What Does The Participation Rate Do In An Annuity?

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What does the participation rate do in an annuity? Hey, good question. Kind of triggered me a little

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bit because we're talking about indexed annuities and how that all works. Hi there. I'm Stan the

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Annuity Man, America's annuity agent, licensed in all 50 states and Puerto Rico. Pioneer of

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contractual guarantees only, top agent out here. And so I do understand the index annuity jargon.

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I've written a book on it. I'll tell you how to get that as well for free after this.

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So, participation rate — what does it do in essence, in English and southernisms? It limits the return.

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That's really what it does. I mean, with index annuities, fixed index annuities, you have,

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you know, a couple of levers — caps, spreads, and participation rates. Now, I've done specific

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videos on those, which, you know, you can pull up on my YouTube channel, but what I'd rather you

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do first is go to my site, theannuityman.com. I've written owner's manuals on all products,

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and I have one on indexed annuities. And in that indexed annuity owner's manual is a very good

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explanation of all of these levers — caps, spreads, participation rates — within index annuities.

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Now, let's do some back history on all of this because that's a pretty interesting question.

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It smells eerily of a bad sales pitch or a presentation at a bad chicken dinner

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or expensive steak dinner seminar, but you need to know kind of the background. In 1995,

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index annuities were introduced as CD products. I did that on purpose because they're

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not market products. They're not securities. They're a fixed annuity designed to compete

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with CD returns. And guess what's happened since 1995 in the biggest raging bull market

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of all time? CD-type returns. That's fine. It's a principle protection product that provides CD-type

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returns. That's not how it's sold. And when this question is asked about participation rates,

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it kind of triggers me because I can just hear Johnny Appleseed agent going, "Yeah,

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you get market upside with no downside. You get market participation with principle protection,

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and you get an upfront bonus." I mean, I can just hear it and go, "Oh gosh." I mean, such garbage.

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What you also need to know about index annuities at the time of this taping — hope they change — is

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that the annuity carrier — life insurance companies issue annuities. They issue index

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annuities, and index annuities are regulated at the state level because they're a fixed annuity,

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and it only takes a life insurance license to sell them. Okay? And in most states, you got

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to make 70. So, most people off the street could do that. That doesn't mean... I always say this:

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you could pass the test on a Friday and then give a seminar the following Saturday,

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and someone could make a decision to give you their life savings and put it

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in an index annuity. Somehow, I don't know how that works because, you know,

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I have a pretty extensive background with, you know, Dean Witter, PaineWebber, Morgan Stanley,

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and UBS. So I understand financial products. I understand true growth. I understand markets.

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I understand options and futures. I understand all of that. But I also understand how annuities work.

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The other thing — the kind of a loaded answer to that very simple question

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about participation rates — currently, at the time of this taping (check the date),

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there are over 800 index option choices for fixed index annuities that include participation rates,

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spreads, caps, whatever. But the point is those typically can be changed with most policies,

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most index annuity policies. The carrier can change the way those gains are calculated

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with those caps, spreads, and participation rates — hold, wait for it — at their discretion.

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Give an example. Let's say you bought an index annuity that has a one-year option.

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Okay? So every year it changes. So you buy an index annuity with a 10-year surrender

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charge. A lot of them have 10-year surrender charges. So what have you really purchased?

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You've purchased a one-year guarantee, and the other nine years can change at

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the carrier's discretion. That's not all index annuities, but that's a vast

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majority of them. What I'm trying to tell you is, if it sounds too good to be true,

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it is every single time. If you're going to do market growth, don't buy an annuity.

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Now, I just got an email. I was checking my emails in between the break, and one of the questions I

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got is, what's the best company to buy an index annuity or a RILA? RILA is a registered

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index-linked annuity, which is what the brokerage firms are selling to combat the index annuities

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so that they have something to sell. My answer is neither. I mean, if your goal is market growth,

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don't buy that. Go buy the market. You know, go have a fee-only advisor manage your money.

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Notice I said fee-only. Fee-only advisors don't sell products. They manage your money. Fee-based

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sell products. They double dip. Not saying they're bad people. I'm just saying be careful out there.

