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How the Annuity Sausage is Made: Shootin' It Straight With Stan

Stan Haithcock
May 22, 2024
How the Annuity Sausage is Made: Shootin' It Straight With Stan

Welcome to Shooting It Straight With Stan. I'm your host, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Please go to my website to run quotes using our proprietary calculators. That site is The Annuity Man. You can download my books and all kinds of stuff.

Today's topic is a great one: How the Annuity Sausage Is Made. Now, I'm not going to go into the depths of the actuaries sitting in their closets, running the numbers, etc., but I'm going to give you the 30,000-foot view of how this all works, and it'll make sense to you once I get done.

First of all, who's making the sausage, Stan? Jimmy Dean? No, Jimmy Dean's not making the sausage. Jimmy Dean's dead, by the way, but he's still in commercials due to artificial intelligence, which is a little bit scary because someone said the other day, "Hey, Stan, when you pass away, are they going to take your thousands of videos and do AI videos?" I'm like, "Hmm, I hope not." But anyway, I digress.

Life insurance companies are the issuers of annuities, and there are many different annuity types. Now, you already own the best annuity on the planet, especially when you look at it from an inflation standpoint, and that's called Social Security. That is an annuity. It pays for life. It increases when our friends in Congress deem it appropriate and run that crazy formula. If you have a pension with your employer, if you're one of the fortunate 9% of the people out there that their employers are offering a pension, then you already own an annuity. Arguably, if you have an IRA and take Required Minimum Distributions, that's another annuity-type payment. But how is the sausage made on the commercial side with annuities? Let's go through the types quickly, and I'll explain how it's done.

Annuity Types

There are three types of primary lifetime income products: Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. Single Premium Immediate Annuities are the granddaddy of all annuities. Those are the ones that were developed and offered in Roman times for the dutiful Roman soldiers and their families as a pension and a thank you for laying it on the line for the empire. That's where the annuity space started, A-N-N-U-A, Latin; I believe it's for payment. That's where it all began. It has been sold in this country for hundreds and hundreds of years.

Deferred Income Annuities are Single Premium Immediate Annuity structures that defer past one year. If your income start date is past one year, it magically turns into a Deferred Income Annuity.

Then, there's another type of deferred income annuity called a Qualified Longevity Annuity Contract. That is something that can be purchased with qualified funds, IRA-type funds. If you hear someone say, "Never buy an annuity inside of an IRA," they haven't read enough. They need to be educated more to talk about annuities because there's actually an annuity called a Qualified Longevity Annuity Contract that the IRS and the Department of the Treasury came out with in 2014 so that people can plan for retirement income in addition to Social Security.

Those are all what I call annuitization products, meaning once you start the income, you've ripped the knob off the faucet, visualize that, the water faucet, in this case, the water is income once you turn that on. But the pricing is primarily on these products, SPIAs, DIAs and QLACs, primarily on your life expectancy or life expectancies, if it's joint.


Now, interest rates play a secondary pricing role, but there are also more things involved from the standpoint of how annuities are priced. You go to my site at The Annuity Man, use our proprietary calculators, which are the best in the business, and we'll quote pretty much every single carrier out there for the highest contractual guarantee for your specific situation. But understand that these quotes are like a gallon of milk; they change every seven to 10 days. The reason that they change, and one of the significant pricing mechanisms that no one ever talks about, is what's called capacity, meaning that, let's just say, XYZ Annuity Company has an excellent quote for 72-year-olds. This week and next week, it's not high. It's not in the top 10 anymore. Why? It's because they had enough 72-year-olds to fill that tranche of what they're trying to fill for that specific company. Once they fill that tranche for age ranges, they will lower the guarantee so that they will not attract you.

You look at longevity. Longevity risk is what you're trying to solve for lifetime income. My friend Tom Hegna, who we have on my podcast Fun With Annuities all the time, always talks about mortality credits. You're pooling your risk with other people your age, but just think of life expectancy, interest rates, mortality credits, and capacity. Capacity is how many 72-year-olds or 56-year-olds or whatever your age, how many they want. That's the reason you can't just quote one company. You have to quote all companies because companies are constantly changing when they want that age range and when they're trying to fill it. I always tell people to think about when they're investing: you have small cap, mid cap, international, etc., value as part of your allocation. With a life insurance company issuing annuities for lifetime income, those tranches are age ranges, and they're trying to fill them. Why are they trying to fill them? Because they know when we're going to die, so they price things accordingly.

