Welcome to the BogleHeads Chapter Series. This episode was jointly hosted by the Pre and Early Retirement and Retired Life Stage Chapters and recorded June 4th, 2024. It features longtime Boglehead and insurance expert, Stinky, also known as Wayne, presenting a complete overview of annuities. Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence.

This recording is for informational purposes only and should not be construed as personalized investment advice. All about annuities in about an hour of talking time, basically. And as Miriam said, we'll have roughly 20 minutes in the first section, 20 minutes in the second section, and then 20 minutes at the end based on what I've done for timing so far.

And I'll encourage if you have questions that you not ask specific questions about your specific product that you're looking at or that you own, you know, you can post those kinds of things on the forum. I do try personally to respond to every question on annuities that I see on the forum, but it's often good to have discussions in the forum, but let me first introduce myself a little bit.

Wayne, also known as Stinky. Stinky, take off on my last name. It's a childhood nickname. I've had that since college, if not before I am retired. I have more than 40 years of experience working in the home offices of major life insurance companies, and I have held senior financial roles most of that time.

I'm a finance guy, a math guy, I had a math major in college. I'm not a marketing guy at all, not a salesman at all. I'm because of my work with my former company and also some acquisition work that I did looking at other companies. I'm familiar with the product design and pricing for most kinds of life insurance and annuities.

And kind of interestingly, I also worked extensively with the rating agencies and state regulators. Um, you know, we talk sometimes about AM best ratings. Um, I have visited the offices of AM best by my count, I think 19 times during my career on behalf of my company. So I've been in Oldbrook, New Jersey, where AM best is for almost 20 times.

I'm also, um, the person that started up the long running purchasing Micah's, um, thread in the, in the forum. That thread now has over 2000 posts and over 300,000 views. And I think a lot of folks have gotten knowledge about multi-year guaranteed annuities, Micah's through that thread. And so that's kind of who I am.

A disclaimer or two, um, this certainly is not financial advice. You know, I'm, I'm giving you my own opinions about things. And my opinions come from my training and experience and also from being exposed to folks on the forum and their, their thoughts also consult with your qualified financial tax accounting or other advisor, it's only a high level overview of annuities.

We could go, you know, if I went two or three hours, you'd get deeper into it. But one hour is not enough to give an overview of everything. And of course, therefore it should not be relied upon for any kind of purchasing decision or surrendering decision, uh, for annuities or financial products.

The opinions are mine. I formed them, as I said, based on my training and experience. And also based upon, you know, seeing things from the Bogle head forum. I am pleased that I'm retired now. So I'm able to be critical of some of the products that my former employer wrote.

You know, I'm, I'm not a fan of certain things as you'll see, um, during the presentation tonight, and I feel freer to speak about those things now that I'm retired and no longer drawing a salary from my company. Um, and I've also never been an insurance agent or a financial advisor.

Cause as I said, I'm a numbers kind of guy. The agenda, um, what is an annuity? We'll talk about that for a few slides. The primary reasons why a Bogle head or anybody might buy an annuity and then get into the two basic use cases for annuities, the first is as a source of income, and then we'll follow that up with the time for questions.

The second use case for annuities is a source of accumulation. And we'll follow that up with the time for questions and then for, um, uh, topics at the end for short topics, how our annuity policy order is protected. How are annuities taxed? Where can I buy an annuity? And what questions might you want to ask when you're considering an annuity?

So what's an annuity at its core? An annuity is just a simple contract between you and an insurance company that requires the insurer to make payments to you, um, after you pay a premium to the insurer and the insurer might pay premium might make payments to you either immediately or at some time in the future.

And as I said, there's two general use cases, income annuities, which is kind of a regular, usually monthly payment of the annuitant or for accumulation, growing a deposit over time, using interest credits or stock market performance. So the income or accumulation, you know, when you look at the posts in the forum and some of the threads that you follow, you'll see a lot of discussion of single premium, immediate annuities, and people think of that as the basic kind of annuity.

Spia, which pays out a monthly amount, uh, in return in exchange for a freemium, but literally 95% of current annuity sales are used for accumulation. Annuities are used these days as a savings vehicle, primarily, um, almost entirely with the monthly income being a very secondary use case for annuities.

Uh, I will note, however, every annuity that you buy, um, has the ability to allow for income. I'll talk frequently tonight about migas and I might use a hundred thousand dollar miga premium or a hundred thousand dollars to be a premium or whatever. But if I buy a hundred thousand dollar miga, I'll probably be using that for accumulation, but I will be able to turn that into an income stream if I choose.

And the acronym miga, M Y G A I'll define that better later, but it's a multi-year guaranteed annuity. So I'll come back to that and just find that more fully in the second section of this presentation. So the primary reasons why a bogey head might buy an annuity for the use case of income, there's really just one case there you're converting a lump sum of money, my a hundred thousand dollars into a guaranteed monthly paycheck for life of, let's say a thousand dollars a month.

So it's a simple use case. It's a simple product. You can also do an income, the use case of an income for a fixed period. I give my a hundred thousand dollars to the insurance company and they'll promise to pay me on a monthly basis for 10 years and then stop when the 10 year period is over.

So that's the use case of, of, of income to use an annuity in that way. The use case of accumulation can be several things. First, you might be able to earn a guaranteed attractive rate of interest over a period of time, like with a multi-year guaranteed annuity. So you're earning interest on a deposit to make with insurance company.

You can also use an accumulation or annuity to defer the reporting of taxable income. There'll be times where people find it attractive to not have to make an investment and to defer the reporting of income for many, you know, several or many years in the future, we'll talk about that later a little bit.

You can also use an accumulation or annuity as a 1035 exchange vehicle from another annuity or a cash value life insurance policy. We'll talk about that a bit later also, but those are your basic reasons why you might buy an annuity. There are more reasons we could go deeper into things.

The primary use cases are income and accumulation, and then those reasons that I've listed out there. Now going into income annuities, income annuities. I'm going to talk about four forms of income annuities here. Uh, spears Diaz, uh, annuitization options and QX. And I'll go into a slide or two on each of those things right now.

A single premium, a media annuity, a SPIA, that is the simplest kind of annuity that there really is. A person will pay a premium to an insurance company. Let's say again, a hundred thousand dollars and the payments usually monthly, we'll start within one year after the premium was paid.

And typically they'll start a month or two after that premium was paid. And so, um, those payments in most cases or many cases will continue for the life of the insured. So long as you're breathing, you're getting that monthly check from the insurance company. Um, you can also, as I think I said before, uh, purchase a, uh, SPIA for a period certain you can buy it for 10 years and a use case for that might be someone who's 60 years old, doesn't plan to take social security until they're 70.

They're retiring. They want to have a sum of money that they put aside right now and have a planned amount, a paycheck coming in every month from the insurance company for 10 years and then stop when social security starts. And so that'd be a fine use case there for a SPIA.

When a person's buying a SPIA for life, you know, Taylor Laramore has mentioned numerous times on the forum about how SPIA is the best thing he's ever bought, um, because it continues to pay as now he's a hundred years old. There are additional options beyond just a single life SPIA that I might buy on myself from my life only.

One of the most typical things is to have a joint SPIA that is I and my spouse could have an annuity that'll pay out. So almost either one of us will survive and we'll stop only when the second one of us dies. Now, of course, that if I was putting down my a hundred thousand, getting a thousand dollars a month, if I include my wife, who's a female, who's younger than me, who will likely live longer than me, the month of payment might be less than a thousand dollars.

Cause they're going to pay till the second one of us dies. A period certain annuity. That's the 10 year annuity that I've been talking about that, uh, that just pays for a period certain, but you can also buy an annuity. It's pays out for your life, but a minimum of 10 years.

And so a period certain means that there's a certain period of time that will be paid for, and then in addition, it will continue paying after that for as long as I'm alive. A refund feature would say, um, if I pay my a hundred thousand dollars, it would take a hundred months to recoup that a hundred thousand dollars and a thousand dollars.

