009: How do Interest Rates affect different Annuity Types?

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welcome to

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fun with annuities with your host me

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stan

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the annuity man america's annuity agent

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can annuities be fun

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can contractual guarantees be fun

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absolutely they can find out the brutal

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facts about annuities

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with no sales pitches or high pressure

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nonsense

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just the brutal and factual annuity

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truth which is all you need to hear

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let's have some fun with annuities and

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let's have that fun start

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right now

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hey this is stan the annuity man and

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welcome to fun

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with annuities what we're going to talk

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about today is a question that i'm

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getting

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so much i mean daily from multiple

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people

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how do interest rates affect annuities

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and different annuity types

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with interest rates at supposed lows i

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mean people think that they're low just

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because most of us remember jimmy carter

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years where you had cds and

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in the double digits right remember that

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but also your mortgage rates were in the

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double digits

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so there was good and bad but everyone

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is yearning for

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higher interest rates and i do feel for

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the people out there

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that need interest rates to live on

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meaning their cds if their cities were

1:18
better they'd be living better

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eating better it is kind of sad where

1:23
it is right now but with that being said

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and i've been in this thing this annuity

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thing and the financial services

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business i was with dean witter morgan

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stanley payne webber ubs for a long long

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long long time

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when i was out of college until now i've

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been in the financial services industry

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what i do know is you can't predict

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interest rates nobody can

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even though there's people that say that

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they can and number two

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this might be the norm the new normal i

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know that's hard to believe

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because people say well interest rates

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are low and my my question

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is and this it's really i'm not trying

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to be smart

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like a smart a about this but

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low compared to what i mean when you say

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it's low and the bogey that we're all

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looking at in the annuity world and

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probably you two

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outside in the investor world is the

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united states 10 year treasury note you

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know whatever that u.s 10-year treasury

2:18
is

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and people say well you know rates stand

2:21
rates are low compared to what

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when you look at the the 10-year

2:24
treasury equivalent

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in other countries you know japan and

2:28
germany

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you know some of those countries have

2:32
negative

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equivalents meaning you have to pay them

2:35
to keep your money

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so right now the united states senior

2:40
treasury is still the highest

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when compared to other countries so

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you know people say let's introduce a

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low compared to what no actually we're

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the highest

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so this might be normal it might be the

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way it is

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for the rest of our lives our children

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might not see

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really high interest rate this might be

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where it's at because

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you know the stock market's kind of

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driving the train and and driving the

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new cycle

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and it's just hard to predict what the

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fed's going to do

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so with that being said how do you

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as an annuity buyer or someone that's

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interested in doing more research in

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annuities and finding out if it's the

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right thing for you to do

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how do you go about doing that how do

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you how does it affect specific types so

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what we're going to do is go through

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every type of annuity that's out there

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and i'll tell you how interest rates

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affect it whether it's affected a lot or

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affects it some

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obviously interest rates play a role in

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all

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annuities but sometimes it's a primary

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role and then sometimes it's a secondary

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role

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most people think it's primary most

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people think that that interest rates

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drive every train with annuities no

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that's not true at the end of the day

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you're buying a contract at the end of

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the day it's all math at the end of the

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day

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you have to be satisfied with the

3:56
contractual guarantee

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that you shop for and you can't time

4:01
rates please don't try

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i'd rather you try nailing jello to the

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wall or putting a jello

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roof on your house it'd be it'd be more

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fruitful because

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no one can time it the best you can do

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in the annuity world to combat the

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movement of interest rates

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is to ladder them later the purchase or

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latter the start date

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just because you just don't know you

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know what's going to happen

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just here recently i thought interest

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rates you know would be going

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up that was my that was my guess and it

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was nothing more than a guess but of

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course

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all of us were wrong guessing that it

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actually went down so you're like okay

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i don't guess and predict and tell my

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clients to do things based upon my

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guessing and predict i was a personal

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guest i said yeah

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i think they might take it up here no

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they didn't they actually lowered it

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which says

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none of us can predict it so let's go

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through each specific type

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and talk about how it affects each

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specific type of annuity first of all

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let's talk about

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single premium immediate annuities just

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a quick elevator speech on each of these

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immediate annuities are the granddaddy

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of all annuities they're the

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pension annuities income starting within

5:09
30 days of the policy be an issue up to

5:11
as far out as 13 months so it's an

5:13
income now

5:14
type quote immediate annuities are an

5:17
annuitized annuitization means

5:20
creating payments it's in that payment

5:22
stream is a combination

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of return of principal plus interest so