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Alright? If it sounds too good to be true, it is every single time. And RILAs, to me — I

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don't sell that. I'm not securities licensed anymore, but I was, so I do understand them.

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I call those co-pay annuities. You say, "Wait a minute. Co-pay?" Yeah. What you're doing is you're

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choosing how much downside that you're going to participate in, and you pay for that right. How

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about that? Who thought that up? Only a brokerage firm could think that product up and go, "You know

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what? Let's charge them..." Who are they? The client. "Let's charge the client to share in the

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downside." You think we can get away with that? I think we can. I mean, and honest to goodness,

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they're as hot as a firecracker, I guess, is what I hear. Not in our world because, in my world,

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it's contractual guarantees only. You own an annuity for what it will do, not what it might do.

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So since 1995, when index annuities were first introduced, and just recently RILAs have been

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introduced as the brokerage combatant to the index annuity — I guess they're twin brothers.

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I guess that would be the way to do it. Big C behind the camera — but regardless,

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you know, you're talking about participation rates and caps and spreads and levers,

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and all those levers do are limit the upside. Now, if you're an agent and you don't believe

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that and you want to yell at me, that's fine. But I'm right. It limits the upside.

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Now, the pitch is, well, ain't no downside or limited downside on the co-pay annuity. Understand

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that. But why not just go get the growth? Why not get it all? Because with indexed annuities,

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whatever index you choose — hold, wait for it — does not include dividends. And you say,

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"You care? I don't care about dividends." Well, the S&P 500 — over 50% of the returns historically

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have been based on the dividends. Okay? So, you know, also, too, with most — not all— most

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index annuities, you get to lock in the gains every year on the contract anniversary dates,

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which means you're an absolute annuity eunuch — write it down — the other 364 days. Now,

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there are some weird little index annuities that allow you to do this, but the vast majority,

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you're a slave to the day, as I say. Please tell me. Please tell me how that makes sense.

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Why not just go market growth? Why not have liquidity? Why not do something that could

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get you real upside? You cannot have your cake and eat it, too. And if you can't explain it to

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a nine-year-old — no offense to nine-year-olds — do not buy it. And if it sounds too good to be true,

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it is every single time with annuities, without exception. Period. End of story.

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And just to pile on a little bit, because I do hit after the play. I've yet to see a proposal

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from any of these index-type products that came true or that were better than what was

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pitched — ever in my life. The only possibility was the one in 1995 when they first came out

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with Keyport Life. I used to call it Keystone, but remember Keystone was a very cheap beer.

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So when I was drinking back in the day — and I don't drink now, I'm 20 years sober — there was

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something called Keystone Light, but I digress. The company was Keyport. They were the first ones.

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Maybe that one beat the proposals, but I don't think they were doing back-tested numbers and

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all this unicorn-chasing butterfly, stuff that you hear now with upfront bonuses.

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By the way — and I'll close with this — there's not a philanthropist at an annuity company that wakes

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up in the morning and goes, "You know what? I am so patriotic right now that I'm going to do

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an upfront bonus, free money, and I'm going to do the best participation rate, pro-consumer, that I

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can do." They're not doing that. They're not doing that. I have a very good friend that's on boards

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of some of these index annuity companies, and he comes out of those meetings saying, "Oh my gosh,

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Stan, you wouldn't believe what they said." I'm like, "Of course, I believe what they said."

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So to answer the question — I know I went all over the place, but it was organized,

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and I did stay in my lane — participation rate, schmate, who cares? If you need market growth,

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don't buy these things. Alright? Do me a favor. There's a video that's apropos,

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as they say. Above my head, click that. It's about contractual guarantees only. I am the

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pioneer of contractual guarantees only and only recommending the contractual guarantees — never,

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ever looking at potential and hypothetical and theoretical unicorns chasing the butterflies. You

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own an annuity for what it will do, not what it might do. That video explains why that's important

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to us and why it should be important to you. My name is Stan the Annuity Man. See you next time.