A month. If I died in month 90 or month 80, then the premiums would likely, or the payments would likely continue until they reached one month. 100. My beneficiary would get the refund of the additional payments to get back to my a hundred thousand dollar initial premium, and then finally increasing.

Most of these are sold as a level of amount, $1,000 or whatever per month. However, there are options offered by most all companies to increase those payments by 1%, 2%, 3% per year. And to my knowledge today in the, in the U S those are only offered, um, in, you know, percentage insurance, like one, two, 3%, et cetera.

There's no insurance company that I'm aware of that offers a single premium immediate annuity that's tied to the CPI, um, they were, they have been sold at sometimes in the past, but they were not very popular at all. And they're not available now to my knowledge, but you can buy one that increases, um, it's payments over time.

And of course, if you're getting an increasing payment over time, your initial payment will be lower than that thousand dollars a month to compensate for the higher payments later on. So that's a spiel, single premium, immediate annuity, SPIA, a deferred income annuity, a deal. Is very similar to a SPIA, except that the payments start more than one year after the premium is paid.

Let's say for example, I'm 65 years old. I'm certain that I want to put down a premium today and start receiving payments when I'm 75. No payments to me between 65 and 75. Then payments commence when I'm 75. Of course, if I put down my a hundred thousand dollars, I can get a lot more than my thousand dollars a month because I'm not getting payments for the next 10 years and the insurance company can invest that money and is not paying it out to me, um, so, but there might be a use case where I know that I want to have payments starting five years or 10 years or whatever out, um, some deals are sold without a death benefit.

So if I'm 65, I buy it and I die at age 72, nothing goes to my beneficiary. However, you can buy a return of premium. So that if I die when I'm 72, that they'll get my premium back as a, as a death benefit. Uh, that's an optional return of premium.

I'll also say that in place of a deal, a regular traditional deferred income annuity, you can have the same use with an indexed annuity with a guaranteed withdrawal benefit rider. Um, we'll talk about that a little bit later on. Most mogul heads don't care too much for indexed annuities.

But if you attach a guaranteed withdrawal benefit rider, that effectively turns it into a guaranteed product where the company can't mess with you and cutting your accredited rates in the future, and you can have equivalent benefits to a deferred income annuity with a indexed annuity with a guaranteed withdrawal rider.

So I believe that a prospective DIA buyer should look at both options, both the DIA and an indexed annuity with a withdrawal benefit rider. So that's a deal, something where payments start more than one year in the future after the premium is received. Next is the annuitization options in life insurance or annuity policies.

If you look at any life insurance policy that you own and turn away to the back of the policy, you'll see that there are ways that the, uh, insurance company can pay out the life insurance benefit. The vast majority of people take their life insurance benefits as either a cash, you know, a one-time check or as a checkbook that they draw down pretty quickly, but you do have the option in every life insurance policy to take the benefit, the life insurance benefit as an annuity for your life or for some period.

Same thing with every annuity, every annuity, be it a variable annuity or a MIGA or an indexed annuity, whatever. The vast majority of those are used for accumulation purposes, but there's a little clause at the end saying that if you want to turn this into a payment stream that you can, and then the options that you have there for life only period, certain, et cetera, it's like you'd have an SPM.

So that's the third use case or the third kind of, uh, annuization options. And the fourth is a qualified longevity annuity, a QAC. Uh, that is a fairly new thing, uh, enabled under the tax code. It's a payout annuity funded with an investment from a IRA. It's a, so it's qualified money, uh, or a 401k or something else.

Um, the start of payments on that is, can be as soon as almost immediately after you make the premium payment from your IRA or whatever, or it can be as late as age 85. And you can do it either on your own life or on the life of you and your spouse.

A benefit of the QLAC is that you can reduce your required minimum distributions from your, um, uh, IRA by putting part of it into a QLAC. Here's an example for you. You have a million dollar IRA, the IRA, the required minimum distribution percentage is 4%. So you've got to take out $40,000 in that year.

Well, if you apply $200,000 of that IRA balance to a QLAC, then you'll be able to reduce your IRA balance that's used for RMD purposes from a million dollars to 800,000, and then you can, uh, have 800,000 times 4% or 32,000, a smaller. RMD, and you've got to eventually pay the Piper when that QLAC starts churning out cash at the date and the age that you define, then that'll all be taxable income at that point, but you can defer having, um, income from your, uh, uh, your IRA by using part of it to, uh, fund a QLAC the maximum premium per the law right now is $200,000.

Uh, one time or 200,000, maybe, maybe you can do multiple tranches, but 200,000 in total, and that will be adjusted with inflation. So that's the fourth kind of, uh, of a, uh, payout annuity. So in summary about income annuities in general, I'm going to say in this presentation, a number of times, many Bogle heads feel, well, I sense, you know, by reading the comments that the people post, I think that a lot of folks feel this way, Bogle heads are not, um, monolithic.

They do have different opinions and different views on things, but from the comments that I see would line up pretty well with my personal beliefs. Most Bogle heads, I think, feel that annuities bought for income purposes are a pretty good consumer value. They are a simple, straightforward product design.

There's no hidden fees. What you see is what you get. You know, if you put down your a hundred thousand dollars for a SPIA and you get your thousand dollars a month, that's about as simple a contract as you can possibly have, and there's no hidden fees. There's no nothing at all.

It's all locked in. Um, and, and you, a person is allowed then is enabled to be able to lock in an income stream over an extended period of time, I can take my premium and I can lock in my thousand dollars a month for the remainder of my life.

Come hell or high water. I'll get that thousand a month. So long as I'm breathing, it allows me to get higher monthly income than a withdrawal method, like the 4% rule. You know, if I had my million dollar, um, IRA, I might only be able to get $40,000 a year out, uh, using the 4% rule, but I can get a higher amount out, uh, by buying a SPIA.

And of course there you got to pay the piper. The reason that you can get that higher amount out is because if there's a residual value in my IRA, when I die, that'll go to my beneficiaries, but unless I have some kind of a refund option in my SPIA, when I die, there's no residual value at all, so you can get more money while you're alive, but you don't end up having a residual value for your beneficiaries.

But you can get higher payments. And for some people, it's an important thing to maximize current income. And that might be attractive if you have no errors that you care about or anything like that. One thing common around frequently on the forum is that inflow inflation does erode the real value of payments over time.

Almost all of these annuities are done in nominal dollars, $1,000 a month. And so a thousand dollars a month in 2024 is almost certainly less than a thousand dollars will be in 2034 or 2044, so inflation does erode the real value of an annuity payment stream over time based on what people post in the forum, the, you can buy a SPIA as young as age 40, but the vast majority of folks will be waiting until there's some time in their late sixties, early seventies, mid seventies, maybe up in their eighties, that's the time when.

You're getting closer to the end of your life. The payments are higher and more attractive for a thousand or a hundred thousand dollars. A premium. And a lot of folks seem to think that's a sweet spot for buying an annuity, a payout annuity of some type at that age.

I'll also finally note that there are some lucky people in this group that still have an old style defined benefit pension plan and the many defined benefit pension plans have an option for taking a, uh, either a monthly paycheck, once you retire a pension check or getting a lump sum.

And so the purchasing decision for that. Uh, annuity is very similar to thinking about a SPIA with a SPIA. You have a lump sum of money. You choose to give it to an insurance company to buy a, uh, a monthly benefit. The same kind of calculation is there. If you have a cash, if you have a defined benefit plan with a lump sum option, you have a lump sum available to you, but you can also go ahead and use that to buy a pension.

And so with that, I finished up the first part of my presentation here. And, uh, we'll take a few questions. Okay. You can post them in the chat or you can raise your hand. If you have a question. Do we have any in the chat? Um, I have one thing to say with, uh, Wayne about that.

The, um, the SPIAs, I know that Taylor has mentioned that he bought two of them. Uh, in one of his posts, he described how he did it. The first SPIA that he bought. I don't remember how old he was. He might've been in his sixties and he calculated, he wrote, he calculated how long he would live probably.