5:26
that interest part

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it is affected by that but with

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immediate annuities

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the primary pricing mechanism is your

5:34
life expectancy or if you're setting up

5:37
joint with someone

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life expectancies plural at the time you

5:41
you take the payment it's a transfer of

5:43
risk bet

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that you're going to live longer than

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the annuity company thinks you're going

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to live and if you do live longer than

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that they are on the hook to pay you

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regardless of how long you live

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rates do play a role but it's secondary

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all right

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and interest rates would really have to

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move significantly

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to move the needle because the life

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expectancy drives the train

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okay so let's go to deferred income

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annuities just

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in a recap deferred income annuity is

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also called a longevity annuity

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it is they it is the cousin or sister or

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brother

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of the immediate annuity because with a

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deferred income annuity

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with an immediate annuity income starts

6:20
as soon as 30 days from the policy being

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issued and

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up to 13 months with a deferred income

6:27
annuity

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if you defer past 13 months and farther

6:31
out than that it's a deferred income

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annuity it just it's the same structure

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very simplistic no market attachments no

6:36
moving parts no annual fees

6:38
but it's the same annuitized structure

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where you're getting payments for life

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you can set up joint

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you can set it up you know single life

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whatever you want to do

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but once again the driving

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pricing mechanism what drives that train

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is life expectancy

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at the time you take the payment do

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interest rates play a role absolutely

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but it's secondary

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it's not a primary factor in the pricing

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of a deferred income annuity so deferred

7:07
income annuity is a future pension

7:08
product

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primarily based on your life expectancy

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and you're transferring that risk to the

7:13
annuity company to pay you for the rest

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of your life

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if the joint rest of your lives

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regardless how long each of you live

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but interest rates do play a role

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because the income stream is a

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combination return of principle plus

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interest

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so secondary it's a secondary pricing

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mechanism

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let's talk about qlax qualified

7:34
longevity annuity contracts

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which are dias it's a deferred income

7:41
annuity

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but you can only use a qualified

7:44
longevity annuity contract qlac

7:46
inside of a traditional ira

7:50
for most p most cases they're trying to

7:52
put them inside of 401ks etc but in

7:54
traditional iras that's where

7:55
the vast majority of people by culax

7:58
once again just like a deferred income

8:01
annuity

8:02
the driving pricing mechanism on it what

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drives the train is life expectancy at

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the time you take the payment

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interest rates play a secondary role

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obviously if they

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move way up it will affect it some but

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they'd have to move

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way way up for it too so people that are

8:18
you know when there's a 25 basis point

8:20
move

8:20
either way it really doesn't

8:23
move the needle 25 basis points is a

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quarter of one percent

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basis points is kind of what what's used

8:29
in the financial world

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um but in english that's 20 you know 25

8:33
of one percent

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so and so if if that's the movement of

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the interest rates it really doesn't

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move the needle because life expectancy

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drives the train

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so with wispias and diaz and kelax

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single premium immediate annuities

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deferred income annuities and qualified

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longevity annuity contracts

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life expectancy is the primary pricing

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mechanism interest rates are secondary

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now let's talk about multi-year

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guarantee annuities which are

8:57
migas multi-year guarantee annuities

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also called fixed

9:01
rate annuities remember it's the

9:05
and i've done a podcast on this as well

9:07
but multi-year guarantee annuities

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are the annuity industry's version of a

9:11
cd

9:13
so a cd pays you an interest rate

9:15
annually for a specific period of time

9:17
that you choose

9:18
a multi-year guarantee annuity is a

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is a fixed rate annuity where it pays

9:23
you a specific interest rate

9:25
for a specific period of time that you

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choose same thing

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the difference between a my gut and a cd

9:32
a multi-year guarantee annuity and a cd

9:34
is that in a non-ira

9:36
account with a cd you have to pay taxes

9:38
on the interest every year

9:41
with a multi-year guarantee annuity in a

9:43
non-ira account

9:44
the interest compounds tax deferred does

9:47
it make it better

9:48
that's just the rule and typically with

9:51
cds

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they offer the highest rates between one

9:55
two three years from three years to five

9:56
years

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it's a miga so multi-year guarantee

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annuities are very very competitive and

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typically offer the highest fixed rate

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when compared to cds three years and out

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but just like a cd multi-year guarantee

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annuity

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they are solely affected 100 by interest

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rates

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because they're not a lifetime income

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product they're not you're not

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annuitizing it you're

10:18
controlling the asset you're protecting

10:21
the principal and you're only getting

10:23
the interest rate that is guaranteed

10:25
within the contract for the specific

10:27
period of time that you choose

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on my site at the annuityman.com we list

