Bogleheads® Chapter Series – All about annuities
00:00:00.000 | Welcome to the BogleHeads Chapter Series.
00:00:04.900 | This episode was jointly hosted by the Pre and Early Retirement and
00:00:09.140 | Retired Life Stage Chapters and recorded June 4th, 2024.
00:00:13.460 | It features longtime Boglehead and insurance expert, Stinky, also
00:00:17.900 | known as Wayne, presenting a complete overview of annuities.
00:00:21.300 | Bogleheads are investors who follow John Bogle's philosophy for
00:00:25.180 | attaining financial independence.
00:00:27.460 | This recording is for informational purposes only and should not be
00:00:30.440 | construed as personalized investment advice.
00:00:32.860 | All about annuities in about an hour of talking time, basically.
00:00:42.680 | And as Miriam said, we'll have roughly 20 minutes in the first section,
00:00:47.020 | 20 minutes in the second section, and then 20 minutes at the end based
00:00:50.560 | on what I've done for timing so far.
00:00:53.400 | And I'll encourage if you have questions that you not ask specific questions
00:01:00.040 | about your specific product that you're looking at or that you own, you know,
00:01:04.080 | you can post those kinds of things on the forum.
00:01:05.860 | I do try personally to respond to every question on annuities that I see on the
00:01:09.880 | forum, but it's often good to have discussions in the forum, but let me
00:01:14.480 | first introduce myself a little bit.
00:01:16.200 | Wayne, also known as Stinky.
00:01:19.160 | Stinky, take off on my last name.
00:01:22.000 | It's a childhood nickname.
00:01:23.640 | I've had that since college, if not before I am retired.
00:01:27.100 | I have more than 40 years of experience working in the home offices of major
00:01:31.320 | life insurance companies, and I have held senior financial roles most of that time.
00:01:35.640 | I'm a finance guy, a math guy, I had a math major in college.
00:01:38.880 | I'm not a marketing guy at all, not a salesman at all.
00:01:41.680 | I'm because of my work with my former company and also some acquisition work
00:01:48.180 | that I did looking at other companies.
00:01:49.860 | I'm familiar with the product design and pricing for most kinds
00:01:52.260 | of life insurance and annuities.
00:01:53.420 | And kind of interestingly, I also worked extensively with the
00:01:56.820 | rating agencies and state regulators.
00:01:58.860 | Um, you know, we talk sometimes about AM best ratings.
00:02:01.660 | Um, I have visited the offices of AM best by my count, I think 19 times
00:02:06.580 | during my career on behalf of my company.
00:02:08.700 | So I've been in Oldbrook, New Jersey, where AM best is for almost 20 times.
00:02:13.380 | I'm also, um, the person that started up the long running purchasing
00:02:17.460 | Micah's, um, thread in the, in the forum.
00:02:20.900 | That thread now has over 2000 posts and over 300,000 views.
00:02:26.460 | And I think a lot of folks have gotten knowledge about multi-year
00:02:30.020 | guaranteed annuities, Micah's through that thread.
00:02:32.380 | And so that's kind of who I am.
00:02:34.220 | A disclaimer or two, um, this certainly is not financial advice.
00:02:38.740 | You know, I'm, I'm giving you my own opinions about things.
00:02:41.980 | And my opinions come from my training and experience and also from being
00:02:45.600 | exposed to folks on the forum and their, their thoughts also consult with your
00:02:50.420 | qualified financial tax accounting or other advisor, it's only a high
00:02:54.260 | level overview of annuities.
00:02:55.700 | We could go, you know, if I went two or three hours, you'd get deeper into it.
00:02:59.380 | But one hour is not enough to give an overview of everything.
00:03:02.300 | And of course, therefore it should not be relied upon for any kind of purchasing
00:03:06.140 | decision or surrendering decision, uh, for annuities or financial products.
00:03:11.020 | The opinions are mine.
00:03:12.380 | I formed them, as I said, based on my training and experience.
00:03:15.880 | And also based upon, you know, seeing things from the Bogle head forum.
00:03:19.360 | I am pleased that I'm retired now.
00:03:22.060 | So I'm able to be critical of some of the products that my former employer wrote.
00:03:25.840 | You know, I'm, I'm not a fan of certain things as you'll see, um, during the
00:03:29.960 | presentation tonight, and I feel freer to speak about those things now that I'm
00:03:33.560 | retired and no longer drawing a salary from my company.
00:03:36.440 | Um, and I've also never been an insurance agent or a financial advisor.
00:03:40.040 | Cause as I said, I'm a numbers kind of guy.
00:03:44.200 | The agenda, um, what is an annuity?
00:03:46.460 | We'll talk about that for a few slides.
00:03:48.180 | The primary reasons why a Bogle head or anybody might buy an annuity and
00:03:52.820 | then get into the two basic use cases for annuities, the first is as a
00:03:57.620 | source of income, and then we'll follow that up with the time for questions.
00:04:01.020 | The second use case for annuities is a source of accumulation.
00:04:04.540 | And we'll follow that up with the time for questions and then for, um, uh,
00:04:09.460 | topics at the end for short topics, how our annuity policy order is protected.
00:04:13.780 | How are annuities taxed?
00:04:14.800 | Where can I buy an annuity?
00:04:16.060 | And what questions might you want to ask when you're considering an annuity?
00:04:19.600 | So what's an annuity at its core?
00:04:23.560 | An annuity is just a simple contract between you and an insurance company
00:04:27.520 | that requires the insurer to make payments to you, um, after you pay
00:04:31.760 | a premium to the insurer and the insurer might pay premium might make
00:04:36.360 | payments to you either immediately or at some time in the future.
00:04:40.280 | And as I said, there's two general use cases, income annuities, which
00:04:45.860 | is kind of a regular, usually monthly payment of the annuitant or for
00:04:50.140 | accumulation, growing a deposit over time, using interest credits
00:04:53.500 | or stock market performance.
00:04:54.620 | So the income or accumulation, you know, when you look at the posts
00:04:58.580 | in the forum and some of the threads that you follow, you'll see a lot
00:05:01.860 | of discussion of single premium, immediate annuities, and people think
00:05:05.000 | of that as the basic kind of annuity.
00:05:07.380 | Spia, which pays out a monthly amount, uh, in return in exchange for a
00:05:11.880 | freemium, but literally 95% of current annuity sales are used for accumulation.
00:05:17.560 | Annuities are used these days as a savings vehicle, primarily, um, almost
00:05:22.680 | entirely with the monthly income being a very secondary use case for annuities.
00:05:28.680 | Uh, I will note, however, every annuity that you buy, um, has
00:05:33.720 | the ability to allow for income.
00:05:36.080 | I'll talk frequently tonight about migas and I might use a hundred thousand
00:05:39.620 | dollar miga premium or a hundred thousand dollars to be a premium or whatever.
00:05:43.220 | But if I buy a hundred thousand dollar miga, I'll probably be
00:05:47.040 | using that for accumulation, but I will be able to turn that
00:05:51.620 | into an income stream if I choose.
00:05:53.220 | And the acronym miga, M Y G A I'll define that better later, but it's
00:05:57.460 | a multi-year guaranteed annuity.
00:05:59.420 | So I'll come back to that and just find that more fully in the second
00:06:03.420 | section of this presentation.
00:06:05.840 | So the primary reasons why a bogey head might buy an annuity for the
00:06:10.520 | use case of income, there's really just one case there you're converting
00:06:14.320 | a lump sum of money, my a hundred thousand dollars into a guaranteed
00:06:18.600 | monthly paycheck for life of, let's say a thousand dollars a month.
00:06:22.240 | So it's a simple use case.
00:06:24.280 | It's a simple product.
00:06:25.280 | You can also do an income, the use case of an income for a fixed period.
00:06:30.520 | I give my a hundred thousand dollars to the insurance company and they'll
00:06:33.960 | promise to pay me on a monthly basis for 10 years and then stop
00:06:37.840 | when the 10 year period is over.
00:06:39.280 | So that's the use case of, of, of income to use an annuity in that way.
00:06:44.680 | The use case of accumulation can be several things.
00:06:48.480 | First, you might be able to earn a guaranteed attractive rate of
00:06:52.520 | interest over a period of time, like with a multi-year guaranteed annuity.
00:06:55.720 | So you're earning interest on a deposit to make with insurance company.
00:07:01.320 | You can also use an accumulation or annuity to defer the
00:07:04.040 | reporting of taxable income.
00:07:05.440 | There'll be times where people find it attractive to not have to make an
00:07:11.640 | investment and to defer the reporting of income for many, you know, several
00:07:16.440 | or many years in the future, we'll talk about that later a little bit.
00:07:19.480 | You can also use an accumulation or annuity as a 1035 exchange vehicle
00:07:23.800 | from another annuity or a cash value life insurance policy.
00:07:27.800 | We'll talk about that a bit later also, but those are your basic
00:07:31.240 | reasons why you might buy an annuity.
00:07:32.920 | There are more reasons we could go deeper into things.
00:07:35.480 | The primary use cases are income and accumulation, and then those
00:07:39.800 | reasons that I've listed out there.
00:07:41.000 | Now going into income annuities, income annuities.
00:07:46.880 | I'm going to talk about four forms of income annuities here.
00:07:50.440 | Uh, spears Diaz, uh, annuitization options and QX.
00:07:55.200 | And I'll go into a slide or two on each of those things right now.
00:07:59.800 | A single premium, a media annuity, a SPIA, that is the simplest kind
00:08:04.680 | of annuity that there really is.
00:08:06.280 | A person will pay a premium to an insurance company.
00:08:10.440 | Let's say again, a hundred thousand dollars and the payments usually
00:08:14.120 | monthly, we'll start within one year after the premium was paid.
00:08:17.680 | And typically they'll start a month or two after that premium was paid.
00:08:20.640 | And so, um, those payments in most cases or many cases will continue
00:08:26.640 | for the life of the insured.
00:08:28.240 | So long as you're breathing, you're getting that monthly
00:08:30.520 | check from the insurance company.
00:08:31.640 | Um, you can also, as I think I said before, uh, purchase a, uh,
00:08:38.440 | SPIA for a period certain you can buy it for 10 years and a use case for
00:08:43.960 | that might be someone who's 60 years old, doesn't plan to take
00:08:47.520 | social security until they're 70.
00:08:48.760 | They're retiring.
00:08:50.040 | They want to have a sum of money that they put aside right now and have
00:08:53.640 | a planned amount, a paycheck coming in every month from the insurance
00:08:57.560 | company for 10 years and then stop when social security starts.
00:09:00.640 | And so that'd be a fine use case there for a SPIA.
00:09:04.040 | When a person's buying a SPIA for life, you know, Taylor Laramore has
00:09:08.880 | mentioned numerous times on the forum about how SPIA is the best thing he's
00:09:12.520 | ever bought, um, because it continues to pay as now he's a hundred years old.
00:09:17.080 | There are additional options beyond just a single life SPIA that I might
00:09:21.680 | buy on myself from my life only.
00:09:25.160 | One of the most typical things is to have a joint SPIA that is I and my spouse
00:09:30.920 | could have an annuity that'll pay out.
00:09:33.360 | So almost either one of us will survive and we'll stop only when
00:09:36.840 | the second one of us dies.
00:09:38.520 | Now, of course, that if I was putting down my a hundred thousand, getting a
00:09:43.760 | thousand dollars a month, if I include my wife, who's a female, who's younger
00:09:48.160 | than me, who will likely live longer than me, the month of payment might
00:09:51.680 | be less than a thousand dollars.
00:09:53.240 | Cause they're going to pay till the second one of us dies.
00:09:55.160 | A period certain annuity.
00:09:57.840 | That's the 10 year annuity that I've been talking about that, uh, that
00:10:00.760 | just pays for a period certain, but you can also buy an annuity.
00:10:04.000 | It's pays out for your life, but a minimum of 10 years.
00:10:07.960 | And so a period certain means that there's a certain period of time that
00:10:12.040 | will be paid for, and then in addition, it will continue paying after
00:10:16.240 | that for as long as I'm alive.
00:10:17.520 | A refund feature would say, um, if I pay my a hundred thousand dollars, it
00:10:22.960 | would take a hundred months to recoup that a hundred thousand
00:10:25.920 | dollars and a thousand dollars.
00:10:26.960 | A month.
00:10:27.360 | If I died in month 90 or month 80, then the premiums would likely, or
00:10:33.040 | the payments would likely continue until they reached one month.
00:10:37.360 | 100.
00:10:37.880 | My beneficiary would get the refund of the additional payments to get back
00:10:43.520 | to my a hundred thousand dollar initial premium, and then finally increasing.
00:10:48.200 | Most of these are sold as a level of amount, $1,000 or whatever per month.
00:10:53.160 | However, there are options offered by most all companies to increase
00:10:57.160 | those payments by 1%, 2%, 3% per year.
00:11:01.800 | And to my knowledge today in the, in the U S those are only offered, um,
00:11:08.000 | in, you know, percentage insurance, like one, two, 3%, et cetera.
00:11:11.640 | There's no insurance company that I'm aware of that offers a single
00:11:15.560 | premium immediate annuity that's tied to the CPI, um, they were, they have
00:11:21.040 | been sold at sometimes in the past, but they were not very popular at all.
00:11:24.560 | And they're not available now to my knowledge, but you can buy one that
00:11:27.760 | increases, um, it's payments over time.
00:11:29.960 | And of course, if you're getting an increasing payment over time, your
00:11:33.600 | initial payment will be lower than that thousand dollars a month to compensate
00:11:37.200 | for the higher payments later on.
00:11:38.480 | So that's a spiel, single premium, immediate annuity, SPIA, a
00:11:45.080 | deferred income annuity, a deal.
00:11:46.880 | Is very similar to a SPIA, except that the payments start more than
00:11:51.400 | one year after the premium is paid.
00:11:53.240 | Let's say for example, I'm 65 years old.
00:11:56.480 | I'm certain that I want to put down a premium today and start
00:11:59.960 | receiving payments when I'm 75.
00:12:02.120 | No payments to me between 65 and 75.
00:12:05.320 | Then payments commence when I'm 75.
00:12:07.600 | Of course, if I put down my a hundred thousand dollars, I can get a lot more
00:12:11.800 | than my thousand dollars a month because I'm not getting payments for the next
00:12:15.800 | 10 years and the insurance company can invest that money and is not paying it
00:12:19.680 | out to me, um, so, but there might be a use case where I know that I want to
00:12:25.120 | have payments starting five years or 10 years or whatever out, um, some deals
00:12:31.320 | are sold without a death benefit.