You Can't Time It

The capacity issue is the one that I want you to stick in the back of your head. Capacity equals competition, and that's why when you look at annuities for just the contractual guarantees of the policy, which is why you should buy, never buy an annuity for the hypothetical returns. Always own an annuity for what it will do, not what it might do. When you strip it down to the contractual guarantees of the policy, then you've commoditized the product, which means that you can go to my site; we're quoting all carriers for that highest contractual guarantee for that specific time. You can't time it. There's no sweet spot or arbitrage moment. You can't be Gordon Annuity Gekko out there. You can't be the master of the universe. If the contractual guarantee looks fair, lock it in because the bell doesn't ring at the top or the bottom. Understand with Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts, especially the first two, there's a myriad of ways to structure them. 40 plus, okay.

Income Rider

Now, the fourth income product is what's called an Income Rider. You can attach that income guarantee to a policy like a Variable Annuity or an Index Annuity, but that Income Rider is also a commodity. When you look at the contractual guarantees of the product, you're looking at the Income Rider only, not the accumulation value, just the Income Rider and you're shopping all carries for that highest contractual guarantee. That sausage is made the same way: life expectancy, interest rates, and capacity. If you're looking at lifetime income, that's how the game's played.

Multi-Year Guarantee Annuities

Similar things apply when looking at Multi-Year Guarantee Annuities, which is the annuity industry version of a CD. There's no lifetime income, so their life expectancy doesn't apply. Still, they're looking at interest rates, they're looking at capacity issues, they're looking at their overall bond portfolio, their legacy bond portfolio within the company, and they're trying to raise money knowing that they can back up that interest rate claim up to a point. Again, it's commodity products; when you go to my site and then hit live my MYGA, you're going to see those companies, and it does change because once those companies hit the goal of whatever that amount of money they want to raise for that duration of that multi-year guarantee annuity, CD type annuity, then they're going to lower the guarantee in order to not attract you. It's that simple. Annuities are contracts; annuities are not investments. They're contracts, they're commodity products when you look at the contractual guarantees, and that's what you should do; you should own an annuity for what it will do, not what it might do.

Index Annuities

When we get to the RILAs, Variable Annuities, and Index Annuities, those accumulation values get very, very, very complicated. To me, you buy an annuity for what it will do, not what it might do. RILAs are kind of the newest thing on the block, and they have some Index Annuity type principles and shiny things. Index Annuities were put on the planet in 1995 to compete with CD-type returns, and there are limitations on the upside using cap spreads and participation rates. Once again, very, very complicated, and I always say, "If you can't explain it to a nine-year-old, don't buy it." No offense to nine-year-olds.

Variable Annuities

We don't sell Variable Annuities because we don't sell anything here at The Annuity Man that has the potential to go down in value. I have nothing against them, but in my opinion, you should buy mutual funds because that's what Variable Annuities have. They call them separate accounts, but you and I call it mutual funds. The problem is with Variable Annuities, the limitation of the choices of the mutual funds, that's the problem in my opinion. When looking at market growth, you should have no limitations if you're looking for real market growth. You can't have your cake and eat it too. If it sounds too good to be true, it is every single time with annuities. I have nothing against those products. We use Index Annuities as a very efficient and cost-effective way to deliver the Income Rider guarantee when you need income in the future. If you're looking just for a principal-protected fixed rate, in my opinion, you will do better contractually with Multi-Year Guarantee Annuities because that number is contractual.

When discussing how the annuity sausage is made, understand that life insurance companies issue annuities. When buying a lifetime income product, realize that life insurance companies have the big buildings for a reason because they know when we're going to die, and they're going to price things accordingly based on your life expectancy or, if it's joint, life expectancies. With lifetime income products, they do look at interest rates and mortality credits in conjunction with your life expectancy and then capacity, which is, do they want your age range at this time that you're quoting? There's not one company better than the other. There's not one product better than the other. It's very easy to filter it. Ask two questions and answer them. What do you want the money to contractually do? When do you want these contractual guarantees to start? From there, we can show you. You can go to my site, The Annuity Man, and schedule a call with us, and we will show you those quotes. Or you can go there yourself and run them 24/7/365.

That's how the annuity sausage is made, and that's why the annuity companies have the big buildings and the property and casualty companies don't. Life insurance companies know when we're going to die, and property and casualty companies don't know when the hurricane, tornado, or fire is going to hit.

You already own the best inflation annuity on the planet, Social Security. You need to look at annuities in general, even the PILL, principal protection, income for life, legacy, and long-term care. Principal protection and income for life are the two primary reasons people look at annuities and lock in those guarantees. They either need to add to their income floor, or they need to just protect the principal. That's what we're seeing here at The Annuity Man. Of course, we're licensed in all 50 states. The gorilla in the room, but we're a factual gorilla, as my grandfather said, "If you tell the truth, you don't have to remember anything."

With that, my name is Stan The Annuity Man. That's Shooting It Straight With Stan. I will see you next time.

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.

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