024: How Annuity Companies Make Money On Your Annuity

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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 i'm

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america's annuity agent licensed in all

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50 states

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that includes yours so we would love to

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have you as a client if you're not

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already one

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and listening to this podcast if you are

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thank you

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today's topic is how annuity companies

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make money

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on your annuity there's a lot of

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misinformation around this topic i mean

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i hear all kinds of stuff especially

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when it comes to indexed annuities where

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there's an index call option that has

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a limitation on the upside lack of a

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better phrase and

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index and news were put on the planet in

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1995 to compete with cd returns and

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that's pretty much what they do even

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though that's not how they're sold many

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times in many cases

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they're sold as too good to be true

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market products they're not they're life

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insurance products

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they're not securities but a lot of

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people are under the assumption

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that you buy this index call option

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you have this index call option within

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your indexed annuity and

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there's a limitation on the upside so

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the logical thought progression i guess

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if you're a consumer is that the annuity

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company the evil annuity company keeps

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the

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keeps the balance which is absolutely

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100 percent

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untrue false bank i actually did a

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youtube video on this topic which i

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would recommend you going

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and listening to i have a youtube

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channel stand the annuity man youtube

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channel

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if you go to youtube and just type in

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stan the annuity man

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you'll see all my videos pop up i do one

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per day monday through friday a new one

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but one of them i did was how annuity

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companies

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you know make money or keep your money

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or use your money with fixed indexed

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annuities

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which is what i just talked about so

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that doesn't happen

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i mean there's no there's no games being

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played

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the annuity industry is highly regulated

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i mean highly regulated now fixed

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annuities

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are regulated at the the state level

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variable annuities are regulated by

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finra

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it's a security so you know just like a

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stock and a bond and

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etfs mutual funds same regulation

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applies to

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variable annuities because that's a

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security

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not a fixed product and then you know

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charitable gift annuities are

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regulated by i guess the uh there's the

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there's the american association of

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charitable gift annuities etc there's a

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governing bodies that oversee that but

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that's not a

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commercial product you can get those

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from your

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charity 501c3 et cetera university

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those people but i digress

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so you know how do they make money how

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do annuity companies make money on your

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annuity first of all

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like i said they're very very regulated

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with with banks if you give money to

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a bank they can take the vast majority

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of that money and then go loan it out

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and they have to keep

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a certain small percentage at the bank

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etc

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with fixed annuities day one

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they have to have a hundred percent of

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your money on hand and they have to have

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it in investment grade bonds

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now i know you tenfold hatters out there

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you conspiracy theorists are shooting

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down that

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investment grade part

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but you know that's as good as it gets

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you know if you don't think treasuries

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are safe then we're an anarchy

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okay and i know the debt situation of

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the country and all

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i get it i understand i'm staying the

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annuity man i get it

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but annuity companies aren't smarter

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than banks they're just more regulated

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than banks so from a safety standpoint

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you know they have to keep all your

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money

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on hand that you know they're buying

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current interest rate bonds

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within their portfolio they have bonds

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what i call

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jimmy carter type bonds they have bonds

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from way back in the day

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they got an old type bond portfolio so

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the bond portfolio is

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is spread out and i'm assuming ladder

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with moscow now and i do have a

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background with morgan stanley ubs payne

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weber dean witter i've done

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that stuff so i understand bonds and

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sometimes i peek in

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to their records and look at what

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they're doing and again highly regulated

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so they are

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old bonds new bonds the other thing too

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so they're making money on that

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and the other thing too is they they can

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buy

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institutional type investment grade

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fixed instruments that me and you as

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individuals cannot buy

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so they do that as well but let's talk

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about making money on let's

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let's say you bought a fixed annuity

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like a multi-year guarantee annuity

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which is a fixed-rate annuity the

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annuity industry's version of a cd or a

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fixed

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indexed annuity you know they're they're

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taking your money they're making money

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off the bonds that they have that

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they're invested in

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and then you know they keep a portion of

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that

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and then give the rest back to you

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either on an interest rate or

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a little bit more complicated on the

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index annuity side but the bottom line

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is they keep some and give you some

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right so that's how that works

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and you say well that doesn't sound like

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a lot well we're talking about billions

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of dollars too

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i mean we're talking about lots of money

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now how annuity companies make money

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with lifetime income products which most

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annuities

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saw for lifetime income they were put on

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the planet annuities originated in the

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roman times

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when the roman empire created

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annuals a nnua is latin word for payment