00:12:33.040 | So if I'm 65, I buy it and I die at age 72, nothing goes to my beneficiary.
00:12:39.440 | However, you can buy a return of premium.
00:12:42.000 | So that if I die when I'm 72, that they'll get my premium
00:12:46.080 | back as a, as a death benefit.
00:12:47.640 | Uh, that's an optional return of premium.
00:12:49.920 | I'll also say that in place of a deal, a regular traditional deferred income
00:12:56.320 | annuity, you can have the same use with an indexed annuity with a
00:13:00.880 | guaranteed withdrawal benefit rider.
00:13:02.520 | Um, we'll talk about that a little bit later on.
00:13:05.400 | Most mogul heads don't care too much for indexed annuities.
00:13:09.920 | But if you attach a guaranteed withdrawal benefit rider, that
00:13:13.280 | effectively turns it into a guaranteed product where the company can't mess
00:13:17.640 | with you and cutting your accredited rates in the future, and you can have
00:13:22.160 | equivalent benefits to a deferred income annuity with a indexed annuity
00:13:27.160 | with a guaranteed withdrawal rider.
00:13:28.400 | So I believe that a prospective DIA buyer should look at both options,
00:13:33.320 | both the DIA and an indexed annuity with a withdrawal benefit rider.
00:13:37.400 | So that's a deal, something where payments start more than one year in
00:13:41.640 | the future after the premium is received.
00:13:44.160 | Next is the annuitization options in life insurance or annuity policies.
00:13:50.560 | If you look at any life insurance policy that you own and turn away
00:13:54.560 | to the back of the policy, you'll see that there are ways that the, uh,
00:13:58.160 | insurance company can pay out the life insurance benefit.
00:14:00.760 | The vast majority of people take their life insurance benefits as either a
00:14:05.600 | cash, you know, a one-time check or as a checkbook that they draw down pretty
00:14:09.520 | quickly, but you do have the option in every life insurance policy to take the
00:14:14.160 | benefit, the life insurance benefit as an annuity for your life or for some period.
00:14:19.240 | Same thing with every annuity, every annuity, be it a variable annuity or a
00:14:23.840 | MIGA or an indexed annuity, whatever.
00:14:26.200 | The vast majority of those are used for accumulation purposes, but there's a
00:14:30.760 | little clause at the end saying that if you want to turn this into a payment
00:14:34.000 | stream that you can, and then the options that you have there for life
00:14:37.520 | only period, certain, et cetera, it's like you'd have an SPM.
00:14:40.480 | So that's the third use case or the third kind of, uh, annuization options.
00:14:45.840 | And the fourth is a qualified longevity annuity, a QAC.
00:14:50.080 | Uh, that is a fairly new thing, uh, enabled under the tax code.
00:14:54.840 | It's a payout annuity funded with an investment from a IRA.
00:14:59.120 | It's a, so it's qualified money, uh, or a 401k or something else.
00:15:04.000 | Um, the start of payments on that is, can be as soon as almost immediately
00:15:09.400 | after you make the premium payment from your IRA or whatever, or
00:15:13.320 | it can be as late as age 85.
00:15:15.160 | And you can do it either on your own life or on the life of you and your spouse.
00:15:19.960 | A benefit of the QLAC is that you can reduce your required minimum
00:15:24.880 | distributions from your, um, uh, IRA by putting part of it into a QLAC.
00:15:31.160 | Here's an example for you.
00:15:33.240 | You have a million dollar IRA, the IRA, the required minimum
00:15:37.640 | distribution percentage is 4%.
00:15:39.240 | So you've got to take out $40,000 in that year.
00:15:42.200 | Well, if you apply $200,000 of that IRA balance to a QLAC, then you'll be able
00:15:49.400 | to reduce your IRA balance that's used for RMD purposes from a million dollars
00:15:54.120 | to 800,000, and then you can, uh, have 800,000 times 4% or 32,000, a smaller.
00:16:00.680 | RMD, and you've got to eventually pay the Piper when that QLAC starts
00:16:05.240 | churning out cash at the date and the age that you define, then that'll all
00:16:10.520 | be taxable income at that point, but you can defer having, um, income from your,
00:16:16.040 | uh, uh, your IRA by using part of it to, uh, fund a QLAC the maximum premium
00:16:22.280 | per the law right now is $200,000.
00:16:24.520 | Uh, one time or 200,000, maybe, maybe you can do multiple tranches,
00:16:29.080 | but 200,000 in total, and that will be adjusted with inflation.
00:16:32.120 | So that's the fourth kind of, uh, of a, uh, payout annuity.
00:16:35.720 | So in summary about income annuities in general, I'm going to say in this
00:16:41.720 | presentation, a number of times, many Bogle heads feel, well, I sense, you
00:16:47.560 | know, by reading the comments that the people post, I think that a lot
00:16:51.320 | of folks feel this way, Bogle heads are not, um, monolithic.
00:16:55.080 | They do have different opinions and different views on things, but from
00:16:58.480 | the comments that I see would line up pretty well with my personal beliefs.
00:17:02.080 | Most Bogle heads, I think, feel that annuities bought for income purposes
00:17:05.720 | are a pretty good consumer value.
00:17:07.560 | They are a simple, straightforward product design.
00:17:10.520 | There's no hidden fees.
00:17:12.160 | What you see is what you get.
00:17:13.200 | You know, if you put down your a hundred thousand dollars for a SPIA and you get
00:17:16.640 | your thousand dollars a month, that's about as simple a contract as you can
00:17:20.080 | possibly have, and there's no hidden fees.
00:17:23.120 | There's no nothing at all.
00:17:24.680 | It's all locked in.
00:17:26.120 | Um, and, and you, a person is allowed then is enabled to be able to lock
00:17:30.560 | in an income stream over an extended period of time, I can take my premium
00:17:34.920 | and I can lock in my thousand dollars a month for the remainder of my life.
00:17:38.480 | Come hell or high water.
00:17:39.520 | I'll get that thousand a month.
00:17:40.960 | So long as I'm breathing, it allows me to get higher monthly income than a
00:17:46.720 | withdrawal method, like the 4% rule.
00:17:48.720 | You know, if I had my million dollar, um, IRA, I might only be able to get
00:17:54.960 | $40,000 a year out, uh, using the 4% rule, but I can get a higher
00:17:59.720 | amount out, uh, by buying a SPIA.
00:18:02.280 | And of course there you got to pay the piper.
00:18:04.600 | The reason that you can get that higher amount out is because if there's a
00:18:08.160 | residual value in my IRA, when I die, that'll go to my beneficiaries, but
00:18:12.920 | unless I have some kind of a refund option in my SPIA, when I die, there's
00:18:17.920 | no residual value at all, so you can get more money while you're alive, but
00:18:22.080 | you don't end up having a residual value for your beneficiaries.
00:18:24.960 | But you can get higher payments.
00:18:26.360 | And for some people, it's an important thing to maximize current income.
00:18:30.280 | And that might be attractive if you have no errors that you care
00:18:33.400 | about or anything like that.
00:18:34.400 | One thing common around frequently on the forum is that inflow inflation does erode
00:18:40.480 | the real value of payments over time.
00:18:42.120 | Almost all of these annuities are done in nominal dollars, $1,000 a month.
00:18:47.280 | And so a thousand dollars a month in 2024 is almost certainly less than
00:18:51.440 | a thousand dollars will be in 2034 or 2044, so inflation does erode the real
00:18:56.720 | value of an annuity payment stream over time based on what people post in the
00:19:01.840 | forum, the, you can buy a SPIA as young as age 40, but the vast majority of
00:19:08.000 | folks will be waiting until there's some time in their late sixties, early
00:19:11.880 | seventies, mid seventies, maybe up in their eighties, that's the time when.
00:19:16.160 | You're getting closer to the end of your life.
00:19:19.520 | The payments are higher and more attractive for a thousand
00:19:22.480 | or a hundred thousand dollars.
00:19:23.400 | A premium.
00:19:23.920 | And a lot of folks seem to think that's a sweet spot for buying an annuity, a
00:19:28.520 | payout annuity of some type at that age.
00:19:30.920 | I'll also finally note that there are some lucky people in this group that
00:19:36.600 | still have an old style defined benefit pension plan and the many defined
00:19:41.880 | benefit pension plans have an option for taking a, uh, either a monthly
00:19:47.160 | paycheck, once you retire a pension check or getting a lump sum.
00:19:52.240 | And so the purchasing decision for that.
00:19:55.440 | Uh, annuity is very similar to thinking about a SPIA with a SPIA.
00:20:00.360 | You have a lump sum of money.
00:20:01.600 | You choose to give it to an insurance company to buy a, uh, a monthly benefit.
00:20:06.520 | The same kind of calculation is there.
00:20:08.840 | If you have a cash, if you have a defined benefit plan with a lump sum option,
00:20:13.960 | you have a lump sum available to you, but you can also go ahead
00:20:16.840 | and use that to buy a pension.
00:20:18.640 | And so with that, I finished up the first part of my presentation here.
00:20:23.280 | And, uh, we'll take a few questions.
00:20:25.640 | Okay.
00:20:29.440 | You can post them in the chat or you can raise your hand.
00:20:32.120 | If you have a question.
00:20:33.880 | Do we have any in the chat?
00:20:37.800 | Um, I have one thing to say with, uh, Wayne about that.
00:20:42.320 | The, um, the SPIAs, I know that Taylor has mentioned that he bought two of them.
00:20:47.200 | Uh, in one of his posts, he described how he did it.
00:20:51.760 | The first SPIA that he bought.
00:20:54.360 | I don't remember how old he was.
00:20:57.000 | He might've been in his sixties and he calculated, he wrote, he calculated
00:21:02.240 | how long he would live probably.
00:21:04.560 | And he calculated it and he figured, okay, I'll live until I'm like in
00:21:08.400 | the, my late seventies, maybe early eighties, if that.
00:21:12.080 | So he bought the SPIA thinking that it would tide him over.
00:21:16.000 | He does have a pension.
00:21:17.360 | Taylor does have a pension, but he needed extra.
00:21:20.320 | He felt more comfortable, you know, more comfortable having more of a steady.
00:21:26.600 | Stream of income coming in.
00:21:29.280 | That would be there for them.
00:21:31.680 | And so that's when he bought his first one.
00:21:34.520 | And then of course he kept, you know, he got into his six sixties.
00:21:38.880 | He passed through his seventies.
00:21:40.400 | He was in his eighties.
00:21:41.920 | He figured I'd better buy another SPIA.
00:21:43.880 | And so he then bought another one.
00:21:46.120 | And he is now a hundred years old and five months, almost
00:21:51.120 | a hundred and a hundred and a half years old.
00:21:53.400 | And so for some, you know, it, it solved his problem or his
00:21:58.600 | wasn't a problem so much, but it solved, it helped him to feel comfortable
00:22:03.960 | with the income stream that he had.
00:22:06.440 | So he did not have to worry about whether or not he took it too much
00:22:12.200 | money out of his Vanguard accounts, his retirement accounts or not.
00:22:15.560 | So that seems to me to be a, a good, you know, a good reason for a SPIA.
00:22:21.480 | Well, there's a, there's a, definitely a comfort level in
00:22:25.040 | having a monthly paycheck.
00:22:26.040 | I mean, he likely had a monthly paycheck or a weekly paycheck
00:22:29.440 | for his entire working career.
00:22:31.080 | And the switching from that mode of having known income coming in
00:22:35.440 | to not having income, maybe except social security, that's a rather big break.
00:22:39.600 | Having a SPIA can tide you over and make you feel a lot more comfortable
00:22:43.720 | with covering the basics of life.
00:22:45.480 | Your basic expenses are being covered by a known amount coming in.
00:22:49.160 | And there was comfort in that.
00:22:50.160 | Yeah.
00:22:51.020 | Yeah.
00:22:51.740 | Uh, lady geek.
00:22:52.680 | Oh, I just want to say we have three questions in the chat.
00:22:56.680 | Okay.
00:22:57.900 | First one, Arctic pineapple corp.
00:23:00.520 | Love that name.
00:23:02.040 | Can't remember the name of the writer you spoke of when discussing index annuities,
00:23:06.040 | but it, but isn't index annuity with the writer you spoke of parentheses that
00:23:10.360 | makes it similar to a DIA parentheses.
00:23:12.920 | More expensive than just buying a DIA.
00:23:15.600 | Are the surrender fees greater or longer than a DIA?
00:23:19.120 | Okay.
00:23:20.660 | Well, there, if you're using in the use case of a indexed annuity with a
00:23:26.480 | guaranteed withdrawal benefit, the, uh, you're using it as a DIA, you're
00:23:31.920 | not going to surrender it, so you're using it as a DIA, you're going to,
00:23:35.840 | you're planning to turn that into an income stream and so surrender charges.
00:23:40.000 | Don't make any difference.
00:23:41.040 | Crediting rates may don't make any difference that that guaranteed
00:23:45.360 | withdrawal benefit writer guarantees that based on some phantom account
00:23:50.360 | value that's being run within that indexed annuity, that you'll get a
00:23:55.280 | certain percent of that every year.
00:23:57.280 | It is fully guaranteed.
00:23:59.560 | And, um, Stan, the annuity man's website is the only one that I'm aware of where
00:24:05.160 | you can actually run quotes on, um, guarantee on, uh, index annuities with
00:24:10.120 | guaranteed withdrawal benefits, but you can compare, you know, and you should
00:24:13.760 | compare to see if you get a higher monthly income five years from now, or
00:24:18.880 | 10 years from now using a guaranteed withdrawal benefit on an index annuity
00:24:23.960 | or a deal it's very, um, carrier specific circumstance specific, you
00:24:29.800 | can't make a general rule about it, but all the Vogel had concerns about indexed
00:24:34.800 | annuities, they fall away when you attach that guaranteed withdrawal benefit writer
00:24:38.520 | to it, then it's just a question of what's the monthly income that you
00:24:41.920 | can get off of that compared to a DIA.
00:24:44.040 | Okay.
00:24:45.360 | Let me come back to Bob.
00:24:46.480 | Let me come back to Bob K.
00:24:48.080 | Uh, because Kim, I think you kind of slid into Kim's questions.
00:24:51.480 | Where do you, where do you recommend what purchase an annuity I've
00:24:54.240 | heard of standing, standing annuity man and immediate annuities.com.