And he calculated it and he figured, okay, I'll live until I'm like in the, my late seventies, maybe early eighties, if that. So he bought the SPIA thinking that it would tide him over. He does have a pension. Taylor does have a pension, but he needed extra. He felt more comfortable, you know, more comfortable having more of a steady.

Stream of income coming in. That would be there for them. And so that's when he bought his first one. And then of course he kept, you know, he got into his six sixties. He passed through his seventies. He was in his eighties. He figured I'd better buy another SPIA.

And so he then bought another one. And he is now a hundred years old and five months, almost a hundred and a hundred and a half years old. And so for some, you know, it, it solved his problem or his wasn't a problem so much, but it solved, it helped him to feel comfortable with the income stream that he had.

So he did not have to worry about whether or not he took it too much money out of his Vanguard accounts, his retirement accounts or not. So that seems to me to be a, a good, you know, a good reason for a SPIA. Well, there's a, there's a, definitely a comfort level in having a monthly paycheck.

I mean, he likely had a monthly paycheck or a weekly paycheck for his entire working career. And the switching from that mode of having known income coming in to not having income, maybe except social security, that's a rather big break. Having a SPIA can tide you over and make you feel a lot more comfortable with covering the basics of life.

Your basic expenses are being covered by a known amount coming in. And there was comfort in that. Yeah. Yeah. Uh, lady geek. Oh, I just want to say we have three questions in the chat. Okay. First one, Arctic pineapple corp. Love that name. Can't remember the name of the writer you spoke of when discussing index annuities, but it, but isn't index annuity with the writer you spoke of parentheses that makes it similar to a DIA parentheses.

More expensive than just buying a DIA. Are the surrender fees greater or longer than a DIA? Okay. Well, there, if you're using in the use case of a indexed annuity with a guaranteed withdrawal benefit, the, uh, you're using it as a DIA, you're not going to surrender it, so you're using it as a DIA, you're going to, you're planning to turn that into an income stream and so surrender charges.

Don't make any difference. Crediting rates may don't make any difference that that guaranteed withdrawal benefit writer guarantees that based on some phantom account value that's being run within that indexed annuity, that you'll get a certain percent of that every year. It is fully guaranteed. And, um, Stan, the annuity man's website is the only one that I'm aware of where you can actually run quotes on, um, guarantee on, uh, index annuities with guaranteed withdrawal benefits, but you can compare, you know, and you should compare to see if you get a higher monthly income five years from now, or 10 years from now using a guaranteed withdrawal benefit on an index annuity or a deal it's very, um, carrier specific circumstance specific, you can't make a general rule about it, but all the Vogel had concerns about indexed annuities, they fall away when you attach that guaranteed withdrawal benefit writer to it, then it's just a question of what's the monthly income that you can get off of that compared to a DIA.

Okay. Let me come back to Bob. Let me come back to Bob K. Uh, because Kim, I think you kind of slid into Kim's questions. Where do you, where do you recommend what purchase an annuity I've heard of standing, standing annuity man and immediate annuities.com. And what to look for.

That's section three, section three coming up. I have a full slot. Am I okay? Uh, Bob K. Uh, what happens if the insurance company goes bankrupt? That's a section three. Also that's a tree. Okay. Products. Not you don't recommend that'll be in section two. Okay. Oh, all right. Then, then pro and con of cash refund or no cash refund for a SPIA option.

It just really depends on whether you want to take kind of more insurance risk. Uh, you know, people will take a refund type option or a period certain option. I mean, what happens if you're 70 years old, you buy a SPIA and you die next month with no refund.

People are concerned about that. And so people who are in bad health shouldn't buy SPIAs. I mean, the people, I will say as a whole, the population of people that buy SPIAs and buy payout annuities is on average, well, healthier than the average U S population. If you're a smoker, you don't buy a SPIA because you're going to die.

Okay. Uh, and, and, uh, so, but, uh, you can also always have the freak accident or cancer or whatever. And so it's just kind of peace of mind. Um, you're getting the most pure insurance protection by not having any kind of a period certain or any kind of a refund, but, uh, you'll, um, maybe have more peace of mind if you have one of those features.

Okay. Yeah. Mel lady geek, Mel, you have a question? Yes. Uh, it's a thing about retirement. Okay. I just needed, uh, Mel, did you call somebody else? Hello, Mel, Mel, it's you. Can you hear me? We can hear you. Yes, because I just, I just wanted to add to Miriam's comments about Taylor's, uh, annuity.

Uh, he has expressed a number of times to me and probably others that one of the reasons he really likes the income stream is it makes him comfortable giving his money away now to his children, which is a big thing because you have the option when you give it away to your children to see the benefit of it, uh, as opposed to when they get it after you die.

So it makes him comfortable giving the money away to his children. And that makes him happy seeing the way they're using it. Yes. He has mentioned that many times on the forum. Why don't we go ahead? If I'm not looking at the chat to see if there's other questions out there, I should answer now, but I'd kind of like to go on to the, I just want to introduce Mel, Mel Lindauer, one of the founders of the bogleheads.org and posted on the Morningstar forum when we were the Vanguard diehards since 1998.

Yep. Okay. Wayne ready for part two, part two, accumulation annuities. As I said before, you know, uh, accumulation annuities are literally 95% of the annuity sales these days, people buy annuities, what's called annuity for accumulation. And there's four kinds of accumulation annuities I'll talk about here going really from the simplest to the most complex, um, a multi-year guaranteed annuity, a MIGA indexed annuities, which at one time were called equity indexed annuities, a buffered annuity, which is a fairly new innovation is also called a registered indexed linked annuity, RILA and a variable annuity.

So those are the four kinds of accumulation annuities that I'll talk about here. Each of those, and this is kind of confusing. Each of those is called a deferred annuity because annuitization, the verb or the word annuitization, I'm using that as a conversion into a payment stream. It's deferred after the issue date.

And most accumulation annuities are never annuitized. Let me give you an example. I have a number of multi-year guaranteed annuities that I've mentioned previously on the forum. I own those. Um, I do not plan to annuitize any of those. I never plan to take monthly payments out of those annuities, but I would have the right to, if I chose to.

The vast majority of sales are accumulation and the vast majority of accumulation sales are never annuitized, but still they fall in the general category of annuities. And so it's a bit confusing nomenclature, but, um, uh, that's, that's the way it is. Multi-year guaranteed annuities. Half of annuity sales are multi-year guaranteed annuities.

The rest of all the other annuities is the other half, but multi-year guaranteed annuities are extremely popular. At one time there were called CD annuities. C is in certificate D of deposit. So they are analogous in a lot of ways to a bank CD in that they pay a certain interest rate for a certain period of time I'm going to use as my example.

You're 5% for five years. You can get better rates than that right now, but the math is easy with a 5% rate for five years. Um, which is an attractive rate. And then when that interest guarantee period expires, you knew it didn't have some options. You can stay in the current product.

The annuity continues on, um, at that time. But if the company is offering, it gives him a good renewal offer, maybe another five years at another 5%, he'll take that and leave the money with the company, you can exchange to an annuity with another company if he chooses, or he can take the funds out in cash.

And so he has options as that five-year period expires. Now these annuities are all withdrawable. Um, Omega, I can get my money out of Omega anytime that I want, but there are pretty stiff surrender charges and withdrawal penalties on most of the kinds of annuities we'll talk about in this section, and my goes are no exception to that, uh, many migas will have a surrender charge in the first year of six or seven or 8% of the account value, plus a market value adjustment, which can ding you.

If interest rates have gone up since you, uh, bought the annuity, most migas or many migas, uh, free partial withdrawals. And so, you know, you can take a withdrawal of often 10% of your prior year account value without any penalty. And so you can get access to your funds without penalty, but going above that 10% free partial withdrawal.

Um, uh, you will, you will not be able to do without, without penalty. There's a tremendous amount of variation in my goes between different companies. And even within the same company, some companies off my offer, my goes with both no free partial withdrawals and with partial withdrawals, and so you'd need to be darn sure of what you're doing with withdrawals characteristics.

