Zero Is NOT Your Hero: Shootin' It Straight with Stan®
Don’t Buy the Annuity Dream
Today's topic is a good one, the industry uses this phrase to sell Indexed Annuities. I'm a big fan of Indexed Annuities, we probably sell more than anyone on the planet, but I tell people all the time, "These are CD products. They are not market products. They are not securities. So do not buy the dream. Do not buy market upside with no downside," because that doesn't exist, period. The phrase is, "Zero is your hero." Now that's a catchy line, and it rhymes, but it's crap.
All that means is if the mortgages go down, you're never going to lose money, which is the Indexed Annuity pitch, or the buffer annuity pitch. That's crap. You can also put money in the backyard in a hole and never lose money. You could also put it in your mattress and never lose money. In the world that we live in you should always be getting some interest on your money. And with Indexed Annuities, the problem that people run into sometimes is they see all these neat, back-tested numbers. They're doing all kinds of stuff.
In some states, that's illegal to show, especially in the Indexed universal life space, but in the annuity space, I think all back-tested returns should be illegal. I mean, I don't think you should be basing your decision on what happened 10 years ago. You should be basing your decision on the future and what's going to happen. The “zero is your hero” is just part of the nonsense that agents use to pitch Indexed Annuities. There's nothing wrong with Indexed Annuities, but they were designed in 1995 to compete with CD returns and that's what they typically do. You should go into every single Indexed Annuity policy on the accumulation side, thinking of a 2-4% return. If you're the sucker at the table and this stupid person that a lot of agents are looking for, then you're going to get 7-9%, or some of these ads, “8.5% annuity return with no loss of principle.” That should be illegal to run. I mean, that is absolute garbage, but I see it all the time, and it's probably popping up on your screen. Remember, if it sounds too good to be true, it is every single time with annuities, with no exceptions whatsoever.
So, the “zero is your hero” is really setting you up for the poor performance of most Indexed Annuities because remember, with most Indexed Annuities, you can lock in the gains one day per year on that contract anniversary day. I got a call the other day from a gentleman, he was tracking his Indexed returns and then we had the dip recently, markets are a tad volatile, can we all agree? And those gains were wiped out and he got a zero for the year. He didn't think zero was his hero. He thought zero was a piece of crap because that's not why he bought it, that's not how it was sold to him.
The Magical Upfront Bonus
Don’t fall for the, "Well, we're going to give you an upfront bonus, and that's free money." No, it's not. There are no philanthropist annuity companies. I keep hammering this point because I keep getting these stupid calls from people that are saying, "Well, he said I was going to get a 20% bonus." I got a call this morning from a person that had a $500,000 IRA, and now it's worth 400,000, which is unfortunate, it's market stuff. And of course, there's the sales pitch from the Indexed-Annuity people, "Well, we have a 25% upfront bonus, which means you'll be back at 500,000." No, you're not going to be back at 500,000, that's going to go to your income account, that's fine, but that doesn't mean you buy it.
Most of the time, we find when we shop all Income Riders, the ones that have the bonuses do not provide the highest contractual guarantee. I know that's not what you want to hear. I know that's not what you're hearing on those Saturday-morning radio shows in your local market. And they only sell Indexed Annuities, they only pitch that. They barely even say the word annuity, but they talk about transfer risk or market participation with no loss of principal, and market upside with no downside. As I always say, if that was true, then I call my friend Chairman Powell, and I say, "Hey, friend, Powell, we have it solved, just buy Indexed Annuities, you're good." And he's going to say, "Well, Stan, zero is not my hero." I'm going to say, "You're right Chairman Powell. And tell Ms. Yellen that as well.” She knows as well, that zero is not your hero.
We are in inflationary times. I don't care whether we're in inflationary times or not, you need your money to grow, period. Now at this time, this might change in the future, but right now I think the better strategy for you for principal protection is a Multi-Year Guarantee Annuity, a MYGA, the annuity industry's version of a CD. Why? It's because you can lock in shorter terms, one year, two years, three years, four years, five years. With most Indexed Annuities out there that are being offered, that have legitimate option strategies, you're going to have to lock in your money seven to 10 years. Please tell me why you should be locking in money for seven to 10 years, other than to buy your agent a car, with the commissions. Remember, the longer the surrender charge time period, the higher the built-in commissions.
Don't let anyone get away with, "Well, they don't pay me, commissioners, there's no fees." Listen, all of us are getting paid on commercial annuities, every single annuity type, SPIAs, DIAs, QLACs, MYGAs, Indexed Annuity, Income Riders, Variable Annuities, buffer annuities, whatever, they all have built-in commissions. People ask us all the time, "What's the commission?" We'll tell you, no big deal on that. We're a capitalist country, I guess I created a for-profit business, we just tell the truth and we don't try to jam things down your throat.
Zero Is Not Your Hero
Bottom line, zero is not your hero. If zero is your hero, then put the money in your safe and lock the safe up. If zero is your hero, then put it in your mattress and sleep on it. If zero is your hero, dig a hole in the backyard and put the money in it. If zero is your hero, you're the zero. If zero is your hero, you're buying the sales pitch. That's so played out, that's so old, that's so bad, that so much junk, I can't even see straight.
Now the argument against that is, "In these markets, my clients…they didn't lose a penny." Yeah, but my clients with MYGAs are getting three to 4%, to upwards to 4.5% guaranteed contractual short term. Zero's not my hero. I don't want my clients to ever get zero. I want them to earn something within the policy. Now, with that being said, there are clients to say, "Stan, I'm putting a gun in your head. I want part of my portfolio in an Indexed Annuity, just choose the best one." There are two currently, out of the hundreds out there, that we actually like and think that are pro-customer with very good companies. So, we do sell those, but I'm very upfront with people. I'm like, "Listen, if you're going to buy a seven-year Indexed Annuity from me, are you okay with seven consecutive years of zero?" And if you say yes, "Okay, great." Then you signed off it. Not one time am I going to say zero as your hero.
Now, why is zero not your hero? Here's the reason, and I want you to think about this, with an Indexed Annuity, the returns can be up and down, depending on the caps and the spreads and the participation rates, which are the limitations to the upside of the policy, the return on the accumulation value. So, let's just say, one year you get six, and one year you get five, and the next year you get two, and the next two years you get zero, that's not market return because those zeros aren't your hero, because those zeros lower that blended return.
Now the argument against that is, "Yeah, but it's not negative." I understand that, but we have to go into the policy rationally, not dreaming and hoping that unicorns chase the butterflies. The numbers you see, "Well, you've got seven here and 10 here and 12 and then 14 and 18, six, five, three and seven." No, that's not going to happen, it's mathematically impossible, I don't care what they show you on the back-tested numbers. If some person, in combination with saying “zero is your hero” says, "Hey, and I bought this one. Here's my statement, and here's my mom's statement." That's crap if they're bringing that out to try to sell you their Indexed Annuity of choice.
The other thing you have to remember with the “zero is your hero” pitch is what's called renewal rates. Renewal rates are the caps, spreads, and participations that are reset at the carrier's discretion. Some carriers are very nice, some carriers are not nice with that. So I think I've gotten my point across. If anyone on the planet says zero is your hero, tell them to shut up and get with the program, because Stan the annuity man® said so. Also, if they throw in the word hybrid to explain an Indexed Annuity, say shut up again. A hybrid's a plant, a hybrid's a mattress, and a hybrid can be a car, but is not an annuity.
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.