00:24:58.080 | And what to look for.
00:24:59.040 | That's section three, section three coming up.
00:25:01.640 | I have a full slot.
00:25:02.600 | Am I okay?
00:25:03.880 | Uh, Bob K.
00:25:05.600 | Uh, what happens if the insurance company goes bankrupt?
00:25:09.000 | That's a section three.
00:25:10.400 | Also that's a tree.
00:25:11.600 | Okay.
00:25:12.160 | Products.
00:25:14.760 | Not you don't recommend that'll be in section two.
00:25:21.160 | Okay.
00:25:21.720 | Oh, all right.
00:25:23.920 | Then, then pro and con of cash refund or no cash refund for a SPIA option.
00:25:27.680 | It just really depends on whether you want to take kind of more insurance risk.
00:25:32.840 | Uh, you know, people will take a refund type option or a period certain option.
00:25:39.400 | I mean, what happens if you're 70 years old, you buy a SPIA and you
00:25:43.080 | die next month with no refund.
00:25:45.280 | People are concerned about that.
00:25:47.560 | And so people who are in bad health shouldn't buy SPIAs.
00:25:51.840 | I mean, the people, I will say as a whole, the population of people that
00:25:57.560 | buy SPIAs and buy payout annuities is on average, well, healthier
00:26:03.120 | than the average U S population.
00:26:05.040 | If you're a smoker, you don't buy a SPIA because you're going to die.
00:26:09.440 | Okay.
00:26:10.360 | Uh, and, and, uh, so, but, uh, you can also always have the
00:26:16.080 | freak accident or cancer or whatever.
00:26:18.400 | And so it's just kind of peace of mind.
00:26:20.360 | Um, you're getting the most pure insurance protection by not having
00:26:24.680 | any kind of a period certain or any kind of a refund, but, uh, you'll, um,
00:26:29.800 | maybe have more peace of mind if you have one of those features.
00:26:32.520 | Okay.
00:26:33.400 | Yeah.
00:26:34.720 | Mel lady geek, Mel, you have a question?
00:26:39.960 | Yes.
00:26:41.440 | Uh, it's a thing about retirement.
00:26:44.320 | Okay.
00:26:47.000 | I just needed, uh, Mel, did you call somebody else?
00:26:52.680 | Hello, Mel, Mel, it's you.
00:26:55.880 | Can you hear me?
00:26:57.080 | We can hear you.
00:26:58.120 | Yes, because I just, I just wanted to add to Miriam's
00:27:02.280 | comments about Taylor's, uh, annuity.
00:27:05.000 | Uh, he has expressed a number of times to me and probably others
00:27:09.400 | that one of the reasons he really likes the income stream is it makes
00:27:13.360 | him comfortable giving his money away now to his children, which is a big
00:27:18.840 | thing because you have the option when you give it away to your children
00:27:22.400 | to see the benefit of it, uh, as opposed to when they get it after you die.
00:27:27.000 | So it makes him comfortable giving the money away to his children.
00:27:30.200 | And that makes him happy seeing the way they're using it.
00:27:32.840 | Yes.
00:27:35.280 | He has mentioned that many times on the forum.
00:27:39.200 | Why don't we go ahead?
00:27:40.560 | If I'm not looking at the chat to see if there's other questions out there, I
00:27:43.800 | should answer now, but I'd kind of like to go on to the, I just want to introduce
00:27:48.240 | Mel, Mel Lindauer, one of the founders of the bogleheads.org and posted on the
00:27:55.040 | Morningstar forum when we were the Vanguard diehards since 1998.
00:27:59.880 | Yep.
00:28:01.480 | Okay.
00:28:03.240 | Wayne ready for part two, part two, accumulation annuities.
00:28:07.640 | As I said before, you know, uh, accumulation annuities are literally
00:28:11.720 | 95% of the annuity sales these days, people buy annuities, what's
00:28:16.240 | called annuity for accumulation.
00:28:18.480 | And there's four kinds of accumulation annuities I'll talk about here going
00:28:22.880 | really from the simplest to the most complex, um, a multi-year guaranteed
00:28:27.600 | annuity, a MIGA indexed annuities, which at one time were called equity indexed
00:28:33.320 | annuities, a buffered annuity, which is a fairly new innovation is also called
00:28:38.440 | a registered indexed linked annuity, RILA and a variable annuity.
00:28:42.760 | So those are the four kinds of accumulation annuities
00:28:45.640 | that I'll talk about here.
00:28:46.600 | Each of those, and this is kind of confusing.
00:28:49.720 | Each of those is called a deferred annuity because annuitization, the verb
00:28:55.800 | or the word annuitization, I'm using that as a conversion into a payment stream.
00:29:00.760 | It's deferred after the issue date.
00:29:03.600 | And most accumulation annuities are never annuitized.
00:29:06.080 | Let me give you an example.
00:29:07.120 | I have a number of multi-year guaranteed annuities that I've
00:29:10.160 | mentioned previously on the forum.
00:29:11.680 | I own those.
00:29:12.600 | Um, I do not plan to annuitize any of those.
00:29:16.000 | I never plan to take monthly payments out of those annuities, but I would
00:29:19.880 | have the right to, if I chose to.
00:29:21.200 | The vast majority of sales are accumulation and the vast majority of
00:29:25.240 | accumulation sales are never annuitized, but still they fall in the
00:29:29.520 | general category of annuities.
00:29:31.000 | And so it's a bit confusing nomenclature, but, um, uh, that's, that's the way it is.
00:29:35.680 | Multi-year guaranteed annuities.
00:29:38.360 | Half of annuity sales are multi-year guaranteed annuities.
00:29:41.360 | The rest of all the other annuities is the other half, but multi-year
00:29:44.720 | guaranteed annuities are extremely popular.
00:29:47.360 | At one time there were called CD annuities.
00:29:50.200 | C is in certificate D of deposit.
00:29:53.440 | So they are analogous in a lot of ways to a bank CD in that they pay a certain
00:29:59.800 | interest rate for a certain period of time I'm going to use as my example.
00:30:03.800 | You're 5% for five years.
00:30:05.800 | You can get better rates than that right now, but the math is easy
00:30:08.600 | with a 5% rate for five years.
00:30:11.240 | Um, which is an attractive rate.
00:30:14.080 | And then when that interest guarantee period expires, you
00:30:17.360 | knew it didn't have some options.
00:30:18.680 | You can stay in the current product.
00:30:20.660 | The annuity continues on, um, at that time.
00:30:25.960 | But if the company is offering, it gives him a good renewal offer, maybe
00:30:29.720 | another five years at another 5%, he'll take that and leave the money with the
00:30:33.880 | company, you can exchange to an annuity with another company if he chooses, or
00:30:38.760 | he can take the funds out in cash.
00:30:40.240 | And so he has options as that five-year period expires.
00:30:43.560 | Now these annuities are all withdrawable.
00:30:46.960 | Um, Omega, I can get my money out of Omega anytime that I want, but there
00:30:51.920 | are pretty stiff surrender charges and withdrawal penalties on most of the
00:30:56.040 | kinds of annuities we'll talk about in this section, and my goes are no
00:30:59.440 | exception to that, uh, many migas will have a surrender charge in the first
00:31:03.920 | year of six or seven or 8% of the account value, plus a market value
00:31:08.840 | adjustment, which can ding you.
00:31:10.040 | If interest rates have gone up since you, uh, bought the annuity, most
00:31:15.520 | migas or many migas, uh, free partial withdrawals.
00:31:18.720 | And so, you know, you can take a withdrawal of often 10% of your prior
00:31:23.240 | year account value without any penalty.
00:31:25.400 | And so you can get access to your funds without penalty, but going
00:31:29.280 | above that 10% free partial withdrawal.
00:31:31.440 | Um, uh, you will, you will not be able to do without, without penalty.
00:31:35.920 | There's a tremendous amount of variation in my goes between different companies.
00:31:41.280 | And even within the same company, some companies off my offer, my goes with
00:31:45.400 | both no free partial withdrawals and with partial withdrawals, and so you'd
00:31:49.440 | need to be darn sure of what you're doing with withdrawals characteristics.
00:31:53.640 | Uh, when you buy a miga, many mogul heads feel that my goes
00:31:58.040 | are a good consumer value.
00:31:59.200 | Currently, as I said, the most popular kind of annuity, 50% of annuity sales.
00:32:04.000 | They are the rates that we've had for the last, ever since I've
00:32:07.680 | been following my goes, which is about four or five years now, um, have
00:32:11.440 | been very attractive compared to comparable things that have a fixed
00:32:15.280 | rate for a fixed period of time.
00:32:17.120 | Like a bank CD, they're attractive compared to bank CDs.
00:32:20.560 | They're attractive compared to treasuries, um, paying a higher
00:32:25.320 | rate and you get your defined amount of money available to you without
00:32:28.680 | surrender charge when the five year or whatever period is up, there are no
00:32:33.120 | hidden fees, which you see is what you get.
00:32:34.720 | If a company promised me 5% for five years, I'll get my 5% for five years.
00:32:40.720 | It allows people to lock in interest rates for a good long period of time, longer
00:32:45.280 | than you can get with most bank CDs.
00:32:47.160 | The most, uh, in general, uh, uh, my goes are available between
00:32:53.000 | two years and 10 years of maturity.
00:32:54.840 | The most popular durations for my sales are three years
00:32:58.520 | and five years and seven years.
00:33:01.240 | And, uh, uh, you'll see the largest number of products offered at three,
00:33:05.720 | five, and seven, just because that's, that's the way that it is.
00:33:10.000 | I'll talk about taxes later on, but my guys are attractive as are all
00:33:13.560 | accumulation or duties because taxes are deferred until funds are withdrawn.
00:33:16.960 | And I'll talk about taxes in the, in the third section here, and it's
00:33:21.000 | a relatively low agent commission.
00:33:22.680 | The blueprint income site discloses the agent commissions that they get.
00:33:26.680 | And they disclose on many annuities that they make one to 3%.
00:33:30.280 | Now you're not paying that commission directly.
00:33:32.560 | It's being paid by the insurance company and the insurance company
00:33:35.840 | gets its money from, you know, spread that they make, but they're
00:33:39.720 | not paying out to you, they're paying to the agent, but that one to 3%
00:33:42.840 | commission rate is a fairly low rate compared to some other products.
00:33:46.040 | And so it's a more attractive consumer value to you because the commission
00:33:49.680 | is paid to the agents are fairly low.
00:33:50.920 | So I'm, as I've posted many times in the forum, I'm a big backer of my
00:33:57.440 | guys, I always try and tell people the negatives about insurance company
00:34:01.840 | insolvency, and we'll talk about that in the third section about the
00:34:05.080 | surrender charges and withdrawal fees.
00:34:06.760 | But for a person who wants, I'm just darn sure they can put away their
00:34:10.800 | money for three, five, or seven years.
00:34:12.520 | Oh, my God, I think is an excellent consumer value.
00:34:14.960 | We'll go on to index annuities.
00:34:18.720 | And somebody asked before if there was the kinds of insurance
00:34:21.000 | product they don't like.
00:34:21.760 | And so we've, we've hit the first one here with indexed annuities.
00:34:25.200 | Um, they pay interest by referring to an external index and it's easiest
00:34:30.720 | for me to go ahead and just, uh, uh, talk about the S and P 500.
00:34:35.080 | You know, you might think if you're buying an indexed annuity, if the S and P
00:34:38.120 | goes up by 20%, that you'll make 20%.
00:34:40.800 | And it does not do that, but it does do, as I say, in the second bullet point,
00:34:45.680 | it doesn't pay the full index movement.
00:34:47.440 | It's limited on the upside by caps and participation rates.
00:34:51.640 | A cap is a simple thing that says if the S and P goes up more than 5%, or 4%,
00:34:59.240 | or 8%, or whatever it is, you don't get anything above that.
00:35:02.280 | No matter how much the S and P goes up, you only get a 4%, 5%, 8%, whatever the
00:35:07.920 | cap is a participation rate means that you get a certain percentage of the S and P
00:35:13.120 | gain, you get 90% or 80% or 50% or whatever it is, and insurance companies
00:35:18.840 | can set those caps and participation rates as a part of their pricing.
00:35:22.160 | Um, now in exchange for that upside limitation that you have with the index,
00:35:29.880 | you're limited the downside to zero by definition and index annuity cannot
00:35:34.520 | have an account value decline year by year based on interest credits.
00:35:38.640 | If the S and P is down 20%, you will not lose any money because of the 20%.
00:35:43.840 | You might have writer fees that I'll talk about in a moment, but you will not lose
00:35:47.160 | money on the account value itself.
00:35:49.640 | That that is a absolute with an index annuity.
00:35:53.040 | Also note that it almost never credits index dividends.
00:35:56.320 | The policy, the S and P does pay dividends of 2% or so per year, but
00:36:02.200 | these index annuities do not pay dividends.
00:36:03.920 | They only have interest credits.
00:36:05.040 | Um, I will, I've used the S and P term, uh, a lot here.
00:36:09.360 | There's a lot, lot, lot more indices than just the S and P 500 that are used.
00:36:14.520 | And there are actually some custom indices that have been made up back
00:36:18.000 | tested to try and illustrate.
00:36:19.680 | Well, uh, so whatever the index is, is an external index of some type.
00:36:25.120 | The S and P is the most popular or the most well-known, but there's a
00:36:28.720 | lot, hundreds of other indices that are followed by various companies.
00:36:32.720 | Index annuities.
00:36:33.520 | One thing that I see as a negative about index annuities is that the
00:36:37.920 | caps and participation rates, in other words, kind of the crediting that
00:36:40.840 | she'll get on the interest is usually subject to change by the insurance
00:36:43.880 | company as often as annually.
00:36:45.560 | I go back to my MIGA example, my MIGA is 5%, five years guaranteed.
00:36:50.440 | That's it with an index annuity.
00:36:53.440 | Often the, uh, policy, uh, cap and participation rate in the
00:36:58.000 | first year is guaranteed.
00:36:59.120 | But after the first year, it's subject to change by the insurance
00:37:02.280 | company in its sole discretion.
00:37:03.680 | And then once you, if you're dissatisfied in year two or three or four with how
00:37:09.480 | the insurance companies treated you, the products will often have high
00:37:12.200 | surrender charges for seven to 10 years.
00:37:14.400 | Surrender charges can start off with 10% or even more on some products.
00:37:18.320 | Um, often they'll start off at seven or 8% and then grade down over time.