Uh, when you buy a miga, many mogul heads feel that my goes are a good consumer value. Currently, as I said, the most popular kind of annuity, 50% of annuity sales. They are the rates that we've had for the last, ever since I've been following my goes, which is about four or five years now, um, have been very attractive compared to comparable things that have a fixed rate for a fixed period of time.

Like a bank CD, they're attractive compared to bank CDs. They're attractive compared to treasuries, um, paying a higher rate and you get your defined amount of money available to you without surrender charge when the five year or whatever period is up, there are no hidden fees, which you see is what you get.

If a company promised me 5% for five years, I'll get my 5% for five years. It allows people to lock in interest rates for a good long period of time, longer than you can get with most bank CDs. The most, uh, in general, uh, uh, my goes are available between two years and 10 years of maturity.

The most popular durations for my sales are three years and five years and seven years. And, uh, uh, you'll see the largest number of products offered at three, five, and seven, just because that's, that's the way that it is. I'll talk about taxes later on, but my guys are attractive as are all accumulation or duties because taxes are deferred until funds are withdrawn.

And I'll talk about taxes in the, in the third section here, and it's a relatively low agent commission. The blueprint income site discloses the agent commissions that they get. And they disclose on many annuities that they make one to 3%. Now you're not paying that commission directly. It's being paid by the insurance company and the insurance company gets its money from, you know, spread that they make, but they're not paying out to you, they're paying to the agent, but that one to 3% commission rate is a fairly low rate compared to some other products.

And so it's a more attractive consumer value to you because the commission is paid to the agents are fairly low. So I'm, as I've posted many times in the forum, I'm a big backer of my guys, I always try and tell people the negatives about insurance company insolvency, and we'll talk about that in the third section about the surrender charges and withdrawal fees.

But for a person who wants, I'm just darn sure they can put away their money for three, five, or seven years. Oh, my God, I think is an excellent consumer value. We'll go on to index annuities. And somebody asked before if there was the kinds of insurance product they don't like.

And so we've, we've hit the first one here with indexed annuities. Um, they pay interest by referring to an external index and it's easiest for me to go ahead and just, uh, uh, talk about the S and P 500. You know, you might think if you're buying an indexed annuity, if the S and P goes up by 20%, that you'll make 20%.

And it does not do that, but it does do, as I say, in the second bullet point, it doesn't pay the full index movement. It's limited on the upside by caps and participation rates. A cap is a simple thing that says if the S and P goes up more than 5%, or 4%, or 8%, or whatever it is, you don't get anything above that.

No matter how much the S and P goes up, you only get a 4%, 5%, 8%, whatever the cap is a participation rate means that you get a certain percentage of the S and P gain, you get 90% or 80% or 50% or whatever it is, and insurance companies can set those caps and participation rates as a part of their pricing.

Um, now in exchange for that upside limitation that you have with the index, you're limited the downside to zero by definition and index annuity cannot have an account value decline year by year based on interest credits. If the S and P is down 20%, you will not lose any money because of the 20%.

You might have writer fees that I'll talk about in a moment, but you will not lose money on the account value itself. That that is a absolute with an index annuity. Also note that it almost never credits index dividends. The policy, the S and P does pay dividends of 2% or so per year, but these index annuities do not pay dividends.

They only have interest credits. Um, I will, I've used the S and P term, uh, a lot here. There's a lot, lot, lot more indices than just the S and P 500 that are used. And there are actually some custom indices that have been made up back tested to try and illustrate.

Well, uh, so whatever the index is, is an external index of some type. The S and P is the most popular or the most well-known, but there's a lot, hundreds of other indices that are followed by various companies. Index annuities. One thing that I see as a negative about index annuities is that the caps and participation rates, in other words, kind of the crediting that she'll get on the interest is usually subject to change by the insurance company as often as annually.

I go back to my MIGA example, my MIGA is 5%, five years guaranteed. That's it with an index annuity. Often the, uh, policy, uh, cap and participation rate in the first year is guaranteed. But after the first year, it's subject to change by the insurance company in its sole discretion.

And then once you, if you're dissatisfied in year two or three or four with how the insurance companies treated you, the products will often have high surrender charges for seven to 10 years. Surrender charges can start off with 10% or even more on some products. Um, often they'll start off at seven or 8% and then grade down over time.

And those effectively can, you know, give you a kind of a devil's choice there. You go and, um, accept a subpar accredited rate or you, uh, eat a surrender charge and have to pay that out. Now, uh, just like on MIGAs, many policies do allow free partial withdrawals of 10%, uh, per year.

And then withdrawals over that allowance is subject to surrender charges and market value adjustments. There are riders that are available on index annuities. The most popular one is a guaranteed withdrawal benefit rider that I described briefly in the prior section. That, um, it gets a little bit complex as to how to describe this, but essentially what it does is it operates separately from the policy account value to give you a guaranteed withdrawal stream, uh, at an age that you decide anywhere, you know, one year to 20 years after you, uh, by the policy, you can turn on that, um, rider and, uh, get a guaranteed, uh, benefit.

Uh, and, uh, the withdrawals are made from your account value. And even if you drain the account value, the guarantee there is that the payments will continue for as long as you're alive. Those riders have fees and the fees can pull the account value down in a year. A guaranteed withdrawal benefit rider might cost 1% per year.

And so even if your interest credit is zero, if you have a 1% fee, then your account value would decline by that 1% fee. You can also have a guaranteed death benefit, but that's not as popular on a, on a, uh, index. Many Bogle heads believe that, um, index annuities are not a good consumer value.

One of the biggest, um, problems I have is that the insurer can change the bargain every year by adjusting cap and participation rates. You buy a policy, you get a big promise going in. And then, um, after that, um, there's no guarantee that that promise will be unchanged in future years.

And you're trapped in the annuity. The rider fees can either way at account values, the surrender charges that I've mentioned before. Commissions are much higher on index annuities. That's one of the things that is almost always true. Index annuities will have commissions that are six to 8%. Some can be as high as 10%, various bonuses.

Some can be lower and insurance companies don't print money. They do not have printing presses. They rely upon, you know, interest that they earn on their funds for generating money. And to the extent that they're paying out more money to the agent, then they have less money to pay out the policy.

So the higher commission you're paying that is being paid on an index annuity is, uh, um, coming out of the consumer's pocket ultimately. One of the worst things that I have seen with annuities with index annuities is, uh, being mis-sell mis-sold as an equity alternative. Anybody who's retired or paid attention to talk radio or whatever might hear people talk, uh, financial advisors or agents talk about, um, you know, market upside with no downside.

And those are buzzwords that are used at these free state dinner seminars to sell indexed annuities. You know, you can, you can have the upside of the market because nominally it follows at least to a certain extent, yes. And P 500 or whatever index, there is no downside, but that's a mis-selling.

This is an interest crediting product and the interest is determined by an index, but it's not participation in the stock market in any way, shape or form. And, uh, one of the reasons I'll just go off of script a little bit here. One of the reasons that insurance agents can do this is the training requirements for insurance agents are pretty minimal and having that, um, index annuity account value being Florida zero, you can't lose money in a year.

That makes it so that an insurance agent can sell this. If a policy can lose money, like a variable annuity cam, then you have to have a securities license. And a securities license requires a lot more training, a lot more exams, and there's a lot more responsibility than there is with an insurance license.

And so that's one reason that index annuities are often pushed by insurance agents as a license is easy to get. And it fits into kind of, kind of a loophole where no securities license is required to sell an index annuity. So that's my rant against indexed annuities. Buffered annuities, buffered annuities or, or registered index index linked annuities are a fairly new innovation.

They also pay interest by referring to an external index and they don't pull the full index movement, but they don't pay the full index movement. But the annuitant accepts some downside risk and they get more upside. You might make 14% per year, max, but in exchange for that, you have a downside of 10%.

You'll never have an unlimited downside, but you will have downside. So go, so it goes below zero. Um, the, the, the knocks on this are very similar to the knocks on an indexed annuity, often the caps and participation rates can be changed annually by the insurer and many, they have products, uh, surrender charges for seven to 10 years.