10:32
the best fixed rates for your state

10:34
because each state

10:36
fixed annuities are regular at the state

10:37
level and approved at each state level

10:39
so when you go to our site

10:40
the site the annuityman.com and click

10:42
the my feed

10:44
you'll be able to filter your state and

10:45
then duration you're looking at

10:48
and it'll list you know what's approved

10:50
in your state

10:51
but you know 100 affected by interest

10:54
rates just like cds are 100

10:56
affected by interest rates if you want

10:58
to go shop for cds the best place in my

11:00
opinion

11:01
is bankrate.com i have no affiliation

11:04
with them other than

11:05
if you use bankrate.com to shop for your

11:07
cds and you use the annuityman.com to

11:10
shop for your mangas you're going to see

11:11
the best rates in the country period

11:13
and you'll be able to ladder and buy the

11:14
buy the ones that you want to buy

11:16
but yeah my gas are 100

11:19
affected by interest rates so it's it's

11:22
a

11:23
it's it is a barometer interestingly

11:25
enough and people always ask me

11:26
stan do you know when the interest rate

11:28
changes do companies

11:30
just react immediately and i'm like no

11:32
not really

11:33
i call it like the middle school dance

11:35
remember the middle school dance where

11:36
the boys were standing on one side and

11:38
the girls are standing on the other

11:39
and we're just waiting for some some

11:41
person some future ceo with guts right

11:44
the person that went out there and

11:45
danced was probably a ceo

11:46
somewhere to break the ice it's kind of

11:48
like you you know back in the day with

11:50
all of us old people remember jumping

11:52
rope and you had two kids

11:53
turning the rope and then one trying to

11:54
get in jump in and time it right i guess

11:58
annuity companies kind of wait on each

12:00
other to react because they're commodity

12:02
products

12:03
in the migra world you know typically

12:05
when rates go up people move slowly

12:08
carriers move slowly and when rates go

12:10
down they move a little faster that's

12:12
just

12:12
that might not be really true if you

12:14
just did a historical

12:16
look into it but that's just my opinion

12:17
and me watching it for decades

12:20
and being one of the top myga people out

12:22
here that sells those simplistic

12:25
cd type products but my goals yes

12:27
certainly are

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affected 100 by interest rates let's

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talk about indexed annuities indexed