00:37:23.120 | And those effectively can, you know, give you a kind of a devil's choice there.
00:37:27.120 | You go and, um, accept a subpar accredited rate or you, uh, eat a
00:37:32.600 | surrender charge and have to pay that out.
00:37:34.000 | Now, uh, just like on MIGAs, many policies do allow free partial
00:37:41.080 | withdrawals of 10%, uh, per year.
00:37:43.680 | And then withdrawals over that allowance is subject to surrender
00:37:46.840 | charges and market value adjustments.
00:37:48.760 | There are riders that are available on index annuities.
00:37:52.240 | The most popular one is a guaranteed withdrawal benefit rider that I
00:37:54.960 | described briefly in the prior section.
00:37:57.520 | That, um, it gets a little bit complex as to how to describe this, but
00:38:02.360 | essentially what it does is it operates separately from the policy account
00:38:06.560 | value to give you a guaranteed withdrawal stream, uh, at an age that
00:38:11.000 | you decide anywhere, you know, one year to 20 years after you, uh, by the policy,
00:38:17.120 | you can turn on that, um, rider and, uh, get a guaranteed, uh, benefit.
00:38:23.320 | Uh, and, uh, the withdrawals are made from your account value.
00:38:26.920 | And even if you drain the account value, the guarantee there is that the payments
00:38:31.240 | will continue for as long as you're alive.
00:38:33.160 | Those riders have fees and the fees can pull the account value down in a year.
00:38:38.960 | A guaranteed withdrawal benefit rider might cost 1% per year.
00:38:42.240 | And so even if your interest credit is zero, if you have a 1% fee, then your
00:38:46.400 | account value would decline by that 1% fee.
00:38:48.520 | You can also have a guaranteed death benefit, but that's not
00:38:51.960 | as popular on a, on a, uh, index.
00:38:53.920 | Many Bogle heads believe that, um, index annuities are
00:38:59.960 | not a good consumer value.
00:39:01.240 | One of the biggest, um, problems I have is that the insurer can change
00:39:06.120 | the bargain every year by adjusting cap and participation rates.
00:39:09.320 | You buy a policy, you get a big promise going in.
00:39:12.400 | And then, um, after that, um, there's no guarantee that that promise
00:39:16.520 | will be unchanged in future years.
00:39:18.960 | And you're trapped in the annuity.
00:39:20.160 | The rider fees can either way at account values, the surrender
00:39:24.360 | charges that I've mentioned before.
00:39:25.680 | Commissions are much higher on index annuities.
00:39:28.680 | That's one of the things that is almost always true.
00:39:31.240 | Index annuities will have commissions that are six to 8%.
00:39:36.040 | Some can be as high as 10%, various bonuses.
00:39:39.360 | Some can be lower and insurance companies don't print money.
00:39:42.880 | They do not have printing presses.
00:39:44.320 | They rely upon, you know, interest that they earn on their
00:39:47.600 | funds for generating money.
00:39:49.400 | And to the extent that they're paying out more money to the agent, then they have
00:39:53.320 | less money to pay out the policy.
00:39:54.640 | So the higher commission you're paying that is being paid on an index
00:39:59.280 | annuity is, uh, um, coming out of the consumer's pocket ultimately.
00:40:04.080 | One of the worst things that I have seen with annuities with index
00:40:08.680 | annuities is, uh, being mis-sell mis-sold as an equity alternative.
00:40:12.520 | Anybody who's retired or paid attention to talk radio or whatever might hear
00:40:17.120 | people talk, uh, financial advisors or agents talk about, um, you know,
00:40:22.000 | market upside with no downside.
00:40:24.320 | And those are buzzwords that are used at these free state dinner
00:40:28.680 | seminars to sell indexed annuities.
00:40:30.840 | You know, you can, you can have the upside of the market because
00:40:34.080 | nominally it follows at least to a certain extent, yes.
00:40:36.720 | And P 500 or whatever index, there is no downside, but that's a mis-selling.
00:40:41.560 | This is an interest crediting product and the interest is determined by an
00:40:45.520 | index, but it's not participation in the stock market in any way, shape or form.
00:40:49.360 | And, uh, one of the reasons I'll just go off of script a little bit here.
00:40:54.080 | One of the reasons that insurance agents can do this is the training
00:40:57.600 | requirements for insurance agents are pretty minimal and having that, um,
00:41:03.560 | index annuity account value being Florida zero, you can't lose money in a year.
00:41:07.880 | That makes it so that an insurance agent can sell this.
00:41:10.760 | If a policy can lose money, like a variable annuity cam, then you
00:41:14.720 | have to have a securities license.
00:41:15.960 | And a securities license requires a lot more training, a lot more exams, and
00:41:20.680 | there's a lot more responsibility than there is with an insurance license.
00:41:24.160 | And so that's one reason that index annuities are often pushed by insurance
00:41:27.840 | agents as a license is easy to get.
00:41:30.400 | And it fits into kind of, kind of a loophole where no securities license
00:41:33.760 | is required to sell an index annuity.
00:41:35.800 | So that's my rant against indexed annuities.
00:41:38.240 | Buffered annuities, buffered annuities or, or registered index index linked
00:41:45.600 | annuities are a fairly new innovation.
00:41:47.880 | They also pay interest by referring to an external index and they don't
00:41:51.600 | pull the full index movement, but they don't pay the full index movement.
00:41:54.240 | But the annuitant accepts some downside risk and they get more upside.
00:41:58.960 | You might make 14% per year, max, but in exchange for that,
00:42:03.200 | you have a downside of 10%.
00:42:05.000 | You'll never have an unlimited downside, but you will have downside.
00:42:08.640 | So go, so it goes below zero.
00:42:10.600 | Um, the, the, the knocks on this are very similar to the knocks on an indexed
00:42:16.040 | annuity, often the caps and participation rates can be changed annually by the
00:42:20.160 | insurer and many, they have products, uh, surrender charges for seven to 10 years.
00:42:25.600 | And most mogul heads feel just as with index annuities that buffered
00:42:29.280 | annuities are not a good consumer value.
00:42:31.280 | That's a fairly small part of the market here, but there have been some
00:42:34.720 | companies that have come out with a pretty big splash with some
00:42:37.520 | of these, uh, buffered annuities.
00:42:39.080 | Finally, a variable annuity, a variable annuity is a, an annuity where the
00:42:45.560 | premium that you pay that the policyholder pays is invested in mutual funds.
00:42:49.960 | They can be equity, mutual funds, or they can be fixed income, mutual funds.
00:42:53.200 | They're held by the insurance company.
00:42:55.640 | And they're drawn from a list of approved mutual funds
00:42:58.560 | by the insurance company.
00:43:00.000 | You can't take the Vanguard or fidelity or whatever mutual funds that you love
00:43:05.400 | in your personal account and have those in a very variable annuity.
00:43:09.120 | If you buy it from company a, you're going to be restricted
00:43:12.840 | in your mutual fund choice.
00:43:14.400 | The mutual funds offered by company a under the variable annuity on those
00:43:20.240 | annuities, the account value grows or shrinks following the mutual fund
00:43:23.760 | performance, it's fairly straightforward on a variable annuity, there are
00:43:27.400 | explicit charges that are assessed against the policy for administration.
00:43:31.920 | Often 1% or so per year writers like guaranteed minimal withdrawal
00:43:37.120 | and guaranteed debt benefit.
00:43:38.560 | And then usually excessive mutual fund fees where you can buy a mutual fund
00:43:44.920 | from a Vanguard or a fidelity for five or 10 basis points per year.
00:43:48.400 | That's 0.05% or 0.1%.
00:43:52.200 | Often the fees on the mutual funds underlying the variable
00:43:55.880 | annuities are 1% per year.
00:43:57.320 | So you can end up with a 3% or more annual fee on a variable annuity.
00:44:03.280 | 1% each for administration or the writers and for excessive mutual fund fees.
00:44:08.120 | I think we've had some postings on the forum of people who have a 4% annual fee
00:44:13.080 | and you, you know, for, for mobile heads who quibble about, you know, a few
00:44:17.080 | basis points or a few 10s of 1% expense rates to pay three or 4% per year.
00:44:22.720 | It's just borderline.
00:44:23.600 | I've seen it really is.
00:44:25.040 | Um, many products have surrendered charges the last seven to 10 years also.
00:44:29.120 | Now many mobile heads seal that most, and I underscored the word most variable
00:44:36.800 | annuities are not a good consumer value.
00:44:38.800 | The high fees and surrender charges.
00:44:41.040 | They're sold by perspectives.
00:44:42.600 | There's a hundred page or longer perspectives.
00:44:45.160 | I'll guarantee you that no mortal human understands every
00:44:48.640 | word in that perspectives.
00:44:50.240 | They're very complex.
00:44:51.680 | The writer fees can eat away at account values, surrender charges.
00:44:55.200 | And then again, the, the six to 8% commission is usually
00:44:59.800 | paid on annuities like that.
00:45:01.360 | However, there's an exception to the rule about variable annuities, and that
00:45:04.880 | comes with fidelity and other low cost variable annuities, most of you will
00:45:09.920 | know fidelity as a, you know, mammoth fund, uh, accumulation, mutual fund
00:45:14.840 | company, and they do very well at that.
00:45:16.640 | But fidelity as a part of its corporate structure also owns a life insurance
00:45:21.160 | company, Fidelity investments, life insurance company, and that company
00:45:24.960 | offers a stripped down bare bones, variable annuity at very low fees.
00:45:30.000 | 25 basis points.
00:45:31.440 | That's 0.25% per year is the administration fee, I believe.
00:45:35.200 | And it goes down.
00:45:36.240 | If your account value goes up, they have very, um, nicely priced, low
00:45:42.000 | priced mutual fund options available under that variable annuity.
00:45:45.240 | There are none of the fancy writers and such, and there are use cases where
00:45:49.120 | it makes sense for a person to keep money in an annuity, like a 10 35
00:45:53.320 | exchange from a life policy or a, or a, uh, annuity policy and that variable
00:45:58.360 | annuity from Fidelity and other low cost providers like that is
00:46:02.360 | a attractive place to be.
00:46:04.240 | Vanguard used to offer a variable annuity like that.
00:46:06.760 | Vanguard stopped doing that three, four, five, six years ago.
00:46:10.000 | And now the, the one recommended most frequently on the forum
00:46:13.920 | is the, uh, Fidelity annuity.
00:46:15.400 | So with that, I've covered four types of accumulation or annuities.
00:46:20.400 | I've given my take, uh, my personal take on all of them is that I like
00:46:24.320 | my goes on, I hate everything else basically.
00:46:26.680 | And, uh, I'm ready for questions.
00:46:30.200 | Okay.
00:46:30.560 | Questions on the second section of accumulation annuities.
00:46:35.040 | Anything from the chat?
00:46:37.360 | Anybody want to raise their hand and ask a question?
00:46:43.200 | We did have some in the, in the chat.
00:46:49.200 | We have questions again on the, um, rating agencies.
00:46:53.920 | We'll talk about that later.
00:46:57.880 | Um, my guys are in their wiki article.
00:47:03.080 | Let's see.
00:47:06.360 | Um, here's one question for existing purchased products.
00:47:19.720 | Is there a company, a third party that can review it?
00:47:25.880 | It can review the purchased product.
00:47:27.720 | I suppose that would apply to all annuities, whether there is somebody
00:47:31.920 | who, um, there are people who can assess life insurance policies,
00:47:36.040 | whether they are good or not.
00:47:37.760 | There are people who are,
00:47:39.520 | I'm not aware of anybody who does that for, for pay.
00:47:42.920 | Yeah.
00:47:43.520 | You can come on the mobile head forum and, you know, get, you
00:47:46.680 | know, free advice from various folks.
00:47:49.360 | But I'm not aware of any firm that does that as a matter of business.
00:47:53.640 | Okay.
00:47:54.720 | The one thing I can say, Mike, he was the one that posted the question
00:47:57.720 | is that we used a, a person for our life insurance policy and assessor.
00:48:03.360 | And he came from the consumer federation of America.
00:48:07.200 | And I've no law.
00:48:10.520 | I don't know if he no longer does.
00:48:12.000 | I don't know if he does that any longer.
00:48:14.240 | And I don't know if he does annuities, but you might Google
00:48:19.160 | it because that's how we found.
00:48:20.880 | Well, I found him through articles, various articles, and he was excellent.
00:48:24.600 | Analyzing a life insurance policy.
00:48:26.360 | And this was years ago.
00:48:27.600 | Um, let me see.
00:48:29.440 | Well, the other questions from the chat, Wayne, I think are more
00:48:34.760 | appropriate at the end, not just.
00:48:36.360 | I'm not looking at the chat, but I'll probably open up the chat, uh, when,
00:48:41.600 | when we get to the end of the presentation here, unless anybody wants
00:48:45.600 | to open their, uh, raise their hand right now, we'll just move along.
00:48:48.600 | And then when we get to the end, it will be open up questions.
00:48:51.600 | Yeah.
00:48:52.400 | I'll, I'll go ahead and, and then I'll, I'll look at the chat
00:48:54.680 | questions too, at that point.
00:48:55.760 | So for kind of, um, short topics here.
00:48:59.600 | And I didn't directly address rating agencies here.
00:49:03.320 | And so I'll talk about rating agencies also at some point.
00:49:05.800 | How are annuity policyholders protected?
00:49:09.360 | Okay.
00:49:10.600 | People are accustomed to having, you know, on their bank
00:49:13.640 | deposits, FDIC insurance.
00:49:15.800 | The FDIC is, is effectively backed by the federal government, full faith
00:49:20.440 | in credit kind of, of the government.
00:49:22.480 | Um, and so the insurance companies are not banks and insurance annuities are
00:49:28.640 | not, um, backed by the federal government.
00:49:31.120 | Rather, they're covered by state run life and health insurance guarantee funds.
00:49:36.000 | What would happen?
00:49:37.480 | Um, where I, as a, as a resident of Alabama to, um, be unfortunate enough
00:49:44.040 | to be a policyholder of a company that goes broke, then my state Alabama
00:49:49.440 | guarantee fund would step in and protect me and provide me with, uh, uh, recovery
00:49:56.240 | of under the terms of the guarantee fund act, those are not governmental entities.
00:50:00.800 | There, there is no tax funding that supports any guarantee fund.
00:50:04.120 | The guarantee funds are supported by assessments, mandatory assessments by
00:50:08.960 | the guarantee fund on the insurance companies, for example, New York life.