And most mogul heads feel just as with index annuities that buffered annuities are not a good consumer value. That's a fairly small part of the market here, but there have been some companies that have come out with a pretty big splash with some of these, uh, buffered annuities. Finally, a variable annuity, a variable annuity is a, an annuity where the premium that you pay that the policyholder pays is invested in mutual funds.

They can be equity, mutual funds, or they can be fixed income, mutual funds. They're held by the insurance company. And they're drawn from a list of approved mutual funds by the insurance company. You can't take the Vanguard or fidelity or whatever mutual funds that you love in your personal account and have those in a very variable annuity.

If you buy it from company a, you're going to be restricted in your mutual fund choice. The mutual funds offered by company a under the variable annuity on those annuities, the account value grows or shrinks following the mutual fund performance, it's fairly straightforward on a variable annuity, there are explicit charges that are assessed against the policy for administration.

Often 1% or so per year writers like guaranteed minimal withdrawal and guaranteed debt benefit. And then usually excessive mutual fund fees where you can buy a mutual fund from a Vanguard or a fidelity for five or 10 basis points per year. That's 0.05% or 0.1%. Often the fees on the mutual funds underlying the variable annuities are 1% per year.

So you can end up with a 3% or more annual fee on a variable annuity. 1% each for administration or the writers and for excessive mutual fund fees. I think we've had some postings on the forum of people who have a 4% annual fee and you, you know, for, for mobile heads who quibble about, you know, a few basis points or a few 10s of 1% expense rates to pay three or 4% per year.

It's just borderline. I've seen it really is. Um, many products have surrendered charges the last seven to 10 years also. Now many mobile heads seal that most, and I underscored the word most variable annuities are not a good consumer value. The high fees and surrender charges. They're sold by perspectives.

There's a hundred page or longer perspectives. I'll guarantee you that no mortal human understands every word in that perspectives. They're very complex. The writer fees can eat away at account values, surrender charges. And then again, the, the six to 8% commission is usually paid on annuities like that. However, there's an exception to the rule about variable annuities, and that comes with fidelity and other low cost variable annuities, most of you will know fidelity as a, you know, mammoth fund, uh, accumulation, mutual fund company, and they do very well at that.

But fidelity as a part of its corporate structure also owns a life insurance company, Fidelity investments, life insurance company, and that company offers a stripped down bare bones, variable annuity at very low fees. 25 basis points. That's 0.25% per year is the administration fee, I believe. And it goes down.

If your account value goes up, they have very, um, nicely priced, low priced mutual fund options available under that variable annuity. There are none of the fancy writers and such, and there are use cases where it makes sense for a person to keep money in an annuity, like a 10 35 exchange from a life policy or a, or a, uh, annuity policy and that variable annuity from Fidelity and other low cost providers like that is a attractive place to be.

Vanguard used to offer a variable annuity like that. Vanguard stopped doing that three, four, five, six years ago. And now the, the one recommended most frequently on the forum is the, uh, Fidelity annuity. So with that, I've covered four types of accumulation or annuities. I've given my take, uh, my personal take on all of them is that I like my goes on, I hate everything else basically.

And, uh, I'm ready for questions. Okay. Questions on the second section of accumulation annuities. Anything from the chat? Anybody want to raise their hand and ask a question? We did have some in the, in the chat. We have questions again on the, um, rating agencies. We'll talk about that later.

Um, my guys are in their wiki article. Let's see. Um, here's one question for existing purchased products. Is there a company, a third party that can review it? It can review the purchased product. I suppose that would apply to all annuities, whether there is somebody who, um, there are people who can assess life insurance policies, whether they are good or not.

There are people who are, I'm not aware of anybody who does that for, for pay. Yeah. You can come on the mobile head forum and, you know, get, you know, free advice from various folks. But I'm not aware of any firm that does that as a matter of business.

Okay. The one thing I can say, Mike, he was the one that posted the question is that we used a, a person for our life insurance policy and assessor. And he came from the consumer federation of America. And I've no law. I don't know if he no longer does.

I don't know if he does that any longer. And I don't know if he does annuities, but you might Google it because that's how we found. Well, I found him through articles, various articles, and he was excellent. Analyzing a life insurance policy. And this was years ago. Um, let me see.

Well, the other questions from the chat, Wayne, I think are more appropriate at the end, not just. I'm not looking at the chat, but I'll probably open up the chat, uh, when, when we get to the end of the presentation here, unless anybody wants to open their, uh, raise their hand right now, we'll just move along.

And then when we get to the end, it will be open up questions. Yeah. I'll, I'll go ahead and, and then I'll, I'll look at the chat questions too, at that point. So for kind of, um, short topics here. And I didn't directly address rating agencies here. And so I'll talk about rating agencies also at some point.

How are annuity policyholders protected? Okay. People are accustomed to having, you know, on their bank deposits, FDIC insurance. The FDIC is, is effectively backed by the federal government, full faith in credit kind of, of the government. Um, and so the insurance companies are not banks and insurance annuities are not, um, backed by the federal government.

Rather, they're covered by state run life and health insurance guarantee funds. What would happen? Um, where I, as a, as a resident of Alabama to, um, be unfortunate enough to be a policyholder of a company that goes broke, then my state Alabama guarantee fund would step in and protect me and provide me with, uh, uh, recovery of under the terms of the guarantee fund act, those are not governmental entities.

There, there is no tax funding that supports any guarantee fund. The guarantee funds are supported by assessments, mandatory assessments by the guarantee fund on the insurance companies, for example, New York life. I'll use their name. Sometimes big, strong, excellent company. New York life is, is authorized to do business in Alabama and New York life would be paying into the Alabama guarantee fund to help, uh, put up, uh, the, to make up the hole if my insurance company went in the, in the tank.

Guarantee fund coverage varies by state. Most States cover $250,000 of surrender value for insurance company for individual. And some cover more, some cover less. Um, so if I have a multi-year guaranteed annuity for $200,000, I should have full coverage of my surrender value, not necessarily the account value, but the surrender value by my state guarantee fund, one thing to stress with guarantee funds though, is in the event that an insurer fails, it may take years for consumer to get all of his money back.

I'll contrast that with banks. I've never thankfully been a customer of a failed bank, but my impression is that if a bank fails, it fails. Uh, you know, you go into the bank Friday and it's a failing bank. The FDIC examiner is coming over the weekend. They take it over, they sell it to a new bank or package it up or whatever.

And it's opens up for business on Monday under a new name and funds are fully available. It's effectively a seamless process. And the FDIC has gotten very good at, um, taking over failed banks and, uh, making, uh, insured depositors hold very, very quickly. That's not the way it is with insurance guarantees funds.

Even in the best of cases, your money might be locked up with the company for months, a short number of years, um, just because that's just the way that it is. Now, typically in insolvencies, uh, the first thing that happens with an insolvency is a court will move in.

The court has the right and the ability to, uh, modify. Mary, you're not on mute. Is it locked? The court has the ability to modify contract terms. And so I have a right to surrender under my insurance policy, but the court can say in order to preserve the estate, we're not going to allow voluntary surrenders, usually in an insolvency, they give priority to death benefit payments and, uh, income annuity payments, the regular thousand dollar a month payments, but not surrenders, and there's one particular egregious example right now, a company called Colorado bankers.

That went, uh, that sold my goes, they had a B double plus rating at the time that they went down. Their owner is a crook. He's a, he's a accused and convicted felon bribery, wire fraud, stuff like that. But he's also very litigious and he sued again and again.

And most recently I saw, I think he sued again last week and the company is still not paid out. His policy was fully five years later. The company went in the tank in 2019 and annuity policy holders have maybe had a chance to withdraw some small amount of money, but their money is still locked up in Colorado bankers five years after the insolvency.

So that's a, an edge case, but it is nowhere near as fast recovery as the FDIC. So there is coverage provided. Their insurance company failures are fairly rare. Uh, I'm not aware of any company of any size that went down during the 2008 financial crisis, which was a terrible thing, even AIG that, uh, had problems, did not have problems with the insurance company that had problems at their holding company.