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they created those

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payments for the dutiful roman soldiers

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and their families that's the genesis

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of the single premium immediate annuity

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that's in essence what it is

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and it's been sold in this country

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forever but getting back to the point

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how do

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annuity companies make money on that

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immediate annuity or deferred income

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annuity or

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qualified longevity annuity contract or

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lifetime income benefit rider

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any type of annuity like that income

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benefit writers and attachment but any

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type of

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lifetime income guarantee that's

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contractual

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that price that they're paying you

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monthly that guaranteed income stream is

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primarily

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based on your life expectancy

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at the time you take the payment or if

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it's joint life life expectancies

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plural at the time you take the payment

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interest rates play a secondary role i'm

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going to repeat that again

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with lifetime income guaranteed products

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interest rates

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play a secondary role and the reason i'm

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getting a little loud with that

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is i keep getting calls i get i'm gonna

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i'll get calls like this until the cows

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come home

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southern expression that hey stan i'm

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gonna wait and just

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you know i'm gonna wait till rates go up

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until i buy that immediate annuity

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it's like hey fred you know are you

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gonna factor in the payments that you

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missed

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while you're trying to time things

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because it's all about life expectancy

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by the way

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works similar to just like and similar

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to just like

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social security the older you are the

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higher the payment

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the older you are the higher the payment

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because the less your life expectancy

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which means that there's fewer payments

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which means that the payments will be

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higher

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so how do annuity companies make money

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on your annuity

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in a lifetime income payment situation

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they're giving your money back while

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they're holding on to the rest of it

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all lifetime income payments are a

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combination of return of principal

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plus interest so they're doling back

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your money

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based upon your life expectancy so

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they're doling it back over time

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and it's a guaranteed issue product so

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they're taking

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all of you at your age lumping everybody

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together knowing that some of you are

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going to live a long time some are you

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going to live long at all and some of

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you're going to live right on the money

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to your life expectancy

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someone asked me they said you stand you

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always say you know

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annuity companies have the big buildings

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for a reason or annuity

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i always say annuity companies have big

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buildings for a reason or they have the

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large logo on their jets for a reason

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and the reason i say that is they don't

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give anything away

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life insurance companies know when we're

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going to die

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so they price things accordingly

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property and casualty companies don't

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have the big buildings for reason in

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most cases because they don't know when

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the hurricane is going to hit or the

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tornado is going to hit or the fire is

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going to happen

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life insurance companies know when we're

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going to die and fixed annuities are

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issued by life insurance companies

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variable annuities are

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issued by life insurance companies so

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when you're buying a lifetime income

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guarantee

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type annuity they're holding on to your

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money

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they're making money not tons

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bond type returns off your money because

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they have to keep an investment grade

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products

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and then they're doling the money back

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to you based on your life expectancy

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they're doling back to

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overtime does that make sense

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should that's how they do it and they

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just do it with

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large amounts of money

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what do they say the eighth wonder of

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the world is compound interest

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so when you're having compound interest

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on hundreds and hundreds and hundreds of

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millions of dollars billions of dollars

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etc

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things work math works right and that's

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life insurance

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companies in a nutshell annuity

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companies in a nutshell

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and most of the products that people are

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buying are life expectancy type products

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now they really like it when you buy an

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annuity and then just defer

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and don't touch it because

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they're holding on to your money now

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internally there there could be some

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guarantees that they have to match

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obviously and contractually guarantee

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but they're holding on to your money

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so anytime annuity companies holding on

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to your money they're making money

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off investment grade paper why they hold

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on to it or if it's life expectancy

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while they pay it back to you

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now another question i get a lot is

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well why did this variable annuity or

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indexed annuity or multi-year guarantee

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annuity

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which is a fixed rate annuity like a cd

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why did these have such high interest

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rates

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i mean such high surrender charges my

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apologies such high

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surrender charges why

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well the reason is number one the

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annuity companies have to lock in the

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guarantees

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because they're contracts there's

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guarantees within the contract they have

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to lock in

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so it can't be 100 liquid secondly

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annuity products pay a commission to the

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writing agent

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like me stay in the annuity man there's

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commissions paid

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and so if you get out of your annuity

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contract

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early and have to pay a surrender charge

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back to the company to get out

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that's there to also try and cover those

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commissions that were paid to the agent

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so the reason i bring that up the reason

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i talk about surrender charges within

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deferred annuities like multi-year

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guarantee annuities fixed rate annuities