00:50:12.600 | I'll use their name.
00:50:13.920 | Sometimes big, strong, excellent company.
00:50:17.160 | New York life is, is authorized to do business in Alabama and New York life
00:50:21.680 | would be paying into the Alabama guarantee fund to help, uh, put up, uh,
00:50:25.880 | the, to make up the hole if my insurance company went in the, in the tank.
00:50:29.920 | Guarantee fund coverage varies by state.
00:50:32.640 | Most States cover $250,000 of surrender value for insurance company for individual.
00:50:38.040 | And some cover more, some cover less.
00:50:40.280 | Um, so if I have a multi-year guaranteed annuity for $200,000, I should have full
00:50:45.760 | coverage of my surrender value, not necessarily the account value, but the
00:50:49.400 | surrender value by my state guarantee fund, one thing to stress with guarantee
00:50:54.440 | funds though, is in the event that an insurer fails, it may take years for
00:50:59.440 | consumer to get all of his money back.
00:51:00.920 | I'll contrast that with banks.
00:51:03.480 | I've never thankfully been a customer of a failed bank, but my impression
00:51:07.960 | is that if a bank fails, it fails.
00:51:10.800 | Uh, you know, you go into the bank Friday and it's a failing bank.
00:51:14.440 | The FDIC examiner is coming over the weekend.
00:51:16.560 | They take it over, they sell it to a new bank or package it up or whatever.
00:51:20.240 | And it's opens up for business on Monday under a new name
00:51:23.800 | and funds are fully available.
00:51:25.320 | It's effectively a seamless process.
00:51:27.520 | And the FDIC has gotten very good at, um, taking over failed banks and, uh, making,
00:51:33.640 | uh, insured depositors hold very, very quickly.
00:51:37.600 | That's not the way it is with insurance guarantees funds.
00:51:41.240 | Even in the best of cases, your money might be locked up with the
00:51:44.160 | company for months, a short number of years, um, just because
00:51:50.560 | that's just the way that it is.
00:51:51.800 | Now, typically in insolvencies, uh, the first thing that happens with
00:51:55.960 | an insolvency is a court will move in.
00:51:57.880 | The court has the right and the ability to, uh, modify.
00:52:02.840 | Mary, you're not on mute.
00:52:05.600 | Is it locked?
00:52:08.480 | The court has the ability to modify contract terms.
00:52:10.840 | And so I have a right to surrender under my insurance policy, but the
00:52:15.240 | court can say in order to preserve the estate, we're not going to
00:52:18.560 | allow voluntary surrenders, usually in an insolvency, they give priority
00:52:23.120 | to death benefit payments and, uh, income annuity payments, the regular
00:52:27.400 | thousand dollar a month payments, but not surrenders, and there's one
00:52:31.000 | particular egregious example right now, a company called Colorado bankers.
00:52:35.080 | That went, uh, that sold my goes, they had a B double plus rating
00:52:38.200 | at the time that they went down.
00:52:39.320 | Their owner is a crook.
00:52:40.840 | He's a, he's a accused and convicted felon bribery, wire fraud, stuff like that.
00:52:46.200 | But he's also very litigious and he sued again and again.
00:52:50.040 | And most recently I saw, I think he sued again last week and the
00:52:53.520 | company is still not paid out.
00:52:55.720 | His policy was fully five years later.
00:52:58.120 | The company went in the tank in 2019 and annuity policy holders have maybe
00:53:03.600 | had a chance to withdraw some small amount of money, but their money is
00:53:06.880 | still locked up in Colorado bankers five years after the insolvency.
00:53:10.360 | So that's a, an edge case, but it is nowhere near as fast recovery as the FDIC.
00:53:16.720 | So there is coverage provided.
00:53:18.720 | Their insurance company failures are fairly rare.
00:53:21.320 | Uh, I'm not aware of any company of any size that went down during the
00:53:25.880 | 2008 financial crisis, which was a terrible thing, even AIG that, uh,
00:53:31.320 | had problems, did not have problems with the insurance company that had
00:53:34.960 | problems at their holding company.
00:53:36.600 | And, uh, the entities that did the, uh, CMBS, not at, uh, uh, the, the,
00:53:41.640 | uh, the credit default swaps, not the ones at the insurance company.
00:53:46.120 | I had an AIG life policy.
00:53:48.000 | There was never a problem with that, but, uh, um, that's not to
00:53:51.280 | say that things, bad things won't happen in the future.
00:53:53.480 | And with that, I might talk just about the rating agencies.
00:53:57.480 | Let me go back, uh, uh, rating agencies.
00:54:01.120 | Um, every company basically is rated by AM best.
00:54:06.040 | AM best is a specialty insurance rating agency.
00:54:09.240 | It's been around for, for many, many, many years, uh, more than a hundred
00:54:15.080 | years, and then make it their business to rate every life insurance company and
00:54:19.480 | every property gasoline company that they can, and when you see ratings on
00:54:24.200 | the various agents websites, most frequently you'll see the AM best rating.
00:54:29.640 | AM best, the very strongest ratings are a double plus a plus plus that
00:54:34.080 | is, and a plus, and then down to a and a minus, and then you get into your B
00:54:38.680 | categories, I can't, you know, as the ratings go down, the risk of default
00:54:43.920 | increases, there's been several times, um, several places posted in the, in
00:54:48.800 | the forum and if anyone wants to private message me, I can send the text again.
00:54:53.640 | AMS is put on a table showing the cumulative default rating over a
00:54:58.360 | period of 30 or 40 years by rating category, by how long it's been
00:55:02.520 | since there was ratings.
00:55:03.440 | And so people need to make their own best judgments as to, um, uh, what
00:55:08.440 | rating they'll find acceptable for a certain period of time.
00:55:11.760 | For me, if I was looking at a SPIA that I expect to pay out for 20 years on my
00:55:17.280 | life, I want a pretty high rated company.
00:55:19.560 | I've said publicly in the forum that, uh, for my goods, which I do purchase, I, uh,
00:55:26.080 | these days would probably not buy a miga from a company rated B double
00:55:31.080 | plus or lower, um, beyond three years.
00:55:34.240 | Uh, I'd want to be in the a category for anything longer than three years.
00:55:38.280 | Uh, but, uh, that's a personal preference and people need
00:55:41.280 | to make their own decisions.
00:55:42.360 | Insurance company failures are extremely rare, but they do happen.
00:55:46.440 | And now we can talk more about agency, about rating agencies in
00:55:50.040 | the chat and, or in the questions.
00:55:52.880 | Changing tops entirely.
00:55:54.240 | How are annuities tack?
00:55:56.280 | Um, let me make sure I'm in the right place.
00:56:00.520 | Yeah.
00:56:00.920 | How, how are they taxed?
00:56:02.160 | First note that annuities can be purchased through a traditional IRA,
00:56:06.000 | a Roth IRA, or using taxable funds with a traditional IRA, like any
00:56:12.920 | other IRA, all withdrawals are taxable.
00:56:15.160 | And just note that a person can have multiple IRA accounts and the RMDs
00:56:19.560 | are calculated over the aggregate of all IRAs.
00:56:22.160 | I have a Vanguard IRA, but I might have also have a bank IRA and I have
00:56:27.320 | IRAs with all the various insurance companies that hold my migas.
00:56:31.480 | Those are all commingled into one big pot.
00:56:33.840 | I, I have to add it up and come to the total number of my IRAs.
00:56:38.040 | And then, um, when I'm of RMD age, I'll apply the RMD percentage
00:56:43.000 | to see how much I need to take out.
00:56:44.720 | If my, if my RMD percentage was 5%, for example, for a certain year, I do
00:56:49.800 | not need to take 5% out from each IRA.
00:56:52.360 | I can take 5% in aggregate and that's good enough.
00:56:55.360 | So, but, uh, they, the, uh, annuities in an IRA are the same as an annuities,
00:57:01.960 | same as IRAs at Vanguard or a bank or anyplace else, second, a Roth IRA annuity.
00:57:09.000 | Very few people from seeing on the forum, I think, but, um, annuities
00:57:14.240 | in their Roth IRA, but if you do put one in a Roth IRA, all withdrawals
00:57:19.400 | are taxed or tax-free now a taxable accumulation or annuity, and we'll
00:57:24.040 | spend some time on that because this is a little bit more complex.
00:57:27.520 | This will be the use case, say a buying a miga or an indexed annuity and
00:57:33.120 | then accumulating money within that.
00:57:34.400 | It's important to note reporting of taxable income is deferred until
00:57:38.320 | funds are withdrawn from the annuity.
00:57:39.600 | What does that mean?
00:57:40.520 | Let's say that I bought a five-year CD from a bank.
00:57:43.320 | Even if I let the money, the interest accumulate in that CD, the bank is
00:57:49.120 | going to report interest income to me every year, so whether I get the cash
00:57:53.000 | or not, they're going to report taxable income to me every year, insurance
00:57:57.600 | companies under annuities don't do that.
00:57:59.280 | The only way that you'll get taxable income reported to you is if you
00:58:03.560 | take money out of the annuity.
00:58:05.720 | I can allow money to accumulate in my annuity tax defer.
00:58:09.600 | Second thing to note withdrawals are taxed as income first followed by basis.
00:58:15.120 | Let me give you an example.
00:58:16.920 | A hundred thousand dollar miga made 5,000 in the first year.
00:58:19.720 | I didn't want to make a $10,000 free partial withdrawal.
00:58:23.440 | So I have $105,000 account value.
00:58:27.680 | The first $5,000 of my withdrawal is taxable income.
00:58:32.040 | Taxable income comes out first.
00:58:34.120 | Then the next 5,000 of my, of my withdrawal is basis.
00:58:38.560 | There's no tax on that, but they're taxed as income first followed by basis.
00:58:44.360 | Importantly, the next point, accumulation annuities don't
00:58:47.320 | receive a step up at death.
00:58:48.520 | Therefore annuities defer, but don't do not avoid taxes.
00:58:51.720 | Let's say that I buy my goes and I keep on accruing, accruing, accruing,
00:58:57.440 | and never take money out.
00:58:58.800 | And here I am at the time of death with an annuity with a basis of a hundred
00:59:02.440 | thousand and an account value of 200,000.
00:59:04.680 | Well, if it were many or most of the kinds of assets that step up from a
00:59:10.320 | hundred thousand of purchase price to $200,000 of market value is not taxed,
00:59:15.480 | but annuities are taxed.
00:59:17.080 | So if I don't pay the taxes, my heirs will no step up a death.
00:59:22.600 | And that's important for annuities.
00:59:23.880 | That's a big negative, uh, in certain use cases, another negative in certain
00:59:29.440 | use cases is that all income, even from variable annuities is taxes, ordinary
00:59:34.200 | income, again, an example, if I had a variable annuity that happened to have
00:59:38.880 | a S and P 500 fund in it, pardon me.
00:59:41.560 | If I wanted to own an S and P 500 fund, if I have an untaxable account, then
00:59:45.960 | I'll get the qualified dividends and capital gains, preferential tracks, tax
00:59:50.720 | treatment for most folks on the income from my S and P 500 fund.
00:59:55.760 | But if that S and P 500 fund is located inside of a variable annuity, there's
01:00:00.680 | no preferential tax treatment, all the income from the annuity, no matter
01:00:04.440 | what the source is taxes, ordinary income.
01:00:07.400 | And that's a negative for certain people, uh, in certain situations for using
01:00:11.840 | annuities compared to taxable accounts.
01:00:13.480 | So all these things need to be taken into account when you're considering
01:00:17.640 | how to kind of think about taxes as they'll affect your annuity purchases.
01:00:22.560 | Then finally changing topics entirely again, um, to a taxable income
01:00:29.480 | annuity that's back to a SPIA where I put it on a hundred thousand dollars
01:00:32.880 | and get a thousand dollars a month.
01:00:34.960 | Part of that a hundred thousand, part of that thousand dollars a month
01:00:37.520 | representing the interest part of that is going to be taxable income.
01:00:41.040 | The rest of it is treated as return of basis and not taxable.
01:00:44.400 | And the insurance company report to each year, what part of your SPIA
01:00:48.120 | payment is taxable and what part is not taxed.
01:00:50.720 | And so there's a, what's called an exclusion ratio, uh, that is used to
01:00:55.400 | determine how much is taxable and how much is not.
01:00:57.680 | So taxes are an important part of annuities.
01:01:00.360 | The great thing about annuities is they deferred taxes, but the bad thing
01:01:04.000 | is they do not avoid taxes and there's no step of a death and they turn all
01:01:09.200 | income into ordinary taxable income.
01:01:11.400 | Changing topics entirely again, where can I buy an annuity?
01:01:17.640 | Now all the newbies are sold through licensed insurance agents.
01:01:21.920 | You have to have an insurance license, which is not that
01:01:25.200 | tough to get to sell an annuity.
01:01:27.040 | And now there are several categories of places that I've listed out where
01:01:31.560 | I've seen mentioned the forum that people buy annuities, the first is what
01:01:35.600 | I'll call a multi-company annuity agent that has a big internet presence.
01:01:39.720 | There are three or four of these that are mentioned frequently on the forum.
01:01:44.160 | These companies will represent dozen.
01:01:46.720 | These agencies will represent dozens of insurance companies and they'll offer
01:01:50.560 | products through all those companies.
01:01:51.880 | My personal favorite website for looking at my goes is blueprint income.
01:01:58.560 | And the reason I say that is because not the blueprint income services
01:02:02.000 | any better, but their website has deeper information on my goes.
01:02:05.960 | You can get more information on particular products from particular
01:02:09.880 | companies on the blueprint site than you can on the other sites.
01:02:13.240 | I don't know if their service is any better, but their website has more
01:02:16.480 | information than the other websites.
01:02:18.240 | Another website mentioned frequently is Stan.
01:02:22.560 | The annuity man, Stan is a real person.
01:02:25.440 | Stan Haycock is his name, and he is an agent who could be a Bogle head.
01:02:29.640 | He's put out a bunch of videos and several books, and he talks and
01:02:34.640 | acts like a Bogle head in terms of how he views annuities, you buy an annuity
01:02:38.520 | for what it will do, not what it might do.
01:02:40.120 | You buy it for the guarantees.
01:02:41.680 | He stresses the, uh, the miga policies, the lower commission
01:02:45.720 | policies, and he's a, he's a good man.
01:02:48.360 | His website also has, um, the only one that I'm aware of where you can
01:02:52.560 | get a real live quote on a guaranteed withdrawal benefit on an index annuity.