And, uh, the entities that did the, uh, CMBS, not at, uh, uh, the, the, uh, the credit default swaps, not the ones at the insurance company. I had an AIG life policy. There was never a problem with that, but, uh, um, that's not to say that things, bad things won't happen in the future.

And with that, I might talk just about the rating agencies. Let me go back, uh, uh, rating agencies. Um, every company basically is rated by AM best. AM best is a specialty insurance rating agency. It's been around for, for many, many, many years, uh, more than a hundred years, and then make it their business to rate every life insurance company and every property gasoline company that they can, and when you see ratings on the various agents websites, most frequently you'll see the AM best rating.

AM best, the very strongest ratings are a double plus a plus plus that is, and a plus, and then down to a and a minus, and then you get into your B categories, I can't, you know, as the ratings go down, the risk of default increases, there's been several times, um, several places posted in the, in the forum and if anyone wants to private message me, I can send the text again.

AMS is put on a table showing the cumulative default rating over a period of 30 or 40 years by rating category, by how long it's been since there was ratings. And so people need to make their own best judgments as to, um, uh, what rating they'll find acceptable for a certain period of time.

For me, if I was looking at a SPIA that I expect to pay out for 20 years on my life, I want a pretty high rated company. I've said publicly in the forum that, uh, for my goods, which I do purchase, I, uh, these days would probably not buy a miga from a company rated B double plus or lower, um, beyond three years.

Uh, I'd want to be in the a category for anything longer than three years. Uh, but, uh, that's a personal preference and people need to make their own decisions. Insurance company failures are extremely rare, but they do happen. And now we can talk more about agency, about rating agencies in the chat and, or in the questions.

Changing tops entirely. How are annuities tack? Um, let me make sure I'm in the right place. Yeah. How, how are they taxed? First note that annuities can be purchased through a traditional IRA, a Roth IRA, or using taxable funds with a traditional IRA, like any other IRA, all withdrawals are taxable.

And just note that a person can have multiple IRA accounts and the RMDs are calculated over the aggregate of all IRAs. I have a Vanguard IRA, but I might have also have a bank IRA and I have IRAs with all the various insurance companies that hold my migas. Those are all commingled into one big pot.

I, I have to add it up and come to the total number of my IRAs. And then, um, when I'm of RMD age, I'll apply the RMD percentage to see how much I need to take out. If my, if my RMD percentage was 5%, for example, for a certain year, I do not need to take 5% out from each IRA.

I can take 5% in aggregate and that's good enough. So, but, uh, they, the, uh, annuities in an IRA are the same as an annuities, same as IRAs at Vanguard or a bank or anyplace else, second, a Roth IRA annuity. Very few people from seeing on the forum, I think, but, um, annuities in their Roth IRA, but if you do put one in a Roth IRA, all withdrawals are taxed or tax-free now a taxable accumulation or annuity, and we'll spend some time on that because this is a little bit more complex.

This will be the use case, say a buying a miga or an indexed annuity and then accumulating money within that. It's important to note reporting of taxable income is deferred until funds are withdrawn from the annuity. What does that mean? Let's say that I bought a five-year CD from a bank.

Even if I let the money, the interest accumulate in that CD, the bank is going to report interest income to me every year, so whether I get the cash or not, they're going to report taxable income to me every year, insurance companies under annuities don't do that. The only way that you'll get taxable income reported to you is if you take money out of the annuity.

I can allow money to accumulate in my annuity tax defer. Second thing to note withdrawals are taxed as income first followed by basis. Let me give you an example. A hundred thousand dollar miga made 5,000 in the first year. I didn't want to make a $10,000 free partial withdrawal.

So I have $105,000 account value. The first $5,000 of my withdrawal is taxable income. Taxable income comes out first. Then the next 5,000 of my, of my withdrawal is basis. There's no tax on that, but they're taxed as income first followed by basis. Importantly, the next point, accumulation annuities don't receive a step up at death.

Therefore annuities defer, but don't do not avoid taxes. Let's say that I buy my goes and I keep on accruing, accruing, accruing, and never take money out. And here I am at the time of death with an annuity with a basis of a hundred thousand and an account value of 200,000.

Well, if it were many or most of the kinds of assets that step up from a hundred thousand of purchase price to $200,000 of market value is not taxed, but annuities are taxed. So if I don't pay the taxes, my heirs will no step up a death. And that's important for annuities.

That's a big negative, uh, in certain use cases, another negative in certain use cases is that all income, even from variable annuities is taxes, ordinary income, again, an example, if I had a variable annuity that happened to have a S and P 500 fund in it, pardon me. If I wanted to own an S and P 500 fund, if I have an untaxable account, then I'll get the qualified dividends and capital gains, preferential tracks, tax treatment for most folks on the income from my S and P 500 fund.

But if that S and P 500 fund is located inside of a variable annuity, there's no preferential tax treatment, all the income from the annuity, no matter what the source is taxes, ordinary income. And that's a negative for certain people, uh, in certain situations for using annuities compared to taxable accounts.

So all these things need to be taken into account when you're considering how to kind of think about taxes as they'll affect your annuity purchases. Then finally changing topics entirely again, um, to a taxable income annuity that's back to a SPIA where I put it on a hundred thousand dollars and get a thousand dollars a month.

Part of that a hundred thousand, part of that thousand dollars a month representing the interest part of that is going to be taxable income. The rest of it is treated as return of basis and not taxable. And the insurance company report to each year, what part of your SPIA payment is taxable and what part is not taxed.

And so there's a, what's called an exclusion ratio, uh, that is used to determine how much is taxable and how much is not. So taxes are an important part of annuities. The great thing about annuities is they deferred taxes, but the bad thing is they do not avoid taxes and there's no step of a death and they turn all income into ordinary taxable income.

Changing topics entirely again, where can I buy an annuity? Now all the newbies are sold through licensed insurance agents. You have to have an insurance license, which is not that tough to get to sell an annuity. And now there are several categories of places that I've listed out where I've seen mentioned the forum that people buy annuities, the first is what I'll call a multi-company annuity agent that has a big internet presence.

There are three or four of these that are mentioned frequently on the forum. These companies will represent dozen. These agencies will represent dozens of insurance companies and they'll offer products through all those companies. My personal favorite website for looking at my goes is blueprint income. And the reason I say that is because not the blueprint income services any better, but their website has deeper information on my goes.

You can get more information on particular products from particular companies on the blueprint site than you can on the other sites. I don't know if their service is any better, but their website has more information than the other websites. Another website mentioned frequently is Stan. The annuity man, Stan is a real person.

Stan Haycock is his name, and he is an agent who could be a Bogle head. He's put out a bunch of videos and several books, and he talks and acts like a Bogle head in terms of how he views annuities, you buy an annuity for what it will do, not what it might do.

You buy it for the guarantees. He stresses the, uh, the miga policies, the lower commission policies, and he's a, he's a good man. His website also has, um, the only one that I'm aware of where you can get a real live quote on a guaranteed withdrawal benefit on an index annuity.

And it would be advantage is another agency that I've used personally and I'm satisfied with them. And finally, immediate annuities.com. That's the website name. They're also a well-known one that has a really easy to use a quote engine for getting immediate annuity quotes very easily. So that's what I'm calling the multi-company annuity agents that are often mentioned on the form.

Nationwide, they all write in all 50 states. Now there are two well-known companies, well-mentioned companies on the forum. There are probably a few others that sell through company employees who are also agents canvas annuity, which sells through a company called Puritan life and gain bridge annuity, which sells through a company called gain bridge, they sell through company owned agencies and the interest rates that those two places pay are higher than many places on the web.

But you're not going to find their products at the same rates on those multi-company agent sites. You have to go to the canvas annuity website or the game rigid annuity site. I think that one reason they might have for paying higher rates is because they figure they're saving on the distribution system costs by, by employing their own agents instead of paying commissions out next.

I'll mention that brokerage firms in particular, I know that fidelity and Schwab broker and limited selection of annuities. Typically at those sites, you'll find only the very highest rated companies, the New York life, the mass mutual, the guardian life, USA folks like that are shown. And there's a very limited number of products.