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fixed index annuities variable annuities

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is that

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annuity companies are smart okay they

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are not going to lose

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if you just pivot and just and change

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your mind mid-stream from what you

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originally decided to lock in so in

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other words if you bought a 10-year

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surrender charge annuity in year five

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you said i don't do that anymore give me

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my money

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and you agreed to pay the surrender

11:48
charge the annuity companies like

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okay we're just going to take the

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surrender charge money and try to cover

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our expenses of what we were trying to

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do

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what you initially agreed upon so

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that's kind of that angle as well

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and people always say well they can make

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money on my annuity and they're they're

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solid

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you know how safe are they how safe are

12:09
the annuity companies well

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you know we look at for rating services

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am best moody standard poor's and fitch

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and we have on our site

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that the annuityman.com under resources

12:19
we give away for free the comdex

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rankings which is a compilation of

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those four rating services and then they

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have a formula that they score

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the annuity company from one to a

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hundred hundred being perfect

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so i always love that because you know

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the ratings a or a a or a plus plus or a

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minor

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a i mean that's great we kind of get

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what that means but i like comdex

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because it takes the four rating

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services they invest moody standard

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fours and fitch and then says okay

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this carry is a hundred or this

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carrier's 82 or this carries 97.

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is it perfect no it's not perfect but

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it's it's a very good

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thing to look at from the standpoint of

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safety and how

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you know how they're making money on the

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annuity from the standpoint of

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hey is my stuff safe can they can they

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back up the claims

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another thing you can do too is if

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you're looking at an annuity with us

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and you want to see more detailed

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financials we can get that to you

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we have the resources and the

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relationships with companies that track

13:18
that to get whatever you need

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whatever balance sheep type stuff that

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you need to see we can get it to you

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but i do have a fiduciary responsibility

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that i take very seriously

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to recommend companies that i do think

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have the claims paying ability

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to back things up the only thing i

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cannot prevent

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is somebody like a bernie madoff cooking

13:38
the books i mean none of us out here can

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we have to believe what's being

13:42
you know put down on paper and honestly

13:44
that's on the regulators

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that's the reason regulators are in

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place is to make sure that doesn't

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happen

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but you know ever since the madoff thing

13:53
we're all like okay

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we really want to trust a lot of people

13:56
will say hey you know they they

13:58
mentioned a company that wears

13:59
i'm not going to mention their name but

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they were part of the whole 2008 debacle

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but

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the bottom line is that company's

14:06
annuity and life insurance side

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was the rock of gibraltar that kept them

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alive it was the derivative side

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of them that was really hurt and you

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probably know who they are

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i just don't need to talk about them

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like that because i respect

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who they are and they've done a good job

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and the annuity and life insurance

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people

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better be getting the the you know the

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head table

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at all the functions because they save

14:29
that place

14:30
so how do annuities make money on your

14:32
annuity

14:33
they buy investment grade bonds they

14:35
hold on to your money or they dole it

14:37
back to you over your life expectancy

14:39
it's really that simple from a baseball

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analogy they're just hitting bunt

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singles

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they might hit a bunt single and then

14:45
they hit a single they're not swinging

14:46
for the fences they're not looking for

14:49
double-digit returns you know just by

14:51
law and regulation they can't they're

14:53
not allowed to

14:54
so they're very good at hitting bunt

14:56
singles and they're very good at

14:59
you know not getting into trouble that

15:00
doesn't that mean that some

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do or some some don't but the other

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thing from a safety standpoint that i

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always tell people

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is that what i like about the annuity

15:09
industry and the annuity industry

15:10
doesn't like it when i talk about this

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but i think it's true

15:13
annuities are confidence products

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meaning that if my mom who's age 80 in

