It seems like TheMotleyFool is so in love with variable products that they can’t use common sense when it comes to fixed annuities. Just like most securities based news organizations, they have no problem trying to explain options, derivatives, and a myriad of other highly complex investment strategies, but when it comes to annuities their brain can’t handle “complexity”.
Let me make it simple for you Fools. Money in a fixed annuity, of any type, goes up, not down, as long as you use it as it is intended to be used. If you withdraw more than your penalty free amount there are surrender charges (just like some mutual funds you love to talk about).
Complex riders, really? Compared to what? The talking points of securities based news organizations is just getting boring.
Here is a great article debunking the myth that a 4% withdrawal rate is a solid rule for a lifetime income plan. It amazes me that variable brokers use a 4% non-guaranteed withdrawal rate when our lifetime income benefit riders pay out at least 4% on a guaranteed basis, and usually much more.
One of the keys to being a successful annuity agent is the ability to get your client to understand that there is a problem with their current situation. If they think nothing is wrong then there is nothing you can do for them. Here is a sale presentation to go along with this article that will help you show your client that 4% that is not guaranteed is no plan at all.
Annuity Sales Presentation: A Retirement Plan for Living, or Dying? You, “Mr. Jones, do you want a retirement plan for living, or for dying?”
Client, “What do you mean?”
You, “You have been told that you need a pile of money that you will draw off of in the hopes that you will only live to a certain age so you won’t run out of money. In other words, your financial plan is based on you dying by a certain age. It’s a plan for dying, wouldn’t you agree?”
Client, “Yes, I never thought of it that way but I guess you are right.”
You, “Mr. Jones, one of the major problems with plans for dying is that the closer you get to the age you are suppose to die the more stress you will have because of the fear associated with outliving your plan for death. In fact, it might even be possible that you will not outlive your plan for death because of the stress it causes the closer you get to the age you are suppose to die. Can you imagine how stressful running out of money would be?
Client, “Yes, that would be terrible.”
You, “Mr. Jones, I want you to know right now that I don’t work with death plans. I specialize in plans for living! If I could show you a way that you would never outlive your money so you could plan on living as long as possible, would you be interested in that?”
If the experts can’t figure out what is going on then what chances do our senior clients have? The graphic linked above and displayed below just goes to show how much our clients need guaranteed lifetime income annuities
It never ceases to amaze me how securities firms spend so much time designing products to try and mimic the lifetime income benefits of fixed indexed annuities and lifetime income benefit riders. So much wasted energy is spent designing investment strategies when the solution is right in front of their faces. You have to wonder if these guys ever climb out of their box to find out what we already know.
Why do they do this? Heard of the saying, “Don’t step over a dollar to pick up a dime”? In this case, they are definitely not stepping over a dollar. Fees are always the motivation when the securities industry tries to mimic a guaranteed product with a risk product.
Study your competition so you are prepared when these products, that pretend to provide lifetime income solutions, are pitched to our clients. For more information read the article linked below:
Fixed and fixed indexed annuity complaints have all but gone away in recent years. If you go back to 2007 one carrier that starts with an “A” had around 35 complaints in Colorado (the state I live in) and this year none. Although not as drastic, other carriers have seen their complaints greatly decrease or disappear completely. How is that possible with fixed and fixed indexed sales increasing?
Suitability requirements have greatly increased. As Bill Broach always says, “The more suitability regulations the better.”
State required annuity continuing education courses have become commonplace, requiring agents to have more education about the products they sell. I have always said that the barriers to entry in this business are way too small. I believe a license requirement closer to what is required in the securities industry would be a huge improvement as long as it was state department of insurance regulated.
Emphasis on guarantees have become the emphasis of the indexed annuity sale. In an environment of decreasing caps agents have been forced to focus on the core benefits of fixed indexed annuities rather than pushing market participation hype. While market participation can be significant at times, this should never be the primary purpose for purchasing a fixed indexed annuity. Preservation of gains and/or lifetime income are the two reasons to buy an indexed annuity.
Why are variable annuities at risk for the guaranteed benefits they provide to their policy holders?
It has to do with taking money vs. holding money. When an insurance company sells a variable annuity they take a client’s money and give it to someone else. That “someone else” is usually a stock or bond mutual fund. Therefore, the only way a variable annuity insurance company can make money is to charge fees on the premium as it “passes through their hands”.
A compounding problem for the variable annuity insurance company occurs in a prolonged downward market. For example, if a client deposits $100K into a variable annuity but then that account is decreased to $50K due to market losses, the guaranteed benefits will remain the same (or may even increase) but the fees are reduced by 50%. (i.e. a 3% fee on $100K is $3,000 and a 3% fee on $50K is $1,500).
If a declining account value due to market loss wasn’t a big enough problem, another problem is the fees themselves. Fees in variable annuities can be very significant and are a major factor in eroding the account value. In a period of loss, or little to no growth, fees will have a compounding effect on account value deterioration. Once again, the lower the account value the lower the fee revenues for the insurance company. It’s somewhat ironic that the more a variable annuity insurance company takes from its clients via fees the less money there is to generate fee revenues.
Consequently, variable annuities can not only be risky for their policy holders but also risky for the insurance companies that sell them.
In contrast, when an insurance company sells a fixed or fixed indexed annuity not only is the principle guaranteed but the insurance company holds on to the money. They assume the risk of investment but the principle is always “in their hands” and always available for them to invest for returns (less the interest rate credited to the account value). For this reason they are able to provide higher guaranteed benefits with little or no fees.
Variable annuity insurance companies assume a much larger risk than fixed annuity insurance companies when offering guaranteed benefits to their policy holders. A competitive insurance environment like we have today gives carriers even more reason to toe the line on offering variable annuity guaranteed living benefits that may be difficult to support during market downturns. Variable annuity insurance companies depend on the account value growing or at the very least maintaining its value. Major collapses in the markets can make these product offerings a significant liability for insurance carriers as we saw in 2008 and 2009.
See the article linked below for more information on how variable annuity insurance companies are cutting back on benefits and increasing fees.
In March this year I had the privilege of listen to Jack Marion, founder of Advantage Compendium, Ltd., speak at the American Equity conference in Las Vegas. He is a true champion and defender of our industry. Below is a link to his website. There is more information about annuities and their real life comparisons to other investment options than any one person could possibly absorb.He also has some great articles that debase the annuity bashing articles we have seen lately.http://www.indexannuity.org/index.html