You'll also find that for the higher in general, not always a hundred percent true by any means, but in general, the higher the rating of a company, the lower interest rate they pay on their product. And so you will not find as high of interest rates on the fidelity website for a certain product.

For in general, compared to what you'll see on blueprint income. I will say New York life, for example, sells on both the fidelity website and on a blueprint income. And the, the, I believe that the New York life interest rates are the same between the two, but New York life, because they have such a high rating, they can pay well lower.

Um, interest rates that now are paid by other insurance companies. So fidelity and Schwab broker, a limited selection of annuities. Fidelity directly sells a very low cost, very limited. I've talked about that already through its company, uh, fidelity, uh, investments, uh, life insurance company, and you can get, uh, application directly to them through the fidelity website.

Finally, many local agents, uh, your, your garden shop agent around the corner from you. They sell annuities. Um, they often have a more limited selection. They might just represent a few companies and often their products are going to be indexed annuities, which, which many vocal heads disfavor, but you can buy annuities through a local agent, but you're likely to get somebody who really specializes in annuities and as a broader selection of companies that they deal with, if you go with one of the websites that I mentioned in the second bullet point there, so those are the places that you can buy an annuity.

Finally, the last, uh, real, uh, slides here. What questions would you ask if you're considering an annuity? What are the kinds of things that you might think about as you're considering annuity? First, are my annuity benefits guaranteed or can they change? Spear the payments are fully guaranteed for life, fully guaranteed with a MIGA interest rates are guaranteed only for, but they're only guaranteed for the initial term.

You may have to change to a different company after that initial term to get an attractive rate. But with indexed credit rates are at the insurer's discretion and the variable product. It depends on market performance. And so, you know, how important is a guarantee a flat guarantee to you?

And, um, just consider what your comfort level is on that. Second, what are the penalties for throwing my money? And speed is there's no penalties because there's no right of withdrawal. Once you put down your a hundred thousand dollar premium, you're locked into that contract. If you've elected one with a, with a refund and then you die, your beneficiaries will get a benefit, but there's no right of you to surrender.

Once the speed is in place, it's in place and there's no right of surrender. With my goes index variable, really all the rest of these annuities, you can surrender the policy. If you're early in the policy period, you may very well have surrender charges or a market value adjustments.

Um, and it's important knowing, going in, uh, what those are. If you have any indication, you might need to withdraw money. What fees will I be paying? Speed is a migas have no explicit fee at all. There's no fee, you know, as I've said with both of those things, what you see is what you get your thousand dollar monthly payment on your spia, no fees.

Are your 5% interest rate in your miga? No fees. I know as an insurance company, you know, practitioner and employee, there's an implicit fee buried in there because the insurance company has to make money, has to pay for administration, has to make a profit as to cover risk charges and such.

And the implicit fee is about 1% per year. That is they're paying you as a policy holder about 1% less than they're making on their assets. And that 1% spread covers all their costs. Index annuities do not have an explicit fee either, but the implicit fee is higher because the commission is high and the, the implicit fee on index annuities is roughly 2% per year.

So I'm wearing that range. Finally, with a variable annuity, there are explicit fees that are laid out in the contract. Administration fee, rider fees, the expense charges on underlying funds. Then finally, do I understand what I'm buying? Stan Haycock, um, Stan, the annuity man often says, you know, you shouldn't buy an annuity if you can't explain it to a nine-year-old, no events to nine-year-olds.

So I think a SPIA qualifies as an annuity you can explain to a nine-year-old. And I think that a MIGA might be an annuity you can explain to a nine-year-old, but can you explain a variable annuity with a hundred page prospectus to a nine-year-old? The answer is no. Again, you've got to determine your own comfort level on things like that.

But, um, um, do you understand fully what you bought? It's amazing how little from the posts on the forum that I see people are being pitched on index annuities, especially that they have no frigging idea what they're buying or what the impacts of that are, or what the penalties are or anything else, uh, and it's really important if you're buying a complex.

Uh, financial instrument, like an annuity that you understand what you have. So I will go on and show you. There are several wiki articles on the vocal heads wiki about various types of annuities. I, uh, when I give the PDF, hopefully these links will be active and you'll be able to click through on the PDF and, uh, get to the, uh, various links in the vocal head wiki.

And with that, um, and an hour and 15 minutes into the conversation here, I'm done with a prepared presentation. Um, I'll open up the chat to look at some of the questions here and then I'll, I'll, um, see what, um. Okay. Miriam, are you, um, got a few questions you want to ask from the chat or let me first ask if anybody wants to raise their hand and ask a question, uh, we can open it up for questions on anything and everything on annuities, personal experiences, if not Jean, do you have from, Oh, Maggie.

Yeah. I think that's a good way to go. The chat is so variable about statements versus questions. It's hard to study a long chat like that. Okay. Well, if you have questions from the chat, Jean, I'll, I'll take you next. Okay. Uh, I have one or two. Okay, good.

Maggie, let's go to you first with your raised hand. Maggie, you are muted. Sorry. Hi, how are you all? Thank you for this. That was an excellent presentation, very thorough, and I have still probably so many questions, but I just, um, I'm entertaining the idea of converting a whole life insurance policy at some point over to a, um, an annuity, because that's what they're recommending, because I do not want to have to pay taxes on the capital gains, but it sounds like I'm going to have to, regardless of how I do it.

So I just wanted to know, uh, if he has any idea of how USAA is with their rates and their performance. Well, you've asked about four or five things, the question really, um, first there's no capital gains that are involved with this. You use the term capital gains. I don't mean to pick at your words there, but when you're talking about income, either, um, income gain on a life insurance policy, surrender, or income from a annuity, that's all ordinary income.

There's no capital gains involved with that. Uh, yes, if you, um, if you were to do a 1035 exchange, 1035 is a section of the tax code and you can exchange a life insurance policy for an annuity and the basis will carry over. So for example, you've paid a hundred thousand in premiums on your life insurance policy.

The policy cash value is 120,000. And as you roll that cash value over to an annuity, $120,000 will be, um, uh, your account value, a hundred thousand as your basis, and you'll have a $20,000 embedded gain there. If the money's in annuity, then you will not avoid taxation. You will either pay taxes while you're alive or your beneficiaries or heirs will pay them after you're dead.

Now you can avoid taxation on the gain on the life insurance policy by keeping it till you die. There's no income taxation on life insurance death benefits. And so that's the way to avoid taxes on a life insurance policy is to keep it. But if it doesn't make any sense to keep the policy, then, um, an annuity can provide a viable way to defer taxes.

Let's say you're 55 years old and making a ton of money in a very high tax bracket. As you can see a time between when you retire and when you start RMDs, where you will not be in a high tax bracket, an annuity can be a viable way to take the money from your life insurance policy, surrender the life policy, then defer the income for five or six or eight or 10 years and take the income while you're in your low years there, pay a lower tax rate on that, and then lapse the annuity.

That's a valid reason for an annuity is to defer payment of taxes in the time when you're in a lower or a different tax regime, does that make sense? Yes. That's very good advice. That's a great way to look at it. Sort of a, from a bird's eye view.

So I appreciate that. Do you know? Yeah, it's like any other kind of, uh, you know, we, we try and, you know, there's a focus on the forum about, uh, taking, uh, taking Roth conversions and taking extra income before you start taking RMDs during your low tax years. This is just another twist on the same thing, trying to place your income in years when you can, where your income tax rate is lower.

Okay. Understood. Do you know much about USAA and their fixed annuities at all? I don't know anything about USAA. I know USA is a fine company, very strong, very high ratings. I have no negative things to say. Um, but they don't sell through blue for an income or those other sites.

I do see their rates on, um, Fidelity or Schwab or the other, and their rates are consistent with other higher rated companies and they're lower than available on other sites. So, but they're a fine company. I got nothing bad to say about USAA. Wonderful. Thank you very much. That was an excellent presentation too.

