As financial professionals, we understand the significant benefit that fixed annuities can provide in the form of guaranteed lifetime income, but our clients are often flooded with so much misinformation that they are cautious to move forward. In this episode of Money Script Monday, Sal provides solutions to overcoming the most common misconceptions about fixed annuities.
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Hello. My name is Sal Mendoza, and welcome back to Money Script Monday.
Today we're going to be talking about the 8 reasons why annuities are a bad idea. The purpose of today's Money Script Monday is that annuities are a bad idea.
So bad in fact that $132 billion were sold in 2018. Out of that $132 billion, around $69 billion were sold in fixed index annuities.
One of the things that I wanted to talk about as I'm going through these bullet points is when I'm coaching one of my advisors, one of my partners, I call all our customers, my partners.
One of the things I want to do is I want to prepare them with what I call in between the slides.
Questions that the client is not going to ask you because they're either too embarrassed or they don't know how, they feel kind of, maybe uncomfortable, it's the first time meeting you.
What they're going to do is they're going to get home and they're going to go ahead and type it up on their personal computer.
There's going to be two pieces of information when they go and look. Bad information and some good information.
There are a lot of misconceptions about annuities.
So, let's get started.
1. Your money cannot participate in the total upside of the market
That is 100% true. The reason why, it's not in the market.
This is not a variable annuity we're talking about, we're talking about fixed annuities or SPIAs or MYGAs.
What we've done is we've had the client maybe have money in their 401k for the last 50 years.
They've grown their account. What we're asking them to do is peel some of that off, a portion of that, and put that into an annuity so that there is no fluctuation during a market volatility.
That's one of the reasons that we sell annuities.
2. If you die, the insurance company keeps your money.
This question I get all the time.
In fact, over the last 17 years working with advisors such as yourself, I get this question probably still once every other month. Even today.
The misconception is, once again, they're typing in the computer, they see that, hey, the insurance keeps the money.
The answer is yes, the insurance does actually keep your money if you have one type of an annuity and it's a SPIA with the lifetime income.
Otherwise, all the rest of the annuities have a beneficiary. So, if you pass away, it transfers.
The SPIA with the lifetime, you can purchase an underlying guarantee so the money or the income continues to the beneficiary.
Let's move on.
3. Expected annuity returns are a paltry 2% to 4%.
That's exactly right. We want it to be a paltry 2% to 4%. Maybe 5%, maybe 6%, that's it.
The trade-off is really simple.
Instead of having 12% or 14% returns, the exchange is were only going to have maybe 2%, 3%, 4%, 5%, maybe 6% in some years, 7%, something like that, depending on good years.
The exchange is, the worst case you're ever going to get is zero.
That is the reason why, we don't want to get a 10% or 15% loss in that money, especially if you're 55 years old.
We're just peeling off some money and putting it into protected income, which usually your pension, your social security, an IUL or annuity fall under protected income.
4. Agent commissions are too high.
Holy smokes, they're so high. In fact, they are so high that you don't even pay me, that's how high they are.
In fact, when you write that check for $100,000 and I put that into a 10-year or a 7-year FIA product, that whole $100,000 is working for you on day one.
The insurance company's going to send me a commission check.
Number one, you don't have to write an additional check outside the $100,000 and none of that $100,000 is part of the commission as well.
The insurance company is going to pay me the $100,000 so that I could help you, make sure you understand the product and how it's designed, the benefits and features.
Completing the application, putting the contract in force.
More importantly, meeting you every year to see if there's any changes that have come in your life or maybe we want to change an allocation to something a little bit different or diversify some of the allocations.
I get paid one time upfront and I do all of that for the commission that gets paid by the insurance company.
So yes, they're very high, but it's not paid by you.
5. Surrender period.
5, 7, 10-year annuities I get requests all the time. I get requests for a 5-year, even though I know a 10-year is a better product.
At the end of the day, one of the things we always want to do when I'm coaching is, when you're going through your benefits and features, you always want to make sure you explain the surrender period and that they understand exactly how it works.
If it's a 10-year surrender period, not only is it a 10-year surrender period, but then exactly how the percentages decrease every year as they hold onto it.
Eventually in the 11th year it zeros.
If they want to surrender it, there's no charge and they can walk away from it. It doesn't take more than a few seconds, but we want to explain that.
When they're on the internet, once again, this gets back to them getting home and jumping on their personal computer, they're going to find out this big pool of bad information and if you didn't disclose that, they're going to think you're hiding something.
We want to be sure we're talking between the slides and we're giving them all information.
Let's move on.
6. Annuities are sold, not bought.
That's exactly right.
The reason that they're sold and not bought is because someone has to get a state license, someone has to do annuity training, someone has to do product training to properly offer the benefits and features of that particular annuity that they're actually selling.
You can't just buy an annuity.
An annuity is a very sophisticated product and someone actually has to have an education before they actually sell them.
7. Income rider charges are expensive.
You know what? They're going to be anywhere from 90 basis points to about a buck 20, 1.20.
Some of the new annuities that have been in the market for a while have no charges.
In return, you can't chart income for 10 years. That's the trade-off.
The ones that do have a rider charge, you know what you're actually exchanging is you're exchanging a benefit, so they're going to charge you 90 basis points or one full basis point or a little bit more.
In exchange, what you're going to have is you're going to have an income rider.
Once you decide to turn on that income and if you choose option two a lot of times with most of these contracts, that money will increase every time that there is an interest credit to that particular contract.
That is the exchange is that you have an income rider that will last a lifetime. It doesn't matter if you live to 85 or 105.
8. My CPA said, “Don't buy an annuity”.
There are a lot of times I hear this.
One of the things I like to do during this process is when I'm talking to, one of my agents, one of my partners, like I said, like to call them is that's a question that you want to address upfront.
“Mr. and Mrs. Kim will there be another financial planner, will there be a CPA that's going to be involved as part of the sale?”
If yes is the answer, how long have you been working with him? Do you run everything by them?
You want to find out because ultimately one, you're going to find out what your competition is.
Number two, if you hear, if it's a CPA, the first thing you want to make sure that they understand is that he's a certified public accountant, not most likely a certified financial planner.
Two different roles.
The other thing too is that maybe they've been with the CPA for the last 10 years and he saved them money in a lot of different areas.
So they think that hey, this guy's kind of a financial planning guru and so they're going to run that by him.
Hey, you know what? That's okay. No, don't be upset. Don't be mad. In fact, join him. You know what? Hey, what's his name? Let's go ahead and meet him.
If you don't mind, I'd like to come because he probably doesn't know the features and I wanted to explain to him the features and benefits that I explained to you and how they're going to work in your overall plan.
That's really important too.
I have all these questions and I have another 10 questions that I always give to all the partners that I work with, agents that I work with, that I coach and I help with annuities.
You want to be sure that you're addressing these questions in between the slides, in between when you're talking about the features and benefits of a particular annuity.
That's important because if you don't address them most likely they're going to find that out when they get home and they put that into the Internet and they do a search, they're going to find out and they're going to have some questions.
But you know what? It's much easier if you address them. When they find that on the Internet, they're going to feel good.
Like, hey, you know what? He covered that. I understand how that works.
My name is Sal. Thank you for allowing me to be part of this Money Script Monday.
Have a great day.