01:02:56.840 | And it would be advantage is another agency that I've used personally
01:03:01.200 | and I'm satisfied with them.
01:03:02.440 | And finally, immediate annuities.com.
01:03:05.000 | That's the website name.
01:03:06.200 | They're also a well-known one that has a really easy to use a
01:03:10.200 | quote engine for getting immediate annuity quotes very easily.
01:03:14.120 | So that's what I'm calling the multi-company annuity agents that
01:03:19.040 | are often mentioned on the form.
01:03:20.960 | Nationwide, they all write in all 50 states.
01:03:23.120 | Now there are two well-known companies, well-mentioned companies on the forum.
01:03:28.760 | There are probably a few others that sell through company employees
01:03:33.840 | who are also agents canvas annuity, which sells through a company called
01:03:38.520 | Puritan life and gain bridge annuity, which sells through a company called
01:03:41.920 | gain bridge, they sell through company owned agencies and the interest
01:03:45.920 | rates that those two places pay are higher than many places on the web.
01:03:51.000 | But you're not going to find their products at the same rates on
01:03:57.440 | those multi-company agent sites.
01:03:59.320 | You have to go to the canvas annuity website or the game rigid annuity site.
01:04:03.040 | I think that one reason they might have for paying higher rates is because
01:04:07.120 | they figure they're saving on the distribution system costs by, by
01:04:10.600 | employing their own agents instead of paying commissions out next.
01:04:15.480 | I'll mention that brokerage firms in particular, I know that fidelity
01:04:19.600 | and Schwab broker and limited selection of annuities.
01:04:23.120 | Typically at those sites, you'll find only the very highest rated
01:04:27.280 | companies, the New York life, the mass mutual, the guardian life,
01:04:30.840 | USA folks like that are shown.
01:04:33.520 | And there's a very limited number of products.
01:04:35.640 | You'll also find that for the higher in general, not always a hundred
01:04:41.680 | percent true by any means, but in general, the higher the rating of a
01:04:46.040 | company, the lower interest rate they pay on their product.
01:04:49.440 | And so you will not find as high of interest rates on the fidelity
01:04:53.440 | website for a certain product.
01:04:55.920 | For in general, compared to what you'll see on blueprint income.
01:05:00.160 | I will say New York life, for example, sells on both the fidelity
01:05:04.040 | website and on a blueprint income.
01:05:06.320 | And the, the, I believe that the New York life interest rates are
01:05:09.560 | the same between the two, but New York life, because they have such a
01:05:13.120 | high rating, they can pay well lower.
01:05:15.920 | Um, interest rates that now are paid by other insurance companies.
01:05:21.040 | So fidelity and Schwab broker, a limited selection of annuities.
01:05:24.800 | Fidelity directly sells a very low cost, very limited.
01:05:28.320 | I've talked about that already through its company, uh, fidelity, uh,
01:05:31.720 | investments, uh, life insurance company, and you can get, uh, application directly
01:05:36.400 | to them through the fidelity website.
01:05:39.000 | Finally, many local agents, uh, your, your garden shop agent
01:05:44.600 | around the corner from you.
01:05:45.520 | They sell annuities.
01:05:46.760 | Um, they often have a more limited selection.
01:05:49.080 | They might just represent a few companies and often their products
01:05:53.040 | are going to be indexed annuities, which, which many vocal heads
01:05:56.400 | disfavor, but you can buy annuities through a local agent, but you're
01:06:00.120 | likely to get somebody who really specializes in annuities and as a
01:06:03.760 | broader selection of companies that they deal with, if you go with one of
01:06:06.640 | the websites that I mentioned in the second bullet point there, so those are
01:06:11.560 | the places that you can buy an annuity.
01:06:12.800 | Finally, the last, uh, real, uh, slides here.
01:06:18.600 | What questions would you ask if you're considering an annuity?
01:06:22.400 | What are the kinds of things that you might think about
01:06:24.720 | as you're considering annuity?
01:06:26.680 | First, are my annuity benefits guaranteed or can they change?
01:06:30.280 | Spear the payments are fully guaranteed for life, fully guaranteed
01:06:36.240 | with a MIGA interest rates are guaranteed only for, but they're
01:06:39.640 | only guaranteed for the initial term.
01:06:41.080 | You may have to change to a different company after that initial
01:06:43.320 | term to get an attractive rate.
01:06:45.080 | But with indexed credit rates are at the insurer's discretion
01:06:48.960 | and the variable product.
01:06:50.160 | It depends on market performance.
01:06:51.600 | And so, you know, how important is a guarantee a flat guarantee to you?
01:06:55.960 | And, um, just consider what your comfort level is on that.
01:07:00.480 | Second, what are the penalties for throwing my money?
01:07:05.480 | And speed is there's no penalties because there's no right of withdrawal.
01:07:07.960 | Once you put down your a hundred thousand dollar premium, you're
01:07:11.040 | locked into that contract.
01:07:12.280 | If you've elected one with a, with a refund and then you die, your
01:07:16.960 | beneficiaries will get a benefit, but there's no right of you to surrender.
01:07:21.080 | Once the speed is in place, it's in place and there's no right of surrender.
01:07:25.360 | With my goes index variable, really all the rest of these annuities,
01:07:30.080 | you can surrender the policy.
01:07:31.760 | If you're early in the policy period, you may very well have
01:07:34.680 | surrender charges or a market value adjustments.
01:07:37.240 | Um, and it's important knowing, going in, uh, what those are.
01:07:41.960 | If you have any indication, you might need to withdraw money.
01:07:44.200 | What fees will I be paying?
01:07:47.480 | Speed is a migas have no explicit fee at all.
01:07:50.880 | There's no fee, you know, as I've said with both of those things,
01:07:54.000 | what you see is what you get your thousand dollar monthly
01:07:56.480 | payment on your spia, no fees.
01:07:58.320 | Are your 5% interest rate in your miga?
01:08:00.760 | No fees.
01:08:02.320 | I know as an insurance company, you know, practitioner and employee, there's an
01:08:06.840 | implicit fee buried in there because the insurance company has to make money, has
01:08:11.320 | to pay for administration, has to make a profit as to cover risk charges and such.
01:08:15.320 | And the implicit fee is about 1% per year.
01:08:17.880 | That is they're paying you as a policy holder about 1% less than
01:08:21.880 | they're making on their assets.
01:08:23.000 | And that 1% spread covers all their costs.
01:08:25.760 | Index annuities do not have an explicit fee either, but the implicit fee is
01:08:30.560 | higher because the commission is high and the, the implicit fee on index
01:08:35.240 | annuities is roughly 2% per year.
01:08:38.360 | So I'm wearing that range.
01:08:39.720 | Finally, with a variable annuity, there are explicit fees that
01:08:44.120 | are laid out in the contract.
01:08:46.080 | Administration fee, rider fees, the expense charges on underlying funds.
01:08:50.160 | Then finally, do I understand what I'm buying?
01:08:54.320 | Stan Haycock, um, Stan, the annuity man often says, you know, you shouldn't buy
01:08:59.720 | an annuity if you can't explain it to a nine-year-old, no events to nine-year-olds.
01:09:03.000 | So I think a SPIA qualifies as an annuity you can explain to a nine-year-old.
01:09:08.560 | And I think that a MIGA might be an annuity you can explain to a nine-year-old, but
01:09:13.320 | can you explain a variable annuity with a hundred page prospectus to a nine-year-old?
01:09:17.600 | The answer is no.
01:09:18.600 | Again, you've got to determine your own comfort level on things like that.
01:09:22.560 | But, um, um, do you understand fully what you bought?
01:09:27.200 | It's amazing how little from the posts on the forum that I see people are being
01:09:32.240 | pitched on index annuities, especially that they have no frigging idea what
01:09:36.360 | they're buying or what the impacts of that are, or what the penalties are or
01:09:39.960 | anything else, uh, and it's really important if you're buying a complex.
01:09:43.440 | Uh, financial instrument, like an annuity that you understand what you have.
01:09:46.880 | So I will go on and show you.
01:09:50.440 | There are several wiki articles on the vocal heads wiki
01:09:54.040 | about various types of annuities.
01:09:56.600 | I, uh, when I give the PDF, hopefully these links will be active and you'll
01:10:00.760 | be able to click through on the PDF and, uh, get to the, uh, various
01:10:05.200 | links in the vocal head wiki.
01:10:06.320 | And with that, um, and an hour and 15 minutes into the conversation here,
01:10:11.600 | I'm done with a prepared presentation.
01:10:13.920 | Um, I'll open up the chat to look at some of the questions here and
01:10:16.880 | then I'll, I'll, um, see what, um.
01:10:23.040 | Okay.
01:10:23.400 | Miriam, are you, um, got a few questions you want to ask from the chat or let me
01:10:29.480 | first ask if anybody wants to raise their hand and ask a question, uh, we can open
01:10:35.200 | it up for questions on anything and everything on annuities, personal
01:10:40.640 | experiences, if not Jean, do you have from, Oh, Maggie.
01:10:45.880 | Yeah.
01:10:46.960 | I think that's a good way to go.
01:10:48.240 | The chat is so variable about statements versus questions.
01:10:51.600 | It's hard to study a long chat like that.
01:10:53.920 | Okay.
01:10:54.800 | Well, if you have questions from the chat, Jean, I'll, I'll take you next.
01:10:57.440 | Okay.
01:10:57.840 | Uh, I have one or two.
01:10:59.960 | Okay, good.
01:11:01.200 | Maggie, let's go to you first with your raised hand.
01:11:04.200 | Maggie, you are muted.
01:11:11.960 | Sorry.
01:11:13.800 | Hi, how are you all?
01:11:16.080 | Thank you for this.
01:11:16.800 | That was an excellent presentation, very thorough, and I have still
01:11:19.920 | probably so many questions, but I just, um, I'm entertaining the
01:11:23.320 | idea of converting a whole life insurance policy at some point over
01:11:29.040 | to a, um, an annuity, because that's what they're recommending, because
01:11:32.880 | I do not want to have to pay taxes on the capital gains, but it sounds
01:11:36.560 | like I'm going to have to, regardless of how I do it.
01:11:39.840 | So I just wanted to know, uh, if he has any idea of how USAA is with
01:11:46.920 | their rates and their performance.
01:11:49.800 | Well, you've asked about four or five things, the question really, um,
01:11:55.920 | first there's no capital gains that are involved with this.
01:11:59.440 | You use the term capital gains.
01:12:00.800 | I don't mean to pick at your words there, but when you're talking about
01:12:04.040 | income, either, um, income gain on a life insurance policy, surrender,
01:12:08.520 | or income from a annuity, that's all ordinary income.
01:12:12.040 | There's no capital gains involved with that.
01:12:14.720 | Uh, yes, if you, um, if you were to do a 1035 exchange, 1035 is a section
01:12:20.920 | of the tax code and you can exchange a life insurance policy for an
01:12:25.120 | annuity and the basis will carry over.
01:12:27.240 | So for example, you've paid a hundred thousand in premiums
01:12:30.880 | on your life insurance policy.
01:12:32.480 | The policy cash value is 120,000.
01:12:34.920 | And as you roll that cash value over to an annuity, $120,000 will be, um, uh,
01:12:42.240 | your account value, a hundred thousand as your basis, and you'll have
01:12:45.520 | a $20,000 embedded gain there.
01:12:47.560 | If the money's in annuity, then you will not avoid taxation.
01:12:51.960 | You will either pay taxes while you're alive or your beneficiaries or
01:12:55.600 | heirs will pay them after you're dead.
01:12:57.080 | Now you can avoid taxation on the gain on the life insurance
01:13:01.200 | policy by keeping it till you die.
01:13:03.080 | There's no income taxation on life insurance death benefits.
01:13:06.760 | And so that's the way to avoid taxes on a life insurance policy is to keep it.
01:13:12.480 | But if it doesn't make any sense to keep the policy, then, um, an annuity can
01:13:16.880 | provide a viable way to defer taxes.
01:13:19.360 | Let's say you're 55 years old and making a ton of money in a very high tax bracket.
01:13:24.120 | As you can see a time between when you retire and when you start RMDs, where
01:13:28.440 | you will not be in a high tax bracket, an annuity can be a viable way to take
01:13:33.160 | the money from your life insurance policy, surrender the life policy, then
01:13:36.480 | defer the income for five or six or eight or 10 years and take the income
01:13:41.480 | while you're in your low years there, pay a lower tax rate on
01:13:44.840 | that, and then lapse the annuity.
01:13:46.520 | That's a valid reason for an annuity is to defer payment of taxes in the time
01:13:50.960 | when you're in a lower or a different tax regime, does that make sense?
01:13:56.720 | Yes.
01:13:57.880 | That's very good advice.
01:13:58.840 | That's a great way to look at it.
01:14:00.040 | Sort of a, from a bird's eye view.
01:14:02.640 | So I appreciate that.
01:14:03.720 | Do you know?
01:14:04.680 | Yeah, it's like any other kind of, uh, you know, we, we try and, you know,
01:14:09.000 | there's a focus on the forum about, uh, taking, uh, taking Roth conversions
01:14:15.160 | and taking extra income before you start taking RMDs during your low tax years.
01:14:19.720 | This is just another twist on the same thing, trying to place your income
01:14:23.880 | in years when you can, where your income tax rate is lower.
01:14:27.760 | Okay.
01:14:30.000 | Understood.
01:14:30.760 | Do you know much about USAA and their fixed annuities at all?
01:14:34.240 | I don't know anything about USAA.
01:14:36.080 | I know USA is a fine company, very strong, very high ratings.
01:14:39.840 | I have no negative things to say.
01:14:41.680 | Um, but they don't sell through blue for an income or those other sites.
01:14:46.520 | I do see their rates on, um, Fidelity or Schwab or the other, and their rates
01:14:52.440 | are consistent with other higher rated companies and they're lower
01:14:55.800 | than available on other sites.
01:14:57.480 | So, but they're a fine company.
01:14:58.760 | I got nothing bad to say about USAA.
01:15:00.280 | Wonderful.
01:15:01.520 | Thank you very much.
01:15:02.520 | That was an excellent presentation too.
01:15:04.280 | That was
01:15:04.760 | Thank you, ma'am.
01:15:05.240 | Wayne, we have, uh, in the iPad, some in, in the questions, I'm sorry.
01:15:11.160 | A iPad too, made a comment.
01:15:14.400 | He said, this guy is fabulous.