12:32
annuities and interest rates

12:34
it's a couple things number one indexed

12:37
are the gains supposed gains hopeful

12:40
gains potential gains are

12:42
tied to an index option typically the s

12:44
p

12:45
not including dividends and those are

12:47
locked in typically

12:48
with most of the annuities from contract

12:51
anniversary date to a contract

12:52
anniversary date

12:53
there's over 700 index option choices so

12:56
i'm not going to go into all 700 but

12:58
that's just the 30 000 foot view of kind

13:00
of how they work

13:02
do interest rates play a role yes and

13:05
it's

13:05
it's i guess it's semi-primary in my

13:07
opinion

13:08
because the caps and the spreads and

13:11
those are the limitations that are

13:12
placed on the index options not getting

13:14
the weeds here but trying to

13:16
trying to show paintings to blind people

13:18
right no offense to blind people

13:21
is when when interest rates a little bit

13:23
higher then the caps

13:25
the limitations on the upside that you

13:26
can lock in and the spreads

13:28
are more favorable to the consumer so

13:31
the lower the rates

13:33
then the lower the caps and the the less

13:35
favorable the spreads etc so

13:38
indexed annuities are affected

13:41
by low interest rates but the argument

13:43
kind of when i said semi or kind of

13:46
because the s p end

13:50
let's just use the s p index as was s p

13:52
500

13:53
x as one of the indexes that they use

13:56
and that's primarily the one that all of

13:57
them use

13:58
if interest rates are low then markets

14:01
typically go up right

14:03
so i think it somewhat offsets each

14:05
other

14:06
with indexed annuities but understand

14:09
indexed annuities are cd

14:10
products they were designed and

14:11
introduced in 1995 for cd returns

14:14
enhanced

14:15
cds that's really what they are they're

14:17
not market products

14:19
you don't have to have a securities

14:20
license to sell them which should tell

14:22
you everything you need to know you only

14:24
need a life insurance license and if you

14:26
really work hard at it you can take the

14:28
crash course pass it in the week and

14:29
start selling the next week that's not a

14:32
very high bar but that's the way it is

14:34
so

14:35
indexed annuities are affected by by

14:38
interest rates but

14:39
they they also benefit from low interest

14:42
rates affecting the index options

14:44
hopefully going a little bit higher so

14:46
let's move to the next one

14:48
variable annuities variable annuities

14:51
are really

14:52
they're the inside of a variable annuity

14:55
which are the separate accounts well you

14:58
know me and you call them mutual funds

14:59
but in the variable annuity industry

15:01
they call them

15:01
separate accounts but these mutual funds

15:05
are affected by interest rates like just

15:06
like regular mutual funds are depends on

15:08
what the mutual fund

15:10
underlying strategy is but where

15:14
variable annuities and index annuities

15:16
can also be

15:17
affected by interest rates are the

15:19
attached benefit

15:21
income writers so with an income rider

15:24
if interest rates are higher the

15:27
the monopoly money percentage that the

15:29
income benefit grows by

15:31
could be a little bit higher if interest

15:33
rates are higher that doesn't mean

15:35
you're getting a higher yield what that

15:37
means is that your income account is

15:38
growing by a higher percentage of which

15:41
you can

15:42
calculate your first income payment

15:44
that's how income riders work

15:46
so you're not getting a five or six or

15:48
seven percent yield

15:49
yield means you can get to the money you

15:51
can peel off interest you can cash it in

15:53
what you're getting is a growth on that

15:56
income

15:57
benefit asset so that you can

16:00
calculate exactly what the income

16:01
stream's going to be in the future

16:02
because

16:03
it's going to grow by a contractual

16:05
percentage monopoly money percentage

16:07
that you can use to calculate your first

16:08
income payment so

16:10
interest rates do affect the income

16:12
riders as well

16:14
so to kind of go over all of them you

16:16
know the immediate annuities the

16:18
deferred income annuities and the queue

16:19
lacks

16:20
interest rates are secondary pricing

16:23
mechanism life expectancy kind of drives

16:25
the train because those are lifetime

16:26
income guarantees

16:28
caveat to that would be if you're buying

16:30
a period certain

16:32
immediate annuity or a period certain

16:33
deferred income annuity

16:35
then interest rates play the primary

16:38
role because it's there's no life

16:41
lifetime income guarantee transfer of

16:42
risk so that's the caveat

16:45
so if you're saying i need a 10-year

16:46
period certain then it is about interest

16:48
rates

16:49
if you're saying stan i need a lifetime

16:51
income stream with a 10-year period

16:52
certain then it's not about

16:54
interest rates primarily it's about life

16:55
expectancy i know we're kind of getting

16:57
caught in the weeds there but

16:59
you know like any industry it can get as

17:03
complex as you want to so that's when

17:04
when people say i hate annuities or all

17:06
annuities are this or all annuities are

17:08
bad

17:08
that's crazy and it's misinformed and

17:11
uneducated

17:12
and you know better than that when you

17:15
hear that stuff that's that's

17:16
similar to turning on a specific news

17:19
channel

17:20
and believing everything you hear from

17:21
that news channel what what whatever

17:22
side of the ledger you're on

17:24
so yeah the interest rate world is

17:27
interesting

17:28
because you know

17:32
eventually i guess it does have to move

17:33
up i was telling someone the other day

17:35
of all the economic classes that i took

17:37
in college and this person was very

17:39
you know very well educated that he took

17:41
in college

17:42
i was saying you know none of that none

17:44
of that's applying somehow

17:46
somehow all of the economic data

17:49
and the interest rate supposed movements

17:52
