income Annuity and a Qualified Longevity Annuity Contract. Just understand the older you are, the higher the payment. Interest rates play a secondary pricing role. But once you turn on that income with SPIAs, DIAs, and QLACs, it's game on, it's income on, and you can't shut it off. Period.

‌Structuring

‌Now, we can structure it so that when you die, 100% of any unused money goes to the beneficiaries. So, all the people out there saying, "Well, I'd never buy an annuitization product because when I die, the insurance company keeps the money," that's only one of about 40 ways to structure it, player. If you don't want that and you say, "I've worked hard for my money. I want the lifetime income stream. I want to transfer the risk to the annuity company, but when I die, when my Learjet hits the mountain, when my Dodge RAM truck hits the tree, I want whatever money's left in that account to go to my beneficiaries," we can do that even though the annuity company's on the hook to pay regardless of how long you're breathing. By the way, there's no ROI until you die because it's a transfer of risk. So, those are the annuitization products from a payout mode.

‌Income Rider Attached

‌The third one is Income Riders. Income Riders are very, very, very popular. Now, it's not a standalone product. It's funny. A guy called the other day, "You know, I've read all your books. I really like the Income Rider Owner's Manual, Stan. I just want to buy that. I don't want to attach it to anything, I just want to buy the Income Rider." I'm like, "You can't do that, player." The Income Rider is attached at the time of application to either an Index Annuity or a Variable Annuity. We don't sell Variable Annuities because you own an annuity for what it will do, not what it might do. I don't do anything that can go down in value. The Income Riders attached to Index Annuities are traditionally and usually higher from a contractually guaranteed standpoint than Variable Annuities.

‌If you're just looking at contractual guarantees, not hypothetical, theoretical, projected, back-tested, unicorns chasing the butterflies returns you hear, never make it. Please never make a decision on, "Well, if you'd owned it 10 years ago, Mr. Jones, you'd done this." That's crap. If you'd done a hundred sit-ups today for the last 10 years, you'd have six-pack abs and didn't do that. So, look at it the same way. But Income Riders are good. It's income later.

‌If you said to me, "Hey, Stan, I want income to start in seven years," we're going to quote DIAs, we're going to quote Income Riders, and if it applies using your IRA, we'll quote QLACs. For income later and income at a future date, we will quote all carriers for those product types for the highest contractual guarantee. Then, we will tell you the limitations and benefits, as well as the good and the bad aspects of each strategy. They're not too good to be true. They have limitations.

‌Now, the other thing you need to keep in mind about Income Riders is once you have an Income Rider attached to a policy, it's tough to transfer it to another policy because you have to show, during the application process, that where you're moving to is mathematically better than where you're coming from. And please do not let some grifter tell you, "Well, let's move it because you'll get an upfront bonus." That is illegal. That's crazy talk. And if you're an agent listening to this, please don't do that.

‌We've gone over the three types of payouts: interest, peeling off interest like on a MYGA, annuitization, and Income Riders. And remember, ask yourself two questions. What do you want the money to contractually do, and when do you want those contractual guarantees to start? Then go to my site, Stan The Annuity Man® | Brutally Honest Facts About Annuities, and quote until your heart's content. It's fantastic, and I'm going to pay for it. That's the philanthropist. I am the annuity philanthropist. CEO, write that down, annuity philanthropist. We need to trademark that because I'm giving.

‌Listen, thanks so much for joining us. Tell your friends and not friends, and I'll see you 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.