01:15:17.200 | I live in Alabama and he would be worth a five hours drive to talk to.
01:15:21.920 | Thank you for hosting this, this meeting.
01:15:26.000 | Well, you know, iPad, you don't have to drive five hours.
01:15:29.000 | We simply have the meetings here on the Vogelheads, Zoom, you know, the Zoom
01:15:33.960 | meetings and, um, we'll have Wayne back again.
01:15:36.680 | Yeah.
01:15:37.440 | The short, the short story on that is, um, back in 2018 or 19, there was a desire
01:15:43.200 | for a Birmingham, Alabama chapter.
01:15:45.680 | And I put my hand up and said that I would chair the thing.
01:15:49.560 | And we started off slow and small and, you know, meeting in the food court at
01:15:55.160 | the Galleria and also meeting in my home in the pandemic yet.
01:15:59.680 | And we switched over to a Zoom meeting format as a lot of chapters did.
01:16:04.480 | And you know, by the time that the pandemic was over and we could meet again, we lost
01:16:09.000 | a number of folks in the Birmingham area.
01:16:10.560 | I picked up some people from elsewhere.
01:16:12.560 | And so I just kept the chapter going as a Zoom only chapter.
01:16:16.600 | You can check the U S chapters.
01:16:18.680 | I just put out maybe our next meeting is this coming Sunday at 4:00 PM central time.
01:16:24.080 | We've got about 12 to 15 people that show up for the meetings.
01:16:26.960 | Most times it's whatever's on folks' minds.
01:16:29.800 | And I encourage anybody who wants to, to, you know, either post in that thread or
01:16:34.880 | send me a private message and I'll be happy to add you to the mailing list.
01:16:38.600 | And I send out, we meet every two months on Zoom, um, uh, and, uh, at four o'clock
01:16:46.720 | central time on a Sunday afternoon.
01:16:48.160 | And I'll keep the meetings going until God calls me home or until people
01:16:52.680 | stop showing up, whichever happens first.
01:16:56.440 | Well, I think that Wayne, you are much too, um, you know, that there's more to it than
01:17:01.880 | that, but you run fabulous meetings and more than sometimes there are 45 people at
01:17:09.320 | his meetings, they are warm.
01:17:11.720 | You can ask questions.
01:17:13.600 | It is what the Vogelheads really are for everybody, people helping other people
01:17:17.960 | in all other personal financial matters.
01:17:21.000 | And the meeting on Sunday is about real estate.
01:17:24.880 | And he has, um, Birmingham Vogelheads who are very good, no real estate very
01:17:29.840 | well, and they're going to speak about the new real estate with the regulations
01:17:34.880 | or the settlement about buyers and sellers commissions.
01:17:39.240 | So it should be a very interesting meeting this Sunday.
01:17:42.240 | Okay.
01:17:44.000 | Jim, do you have a question?
01:17:45.520 | A raised hand question.
01:17:47.800 | Uh, yeah, this is Carolyn.
01:17:50.880 | Um, I'm the wife.
01:17:53.480 | I just, I didn't hear anything mentioned about cost of insurance, but, uh, we were
01:18:00.760 | burned by an insurance company, um, where they gave us these illustrations about
01:18:08.600 | the minimum we could make and the maximum.
01:18:11.480 | And we didn't really make anything.
01:18:14.160 | Uh, it was a whole life policy, but it was something else.
01:18:18.920 | Uh, I don't remember it was a long time ago, but, uh, anything with insurance
01:18:24.680 | company, I just want to be so careful.
01:18:28.080 | Uh, I mean, I don't want to have anything to do with insurance companies myself
01:18:32.080 | because, uh, my father lost a lot of his, he lost most of his money.
01:18:38.600 | He had a, a, um, an annuity in mutual benefit life.
01:18:43.800 | And they went under, uh, a few decades ago, maybe in the nineties or eighties.
01:18:49.280 | It was the nineties.
01:18:50.200 | Yeah.
01:18:50.600 | Yeah.
01:18:51.200 | And I got to say, what you're talking about there is, is highly unfortunate.
01:18:59.120 | And insurance companies have, uh, often over-promised and underperformed on things.
01:19:05.760 | You know, the illustration there, there's all kinds of gaming that's been done by
01:19:10.560 | certain companies in trying to, um, design products to, to, uh, utilize a
01:19:17.400 | certain index that makes things illustrate good or cost of insurance charges on
01:19:22.880 | universal life policies that are raised.
01:19:24.400 | And it's really a seedy, seamy, terrible thing.
01:19:28.360 | I mean, I've publicly said I'm buying my 5% guaranteed for
01:19:33.400 | five years and I'll take that.
01:19:34.640 | I don't like the non-guaranteed elements either.
01:19:38.600 | Is there anything from, thank you, Carol Jean from the chats.
01:19:42.760 | Yeah.
01:19:43.280 | I like this one.
01:19:44.160 | Uh, retired teachers have a 403 B with a variable annuity.
01:19:50.280 | Is this eligible for a 10 35?
01:19:54.120 | I might mean 10 31, but I'm not sure.
01:19:57.240 | 10 35 exchange or an IRA rollover.
01:20:03.960 | I would think both, um, first, uh, teachers, unfortunately, oh, if there's,
01:20:12.440 | if there's a predatory sales practice, that's been, uh, this happened a lot.
01:20:15.960 | It's been on teachers.
01:20:17.160 | Yeah.
01:20:17.920 | Thankfully I am not in that mode and my company was never in that teacher's market.
01:20:22.240 | So I, we were away from the worst of that, but, uh, there's some awful abusive
01:20:27.400 | products in the teacher's market that being said, and I'm making up here a
01:20:31.160 | little bit, but I would think that if it's in a 403 B, it should be surrenderable
01:20:37.320 | to a IRA and maybe surrender fees there, but it should be surrenderable to an IRA.
01:20:43.320 | I would also think that since it's a newly, since it is, is an annuity, it
01:20:49.040 | should be 10 35 to a lower cost annuity.
01:20:52.040 | If you desire to do that, I would think that's the case.
01:20:55.760 | I can't guarantee, but I would think so.
01:20:58.640 | I'm working on that with my niece.
01:21:00.400 | Who's also got a nurse annuity that I think is a 403 B.
01:21:05.640 | So I'm learning this one myself.
01:21:07.520 | Just look at, look at your charges and look at what kind of annuities there's
01:21:13.480 | been some, some abusive behavior with that.
01:21:15.840 | I'll I'll no other way to characterize that abuse.
01:21:19.840 | Can I say something?
01:21:22.200 | Sure.
01:21:23.040 | I recognize way.
01:21:26.560 | Sorry, I, the energy is bad here.
01:21:29.920 | I know my voice is anyway, 10 35 exchange can only be used on taxable accounts.
01:21:38.120 | You know, of course, of course.
01:21:40.200 | Yes.
01:21:40.680 | Miriam.
01:21:41.520 | Thank you.
01:21:42.000 | Can I use 25 on IRAs, IRAs?
01:21:46.240 | You can roll over.
01:21:47.440 | Remember what IRA means?
01:21:49.680 | IRA means individual retirement arrangements in arrangement.
01:21:56.240 | You have an individual retirement account and individual retirement
01:22:01.040 | annuities, the two types of IRAs.
01:22:03.880 | So either I, if 4143 B it's a employer sponsor retirement account, you should
01:22:13.240 | be able to roll that over to IRA.
01:22:15.880 | Yeah.
01:22:17.040 | I don't see the problem.
01:22:18.240 | And, and I, I was wrong in saying 10 35, you're right.
01:22:22.200 | 10 35 applies to taxable accounts.
01:22:25.040 | I would think you could roll it to another annuity, but
01:22:27.240 | it would not be a 10 35 exchange.
01:22:28.880 | It would be a, just an exchange.
01:22:30.400 | Thanks way that answers the question for my niece.
01:22:36.160 | So next question, any opinion on long-term care annuities?
01:22:43.600 | I haven't heard of these.
01:22:44.760 | Um, there are, um, long-term care.
01:22:51.600 | Um, is it really troubled insurance product sold by many companies years ago?
01:22:57.960 | The actuaries didn't know quite how to price it.
01:22:59.960 | And so traditional standalone long-term care is really
01:23:03.360 | not very available these days.
01:23:05.040 | Um, the, uh, way that the insurance industry has tried to respond to that
01:23:11.000 | is by putting long-term care riders on annuities or on life insurance to
01:23:16.200 | have a pot of cash that can be used for either annuity purposes or for
01:23:20.600 | long-term care, I'm not a big fan of those.
01:23:23.080 | I'm not really deep into those.
01:23:24.320 | And so I don't want to express too strong of an opinion, but, uh, I think
01:23:28.520 | you're better off outside of an insurance product that's, uh, really
01:23:31.200 | not meant for long-term care, but you can look at those things.
01:23:34.280 | So, um, I don't have a strong opinion in one way or the other.
01:23:37.720 | Okay.
01:23:39.120 | Um, Wayne, one question that came up in the chat is that you have ratings,
01:23:46.240 | the rating system for companies, insurance companies.
01:23:50.640 | Are, is there a rating system for the products, the products?
01:23:55.080 | In other words, like mutual funds, you can find out whether certain mutual
01:23:58.560 | funds really are highly rated or not.
01:24:00.480 | How about for these insurance products from these different companies?
01:24:04.520 | No, there is, there is no, uh, there's no, um, um, rating agency or rating
01:24:10.320 | firm that rates insurance products.
01:24:12.720 | If you Google, you can see some really superficial reviews out there on the
01:24:18.240 | internet on certain annuities, but they're so superficial to be worthless.
01:24:21.080 | So no, there is no, um, it's, it's doing your own due diligence or, you
01:24:26.520 | know, posting on the forum and getting the opinions of other people about this
01:24:30.000 | particular product versus that product.
01:24:31.440 | That's too bad, but it's the case.
01:24:33.360 | Is there a, an annuity forum?
01:24:36.760 | I know there is a teacher's forum.
01:24:39.280 | I visited the teacher's forum.
01:24:41.520 | Uh, very nice.
01:24:42.600 | Some Bogle has run it for teachers and their finances, but what about, uh,
01:24:47.720 | you know, insurance products or, uh, annuities in particular?
01:24:51.080 | Is there a, I'm not aware of it.
01:24:52.240 | No, I'm not aware of anything.
01:24:53.640 | Okay.
01:24:55.120 | Um, on the ratings of the companies, we do have some questions on the companies,
01:25:01.520 | how they rate these, I'm sorry, how the rating companies rate the insurance
01:25:07.880 | companies, and you mentioned that the ratings, um, the insurance companies
01:25:13.720 | have different products and the ratings do not necessarily cover each, do I get
01:25:19.800 | it right, the entire insurance company AIG being an example that they had
01:25:25.960 | trouble in one area, but not in another area.
01:25:28.160 | And we had a relative, actually, we had, uh, an insurance policy from
01:25:31.840 | bankers like, and I understand that they had difficulties, but they had
01:25:36.160 | no trouble with their insurance.
01:25:37.600 | Uh, difficult.
01:25:39.120 | They had no insurance difficulties, even though the company had difficulties.
01:25:44.040 | Yeah.
01:25:44.360 | Um, insurance companies are a legal organization unto itself.
01:25:50.360 | Um, and the ratings applied by AM best, none of the other agencies,
01:25:56.240 | standard and poor's and Fitch and Moody's.
01:25:58.080 | They're providing a variety of ratings, but they're rating the financial
01:26:04.080 | strength rating or the claims paying ability of the insurance entity.
01:26:07.800 | In the case of AIG, for example, AIG life insurance company and American
01:26:12.920 | general life insurance company and variable annuity life insurance company.
01:26:16.000 | They were all part of the AIG group.
01:26:18.480 | They are owned by AIG corporation.
01:26:22.120 | Some, you know, some, maybe two, two levels upstream or three
01:26:25.720 | levels upstream or whatever.
01:26:26.920 | Um, and the insurance companies are regulated by the state insurance
01:26:33.800 | regulators who have fairly tight controls over the company.
01:26:36.760 | The insurance regulators, for example, have the ability to, um, to, uh, set,
01:26:42.840 | uh, invested asset limits, concentration limits.
01:26:45.840 | Um, they require fairly stringent financial reporting.
01:26:49.760 | They can, um, deny dividends being paid out of the life insurance company.
01:26:54.880 | So it's not uncommon.
01:26:56.640 | I think bankers life.
01:26:57.920 | I think that was part of the Conceicao group.
01:26:59.560 | Uh, Conceicao went, went broke, but bankers life, the insurance company
01:27:04.400 | owned by Conceicao did not go broke.
01:27:06.320 | Same thing with AIG, AIG real problems, but the AIG life companies did not.
01:27:11.800 | Um, does that answer your question?
01:27:15.280 | I'm trying.
01:27:16.000 | One thing it means is that if you hear on the news, something
01:27:19.120 | about your insurance company, you don't have to panic.
01:27:22.000 | You, you, you examine further what happened.
01:27:26.320 | Yeah.
01:27:27.040 | The insurance regulators are, are very much.
01:27:30.360 | And then I'll talk to the rating agencies, the rating agencies.
01:27:33.960 | Those rating agencies are, um, examining the there's, there's frequent
01:27:40.680 | contact between the insurance company and the rating agencies every quarter.
01:27:46.680 | A full set of financial reports and usually additional supplementary
01:27:51.120 | interrogatories is sent from the insurance company to the rating agency.
01:27:54.920 | So they have a full open view.
01:27:57.080 | Um, I was the primary contact with the rating agencies for part
01:28:01.960 | of my time at the company.
01:28:03.640 | And, uh, they would each come to our offices once a year and want to sit
01:28:08.760 | down with the CEO and the CFO and the chief investment officer and the
01:28:13.360 | chief people officer and those kinds of things to see face to face
01:28:17.720 | eyeball to eyeball what's going on.
01:28:19.720 | Um, they have the right to, um, make special requests at pretty much any
01:28:25.440 | time of the company as to what to do.
01:28:27.760 | Um, they also, when they rate a company, having adequate capital, strong
01:28:34.160 | capital is by no means the only thing required for a strong rating.
01:28:38.720 | You need to have a good depth of management.
01:28:40.120 | You need to have a good diverse marketing plan.
01:28:42.480 | You need to have good, um, asset liability controls.
01:28:45.640 | You need to have good risk management.
01:28:47.160 | You need to have all kinds of things in order to get a good rating.