based on that economic data

17:54
doesn't seem to be correlating anymore

17:57
so

17:58
all bets are off i guess we're in blue

17:59
water here that nobody really knows

18:02
and the tick data going backwards

18:04
doesn't really count because

18:05
the tick data going way back didn't

18:07
include a 24 7 365 global

18:11
internet attached markets where

18:13
everything's trading real time

18:15
so i really don't know um it is i feel

18:18
for people that really need to

18:19
to live off interest rates and if they

18:21
were higher than the

18:22
then even the products that are that are

18:25
affected you know secondarily

18:26
you know the the lifetime income type

18:28
products those guarantees would be

18:30
higher

18:31
as well and it wouldn't be a tons higher

18:34
but it could be depending on the rate

18:35
movement

18:36
so i tell people all the time if you

18:38
instead of trying to time interest rates

18:40
and getting all caught up in it

18:42
and you know trying to do research on

18:44
when they're going to move

18:45
i mean that's crazy you're not going to

18:47
figure that out nobody is

18:49
the best bet is to ladder the purchase

18:52
like for instance on my you know fixed

18:55
rate annuities

18:56
you just ladder them in different

18:57
durations like you do a three year and a

18:59
four year and a five year ladder

19:01
and have money coming due in case rates

19:03
move obviously that could work against

19:04
you if rates go down

19:06
but that's your only shot in my opinion

19:09
so

19:09
laddering is is the only way to look at

19:12
it

19:12
if you're if you're trying to time it

19:14
also understand that

19:16
all annuity types bsd is my guess culex

19:19
immediate annuity variable annuities

19:21
these are commoditized quotes in my

19:23
opinion

19:24
if you're buying them for the

19:25
contractual guarantees which you should

19:26
you should be quoting

19:28
as many carriers as humanly possible

19:29
which we do looking for the contractual

19:32
guarantees that fit your specific

19:33
situation

19:35
annuities are not one size fits all you

19:37
have to

19:38
all the time shop and don't allow people

19:41
just show you one or two carriers make

19:43
them show you five

19:44
make them go out there and work to show

19:47
you

19:48
as many quotes as seemingly possible on

19:50
our myga feed at the annuityman.com

19:52
you'll see tons uh depending on the

19:55
duration of

19:56
of migas out there with our immediate

19:58
annuity income now quotes

20:00
you know we'll show you 10 or more of

20:02
the top

20:03
in order of the top contractual

20:05
guarantees for our income later

20:07
we do the same thing for our creolitt we

20:09
do the same thing

20:10
we go into all quotes not knowing who's

20:13
going to finish first

20:15
and you know then we have the discussion

20:17
on claims suspendability is this the

20:18
right company do you feel comfortable

20:20
with it do you like the guarantee etc

20:22
but you have to be satisfied with the

20:24
guarantees

20:25
and regardless of interest rates it

20:29
really comes down to once again

20:30
two things pill which is principal

20:32
protection income for life legacy and

20:34
long-term care confinement care

20:36
if you don't need to solve for one of

20:37
those four things you probably don't

20:38
even need an annuity

20:39
if you need market growth you probably

20:41
need just to stay in the market

20:43
so you have an infinite amount of

20:44
choices because any

20:46
annuity that says they can provide

20:49
market growth you're limited

20:50
there's some there's some big time

20:52
limitations

20:53
with with those products so just stay in

20:55
the market if you need market growth

20:57
and then the other the other thing is

20:58
the two questions to determine

21:01
what type of annuity is what do you want

21:03
the money to contractually do and when

21:04
you want those contractual guarantees to

21:06
happen from those two answers

21:08
then we can pinpoint exactly the type of

21:10
annuity that you need

21:12
or that you might need and then we quote

21:14
it and then we start the process

21:16
of of talking about the limitations and

21:17
the benefits so

21:19
in summary about interest rates you know

21:21
how do you how do they affect they

21:22
affect

21:23
all annuities but they affect all

21:24
annuities differently

21:26
depend if it's a lifetime income stream

21:27
annuity it's a secondary pricing

21:30
mechanism if it's

21:31
if it's a fixed rate annuity or it's

21:33
going to affect it 100

21:35
and with variable and index with income

21:37
riders you know

21:39
it's going to affect it on one side good

21:41
and the other side maybe not so good so

21:44
there's no perfect answer there's no

21:45
perfect product there's just a bunch of

21:47
bad sales pitches out there as you know

21:49
so be careful do your homework

21:52
and continue to tune into this podcast

21:55
because i'm going to keep digging down

21:57
into every single aspect of annuities

22:00
good and bad

22:02
and strategies etc so with that my name

22:05
is stan

22:05
the annuity man and you have been

22:07
listening to fun

22:08
with annuities see you next time thanks

22:12
for listening to fun

22:13
with annuities please hit the subscribe

22:15
button and make sure to go to my site

22:17
at the annuityman.com where you can run

22:20
your own spea dia

22:22
and q lat quotes and see a live feed of

22:24
the best mica fix rates

22:26
in the country and even get indexed and

22:28
income writer quotes as well

22:30
you can also sign up for my six annuity

22:33
owners manual books and i'll ship them

22:35
for free and under no

22:37
obligation i also encourage you to

22:39
schedule a one-on-one call with me

22:42
stan the annuity man so we can have a

22:44
full discussion

22:45
of your specific situation it will be

22:47
the best

22:48
brutally factual and truthful advice you

22:51
will ever get and that's one guarantee

22:54
you should definitely take advantage of

22:55
so join me next time for the number one

22:58
annuity podcast

22:59
on the planet fun with annuities

23:12
you