15:16
st augustine florida doesn't get an

15:18
annuity payment

15:19
it's over she's on the nightly news and

15:21
it's game over for the industry because

15:23
she's going to squall like a pig

15:24
she's going to go crazy and she should

15:28
so what happens is i call it the annuity

15:29
mafias the annuity companies kind of

15:31
oversee each other

15:33
and the big ones are not going to let

15:34
some yahoo mess things up

15:38
they're going to come in and swoop up

15:39
the assets and buy the company and

15:41
everything's going to be

15:42
beautiful and the rainbows are going to

15:44
you know set over the sunset and the

15:45
unicorns to chase the butterflies

15:48
so you know when you're looking at a

15:51
transfer risk contract because annuities

15:53
are contracts their transfer risk

15:55
contracts to solve for specific things

15:57
primarily for things principal

15:58
protection income for life legacy and

16:00
long-term care that

16:01
acronym is pill that's what they solve

16:04
for long-term care confinement care

16:06
and their commodity products you should

16:08
shop all carriers for the highest

16:09
contractual guarantee that you're trying

16:11
to solve for that fits your specific

16:13
situation

16:14
and you only own annuities for their

16:15
contractual guarantees what they will do

16:17
not what they might do

16:19
and if you stick with that and do your

16:22
due diligence on

16:23
you know the ratings and the conduct

16:24
score you're going to be fine

16:26
but i hope i've covered on how annuity

16:28
companies make money on your annuity

16:30
if you think logically about it it makes

16:32
total sense and

16:33
it begs the question why don't me and

16:35
you start an annuity company or life

16:37
insurance company

16:38
first of all it takes a lot of money to

16:40
do that but if you have a couple hundred

16:41
million dollars laying around

16:43
it's not a bad business plan because

16:45
what did i say in the first part of the

16:47
podcast annuity companies know when

16:49
we're going to die life insurance

16:50
companies know when we're going to die

16:52
they just price things accordingly so if

16:54
you're getting a lifetime income stream

16:55
product they're going to price that

16:57
payment based on your life expectancy

16:59
period and hold on to the rest of the

17:01
money as they're doling it back to you

17:04
because remember all lifetime income

17:06
payments are a combination return of

17:08
principal plus interest you're getting

17:09
your money back with interest

17:11
and so people will slap their head and

17:13
go what what's the what's the good news

17:15
about that

17:16
standing annuity man mr transfer of risk

17:19
the good news is they're on the hook to

17:21
pay even if the account's at zero

17:24
they are on the hook to pay regardless

17:26
of how long you live an annuity is the

17:28
only product

17:29
that does that in the financial world

17:33
it's a monopoly it is an actual monopoly

17:36
that they have that they don't pound the

17:38
table and tell people about which is

17:39
kind of interesting

17:41
i digress but that's what i would i mean

17:43
that's what i talk about

17:44
is that's what these products are for

17:46
there's no roi until you die so you

17:48
should be looking at annuities as

17:49
pension products

17:51
just like you look at you don't look at

17:52
your social security and go i wonder

17:53
what the return on investment's going to

17:54
be on that you don't

17:56
or your pension if you're so fortunate

17:58
to have one you don't say i wonder what

17:59
the return on investment you don't

18:01
you just like the income stream coming

18:03
in okay

18:04
that's that's kind of where annuities

18:06
need to fit most of them there are some

18:08
deferred annuities we talked about that

18:09
on how they make money on deferred

18:11
annuities

18:11
they're holding on to your money they're

18:14
giving you back the contractual

18:15
guarantee that they promised within the

18:16
contract and they're keeping a little

18:18
bit

18:18
extra of what they're getting from the

18:20
standpoint of the investment grade bonds

18:22
it's really that simple bun singles

18:24
right

18:25
baseball analogy that's just a bunt

18:27
single

18:29
so i hope i have answered that

18:32
question i've got so many of these

18:34
questions i said i finally have to do a

18:35
podcast on it

18:36
to cover it but if you think logically

18:38
about it that's how it all works

18:40
annuity companies aren't smarter than

18:41
banks they're just more regulated than

18:44
banks

18:45
and that's the reason that in my opinion

18:47
they are in most cases

18:49
safer than banks i know they're going to

18:52
get some blow back on that but

18:54
hey facts are facts right and that's the

18:57
way i feel

18:58
so with that i appreciate you listening

19:00
to fun

19:01
with annuities thanks for listening to

19:04
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with annuities please hit the subscribe

19:07
button and make sure to go to my site

19:09
at the annuityman.com where you can run

19:12
your own

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spea dia and culat quotes and see a live

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feed of the best

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maga fix rates in the country and even

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get

19:20
indexed and income rider quotes as well

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you can also

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sign up for my six annuity owner's

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manual books and i'll ship them for free

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and under no

19:28
obligation i also encourage you to

19:31
schedule a one-on-one call with me

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stan the annuity man so we can have a

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full discussion

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of your specific situation it will be

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the best

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brutally factual and truthful advice you

19:43
will ever get and that's one guarantee

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you should definitely take advantage of

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so join me next time for the number one

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annuity podcast

19:50
on the planet fun with annuities