01:28:50.720 | Insurance rating agencies also value diversity of business.
01:28:56.360 | They don't like a company.
01:28:57.640 | It's term life insurance only or migas only.
01:29:01.560 | They'd much prefer a company, very diverse lines of business where
01:29:06.080 | it can be offsets or something is down in one side and it's up in the other.
01:29:10.120 | So they prefer that.
01:29:11.520 | And so the higher ratings will go to companies that have by definition,
01:29:15.440 | strong capital, but also have strong management, strong marketing plans,
01:29:19.840 | maybe strong brand names if they're a national company.
01:29:22.520 | So, so those kinds of things, um, that it's a rating agencies
01:29:28.760 | don't always get it right.
01:29:29.680 | You know, there are times for companies that are, that
01:29:32.440 | are well-rated do fail.
01:29:35.120 | Colorado bankers had a B double plus rating from AM best
01:29:38.160 | before they went in the can.
01:29:39.400 | So it does happen.
01:29:40.880 | Um, but, uh, the rating agencies certainly try to stay abreast of things
01:29:46.120 | and, and, uh, come down once a year and then update their, they take their
01:29:52.080 | ratings into the analyst to a report back to a committee, the committee
01:29:56.600 | will decide based on slotting this company in with the rest of their
01:30:00.720 | universal companies, how does this company fit into that slot, uh, compared
01:30:05.320 | to other companies that are pure companies, it's a fairly intrusive process.
01:30:09.000 | Very interesting.
01:30:11.440 | One question in the chat was, is there a real difference between a
01:30:15.600 | rating of a plus a B plus plus B minus, et cetera, is there much of a
01:30:22.520 | difference between an eight plus and a B minus, a significant one that we would,
01:30:29.640 | um, that would cause us to not buy a product, for example?
01:30:33.920 | Yes.
01:30:34.760 | I would, I've said on the forum personally, I'm not going to buy a
01:30:39.680 | policy from a B from a B plus company.
01:30:41.320 | That's just too low.
01:30:42.080 | I would restrict my purchases of my goes with B double plus
01:30:47.720 | companies to, uh, to, uh, uh, three years or less.
01:30:51.760 | I just don't want to take that risk.
01:30:53.440 | Other people can vary, uh, trying to think I might go and amend the, uh, or
01:31:01.320 | append onto the slide presentation, the, uh, ratings thing from a and best.
01:31:05.840 | If I can figure out how to get it in there, showing the default by, um, by
01:31:11.120 | rating category and by years of exposure.
01:31:14.360 | For example, if a company is rated B plus on a certain date, what's the
01:31:19.160 | chances of default in one year, in two years, in five years, in 10 years.
01:31:23.760 | Now, of course we don't operate on averages.
01:31:25.960 | We operate on a policy on a company.
01:31:28.120 | And so, you know, there've been very, very few insurance defaults, but,
01:31:33.000 | um, you know, things do happen sometimes and companies do go down sometimes.
01:31:36.680 | So, uh, yes, I would not buy it from a B plus company.
01:31:40.200 | I'd buy if it was New York life, which I regard as the king of the industry.
01:31:45.280 | I'd buy an any amount.
01:31:46.800 | I mean, New York life actually has a, has a rate band.
01:31:50.160 | You can get a higher rate on Omega if you put $10 million with New York life.
01:31:54.920 | And I don't have $10 million, but if I did, I'd feel comfortable
01:31:58.840 | with New York life's credit.
01:31:59.720 | Interesting.
01:32:02.600 | Any other questions, any raised hand Jean from the chat?
01:32:07.240 | Yeah.
01:32:07.840 | From the chat.
01:32:08.760 | Can there be an annual withdrawal rider on a SPIA for small emergency cash needs?
01:32:16.320 | Not to my knowledge.
01:32:17.840 | You'd have to ask an agent about that.
01:32:19.600 | Not to my knowledge.
01:32:20.520 | Let's be a, you got what you got.
01:32:22.640 | Yeah.
01:32:23.400 | That's kind of what I guessed.
01:32:24.920 | And then another question, what would be a use case for buying an
01:32:31.120 | annuity with an IRA other than a QLAC?
01:32:35.000 | Well, I will say, as I've said on the forum publicly that I have
01:32:40.000 | almost all of my Amigas in my IRA.
01:32:42.880 | And the reason is because I personally and others on the forum will disagree,
01:32:48.400 | but I like the certainty of knowing that I will have, you know, X thousand
01:32:52.680 | dollars available from this Amiga in 2027 from hell or high water.
01:32:57.360 | Now I don't need the money until 2027.
01:33:00.800 | And so I'm happy deferring until that date, but I don't with a bond fund.
01:33:04.920 | If I put money into a bond fund today, I don't know what
01:33:07.440 | it would be worth in 2027.
01:33:08.640 | I know what my, my Michael will be worth in 2027.
01:33:12.440 | So tell her me silly.
01:33:14.480 | I like the certainty of the known amount of principle that I'll
01:33:19.560 | have at a certain future date.
01:33:21.360 | You can get that same certainty with other things like individual bonds,
01:33:26.640 | individual treasuries, uh, defined maturity ETFs, bank CDs.
01:33:33.000 | Those all have those same characteristics.
01:33:35.000 | I find that usually the migrates are, are attractive compared to
01:33:39.640 | the rates available elsewhere.
01:33:41.840 | So yes, it's, it's like any other fixed cum fixed income within a, um, IRA,
01:33:48.880 | which I think typically is where Vogel had say, you ought to put a lot of
01:33:52.640 | your fixed income is in your, your IRA.
01:33:54.720 | I like an annuity in an IRA because of the, um, because of the characteristics.
01:34:00.560 | The only unknown factor in that is inflation, right?
01:34:04.800 | Well, you have inflation everywhere, right?
01:34:07.640 | It's the bond fund is the same type of thing.
01:34:10.440 | Yeah, sure.
01:34:12.440 | Yeah.
01:34:12.720 | Very similar.
01:34:13.400 | Okay.
01:34:14.920 | Miriam, back to you.
01:34:15.760 | You got another one out there?
01:34:16.960 | Yeah.
01:34:17.800 | Do any raised hands?
01:34:19.600 | Anybody in the audience want to ask a question?
01:34:22.080 | We do have a question in the chat from Gorey.
01:34:27.320 | He says, he asks Wayne in general, Wayne, uh, do you think annuities are
01:34:34.680 | underutilized by folks who have sufficient assets and they have
01:34:42.040 | sufficient non-annuity income sources?
01:34:45.120 | Meaning if you don't need an additional income source, is there still a
01:34:51.560 | benefit from a cost-efficient perpetual optional income source with an annuity?
01:34:59.240 | Or is it simply better that annuities are for folks who need that income source?
01:35:05.520 | You used the word sufficient about four times there.
01:35:08.760 | And so with that, I'd say probably not, you know, I wouldn't buy annuity.
01:35:16.480 | If I just simply had no need at all, if everything else was sufficient and I
01:35:20.600 | was highly confident that it would be, then I, then I wouldn't do it.
01:35:24.520 | But I think, uh, uh, plumbing use cases for annuities is as people, you know,
01:35:30.080 | the, uh, retirement system in this country has moved increasingly to a
01:35:35.480 | defined contribution retirement system where people have their IRAs and their
01:35:40.560 | 401ks and, uh, being able to easily, seamlessly cost-effectively convert
01:35:47.720 | that lump of money into a monthly income.
01:35:51.320 | Might be attractive for a whole lot of folks.
01:35:54.440 | And to have that as a second stool of your leg, a second leg to your stool.
01:35:58.640 | Right.
01:36:01.840 | It's like you're creating, it's like creating your own pension.
01:36:08.200 | Yeah, it is.
01:36:09.440 | It's creating your own pension.
01:36:10.480 | And, and, uh, hopefully over time there'll be more, um, more
01:36:15.080 | people that have that access.
01:36:17.080 | Yeah.
01:36:17.920 | Simon, do you have a question?
01:36:23.640 | Simon, you're, you are muted.
01:36:25.480 | Okay.
01:36:27.480 | Thank you, Wayne.
01:36:28.560 | Um, my question is about guarantee fund coverage.
01:36:32.480 | Uh, my state, uh, has limits that differ for an annuity in accumulation
01:36:40.840 | mode versus an annuity in, uh, in payout mode and the surrender value.
01:36:47.240 | Well, they talk about the limit of coverage by the guarantee association.
01:36:52.680 | Um, and they still use the word surrender value.
01:36:55.200 | Um, what, what would be the estimation of a surrender value for something
01:37:01.280 | that's been in payout mode for 10 years?
01:37:03.760 | Um, I'd have to see what state it is.
01:37:07.160 | I'd be surprised if they used surrender value in connection with a payout
01:37:11.200 | annuity, because there is no surrender value on a payout annuity.
01:37:14.320 | Right.
01:37:15.440 | But I think what they would, I don't have, thankfully I've never been an
01:37:21.280 | employee or worked on an insolvency, so I can't tell you exactly how they do it.
01:37:24.640 | But it would seem to me that, uh, what they would do if, if for policyholders
01:37:30.200 | who had payout annuities of, uh, an insolvent company is that they would
01:37:34.800 | do evaluation of those annuities using kind of first principles, you know,
01:37:39.320 | what's the present value using actual principles of a stream of a thousand
01:37:43.440 | dollars a month for a person who, for a male age 75, you know, whatever that is.
01:37:48.560 | And that's how they would come to the value that's
01:37:50.480 | covered by the guarantee fund.
01:37:51.680 | It is not uncommon.
01:37:53.320 | It's it is common for there to be different dollar amounts of coverage
01:37:58.720 | for payout annuities and for accumulation or news that's common.
01:38:02.360 | Yeah.
01:38:03.120 | Thank you.
01:38:04.160 | Um, I'll, I'll go back and read it more carefully.
01:38:07.240 | Thank you.
01:38:07.640 | Yeah.
01:38:08.480 | And Jean.
01:38:11.560 | Um, I've got one from the chat.
01:38:14.320 | Does cost of insurance allow insurance companies to take
01:38:18.440 | most of the interest earned away?
01:38:21.000 | Well, the cost of insurance would not apply to a, um, a, uh, annuity.
01:38:29.280 | Uh, the only kinds of things that are even remotely close to a cost of
01:38:33.880 | insurance would be writer fees on an annuity cost of insurance that term
01:38:39.680 | is used almost exclusively when you're talking about life insurance and
01:38:44.080 | specifically universal life, universal life has explicit cost of insurance
01:38:48.920 | charges and the relationship of cost of insurance on a universal life
01:38:52.880 | policy to the interest just really depends upon what is the amount of
01:38:57.560 | insurance that you have and what's the amount upon which you're earning interest.
01:39:00.960 | You know, so there are two entirely separate concepts.
01:39:05.040 | The interest earned is the amount earned on the account value.
01:39:08.160 | The cost of insurance is based on your age, sex, and amount of insurance.
01:39:13.640 | And the two can be very close to the same or dramatically different,
01:39:18.040 | but there's really no linkage at all between the two.
01:39:19.760 | They're two separate concepts, but that applies to life insurance,
01:39:23.400 | universal life, not to annuities.
01:39:25.400 | Excellent.
01:39:28.320 | Wow.
01:39:28.920 | You really know your stuff.
01:39:30.440 | 43 years.
01:39:33.680 | It shows.
01:39:35.760 | Thank you, Wayne.
01:39:36.600 | Good job.
01:39:37.440 | He likes the Vogel head for him.
01:39:39.800 | Cause he has an opportunity to get, you know, talk about all this stuff.
01:39:44.480 | Well, I'll tell you, uh, as pure mortals out here who came along later in life
01:39:49.720 | and tried to figure this out, we appreciate it, Wayne.
01:39:52.240 | Good job.
01:39:52.800 | Yeah.
01:39:54.200 | Um, Wayne, I must, must say that, um, Melinda has posted on the chat.
01:39:59.760 | A very nice, um, he says outstanding presentation, Wayne.
01:40:05.320 | Thanks so much for being an experienced straight shooter in an industry that's
01:40:12.400 | right with misinformation to enhance sales.
01:40:17.120 | That's very nice.
01:40:18.760 | Thank you.
01:40:19.240 | But in closing, I'll say that, you know, I didn't know what I was
01:40:23.760 | going to kind of do in retirement.
01:40:25.120 | I'm five and a half years into retirement here and didn't
01:40:27.640 | really have kind of a passion.
01:40:28.640 | I found I get personal enjoyment and satisfaction from being able to answer.
01:40:34.920 | And the best way that I can things that people post.
01:40:38.120 | And so I'd encourage anybody I, as I said at the start, I do try and
01:40:43.240 | weigh in on most, all the annuity threads on most, all the life insurance threads.
01:40:47.840 | And if you want my input, either send me a private message and give me a heads
01:40:52.160 | up about a particular thread or send me a private message with your particular
01:40:56.760 | situation, my, it's a kind of a purpose that I have, and, and, uh, I hope that
01:41:01.880 | it's, I think it's been useful to a few folks and I hope to do it for a good while.
01:41:07.120 | Um, one other possibility, possible use of an annuity is where I've read that.
01:41:14.840 | Let us say that we are, you know, younger and we are taking
01:41:19.200 | care of our elderly parents.
01:41:20.960 | And we have ourself the possibility of dying earlier than our parents,
01:41:31.720 | but we are taking care of them.
01:41:34.000 | In other words, to use it as to buy an annuity for them, you buy an annuity for
01:41:41.040 | them so that if you pass away earlier, at least they have an income stream for them.
01:41:47.360 | Now there's also life insurance, of course, but what is, um, what would you say about that?
01:41:52.840 | Well, you know, that would probably not a way you could structure that would be as
01:41:59.520 | part of your will to direct your will or your trust or whatever, I'm not an attorney
01:42:05.160 | by any means to buy an annuity on your parents at that point, it'd probably be
01:42:09.800 | less effective to go and buy one on you as you're a youngish person and to have
01:42:15.600 | it being paid out when you don't need the income, if your goal is to try and
01:42:19.200 | help out your parents, um, after your death, but it would be, it would be a way
01:42:24.920 | of doing things to direct that you're in your will, that part of the, your estate
01:42:30.480 | will be used to purchase an annuity on your parents.
01:42:32.840 | That's that again, that there may be twists and turns there that I don't
01:42:36.640 | understand, but just in terms of raw kind of actuarial and mathematical
01:42:41.360 | things, that's a way that you.
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