That was Thank you, ma'am. Wayne, we have, uh, in the iPad, some in, in the questions, I'm sorry. A iPad too, made a comment. He said, this guy is fabulous. I live in Alabama and he would be worth a five hours drive to talk to. Thank you for hosting this, this meeting.

Well, you know, iPad, you don't have to drive five hours. We simply have the meetings here on the Vogelheads, Zoom, you know, the Zoom meetings and, um, we'll have Wayne back again. Yeah. The short, the short story on that is, um, back in 2018 or 19, there was a desire for a Birmingham, Alabama chapter.

And I put my hand up and said that I would chair the thing. And we started off slow and small and, you know, meeting in the food court at the Galleria and also meeting in my home in the pandemic yet. And we switched over to a Zoom meeting format as a lot of chapters did.

And you know, by the time that the pandemic was over and we could meet again, we lost a number of folks in the Birmingham area. I picked up some people from elsewhere. And so I just kept the chapter going as a Zoom only chapter. You can check the U S chapters.

I just put out maybe our next meeting is this coming Sunday at 4:00 PM central time. We've got about 12 to 15 people that show up for the meetings. Most times it's whatever's on folks' minds. And I encourage anybody who wants to, to, you know, either post in that thread or send me a private message and I'll be happy to add you to the mailing list.

And I send out, we meet every two months on Zoom, um, uh, and, uh, at four o'clock central time on a Sunday afternoon. And I'll keep the meetings going until God calls me home or until people stop showing up, whichever happens first. Well, I think that Wayne, you are much too, um, you know, that there's more to it than that, but you run fabulous meetings and more than sometimes there are 45 people at his meetings, they are warm.

You can ask questions. It is what the Vogelheads really are for everybody, people helping other people in all other personal financial matters. And the meeting on Sunday is about real estate. And he has, um, Birmingham Vogelheads who are very good, no real estate very well, and they're going to speak about the new real estate with the regulations or the settlement about buyers and sellers commissions.

So it should be a very interesting meeting this Sunday. Okay. Jim, do you have a question? A raised hand question. Uh, yeah, this is Carolyn. Um, I'm the wife. I just, I didn't hear anything mentioned about cost of insurance, but, uh, we were burned by an insurance company, um, where they gave us these illustrations about the minimum we could make and the maximum.

And we didn't really make anything. Uh, it was a whole life policy, but it was something else. Uh, I don't remember it was a long time ago, but, uh, anything with insurance company, I just want to be so careful. Uh, I mean, I don't want to have anything to do with insurance companies myself because, uh, my father lost a lot of his, he lost most of his money.

He had a, a, um, an annuity in mutual benefit life. And they went under, uh, a few decades ago, maybe in the nineties or eighties. It was the nineties. Yeah. Yeah. And I got to say, what you're talking about there is, is highly unfortunate. And insurance companies have, uh, often over-promised and underperformed on things.

You know, the illustration there, there's all kinds of gaming that's been done by certain companies in trying to, um, design products to, to, uh, utilize a certain index that makes things illustrate good or cost of insurance charges on universal life policies that are raised. And it's really a seedy, seamy, terrible thing.

I mean, I've publicly said I'm buying my 5% guaranteed for five years and I'll take that. I don't like the non-guaranteed elements either. Is there anything from, thank you, Carol Jean from the chats. Yeah. I like this one. Uh, retired teachers have a 403 B with a variable annuity.

Is this eligible for a 10 35? I might mean 10 31, but I'm not sure. 10 35 exchange or an IRA rollover. I would think both, um, first, uh, teachers, unfortunately, oh, if there's, if there's a predatory sales practice, that's been, uh, this happened a lot. It's been on teachers.

Yeah. Thankfully I am not in that mode and my company was never in that teacher's market. So I, we were away from the worst of that, but, uh, there's some awful abusive products in the teacher's market that being said, and I'm making up here a little bit, but I would think that if it's in a 403 B, it should be surrenderable to a IRA and maybe surrender fees there, but it should be surrenderable to an IRA.

I would also think that since it's a newly, since it is, is an annuity, it should be 10 35 to a lower cost annuity. If you desire to do that, I would think that's the case. I can't guarantee, but I would think so. I'm working on that with my niece.

Who's also got a nurse annuity that I think is a 403 B. So I'm learning this one myself. Just look at, look at your charges and look at what kind of annuities there's been some, some abusive behavior with that. I'll I'll no other way to characterize that abuse. Can I say something?

Sure. I recognize way. Sorry, I, the energy is bad here. I know my voice is anyway, 10 35 exchange can only be used on taxable accounts. You know, of course, of course. Yes. Miriam. Thank you. Can I use 25 on IRAs, IRAs? You can roll over. Remember what IRA means?

IRA means individual retirement arrangements in arrangement. You have an individual retirement account and individual retirement annuities, the two types of IRAs. So either I, if 4143 B it's a employer sponsor retirement account, you should be able to roll that over to IRA. Yeah. I don't see the problem. And, and I, I was wrong in saying 10 35, you're right.

10 35 applies to taxable accounts. I would think you could roll it to another annuity, but it would not be a 10 35 exchange. It would be a, just an exchange. Thanks way that answers the question for my niece. So next question, any opinion on long-term care annuities? I haven't heard of these.

Um, there are, um, long-term care. Um, is it really troubled insurance product sold by many companies years ago? The actuaries didn't know quite how to price it. And so traditional standalone long-term care is really not very available these days. Um, the, uh, way that the insurance industry has tried to respond to that is by putting long-term care riders on annuities or on life insurance to have a pot of cash that can be used for either annuity purposes or for long-term care, I'm not a big fan of those.

I'm not really deep into those. And so I don't want to express too strong of an opinion, but, uh, I think you're better off outside of an insurance product that's, uh, really not meant for long-term care, but you can look at those things. So, um, I don't have a strong opinion in one way or the other.

Okay. Um, Wayne, one question that came up in the chat is that you have ratings, the rating system for companies, insurance companies. Are, is there a rating system for the products, the products? In other words, like mutual funds, you can find out whether certain mutual funds really are highly rated or not.

How about for these insurance products from these different companies? No, there is, there is no, uh, there's no, um, um, rating agency or rating firm that rates insurance products. If you Google, you can see some really superficial reviews out there on the internet on certain annuities, but they're so superficial to be worthless.

So no, there is no, um, it's, it's doing your own due diligence or, you know, posting on the forum and getting the opinions of other people about this particular product versus that product. That's too bad, but it's the case. Is there a, an annuity forum? I know there is a teacher's forum.

I visited the teacher's forum. Uh, very nice. Some Bogle has run it for teachers and their finances, but what about, uh, you know, insurance products or, uh, annuities in particular? Is there a, I'm not aware of it. No, I'm not aware of anything. Okay. Um, on the ratings of the companies, we do have some questions on the companies, how they rate these, I'm sorry, how the rating companies rate the insurance companies, and you mentioned that the ratings, um, the insurance companies have different products and the ratings do not necessarily cover each, do I get it right, the entire insurance company AIG being an example that they had trouble in one area, but not in another area.

And we had a relative, actually, we had, uh, an insurance policy from bankers like, and I understand that they had difficulties, but they had no trouble with their insurance. Uh, difficult. They had no insurance difficulties, even though the company had difficulties. Yeah. Um, insurance companies are a legal organization unto itself.

Um, and the ratings applied by AM best, none of the other agencies, standard and poor's and Fitch and Moody's. They're providing a variety of ratings, but they're rating the financial strength rating or the claims paying ability of the insurance entity. In the case of AIG, for example, AIG life insurance company and American general life insurance company and variable annuity life insurance company.

They were all part of the AIG group. They are owned by AIG corporation. Some, you know, some, maybe two, two levels upstream or three levels upstream or whatever. Um, and the insurance companies are regulated by the state insurance regulators who have fairly tight controls over the company. The insurance regulators, for example, have the ability to, um, to, uh, set, uh, invested asset limits, concentration limits.

Um, they require fairly stringent financial reporting. They can, um, deny dividends being paid out of the life insurance company. So it's not uncommon. I think bankers life. I think that was part of the Conceicao group. Uh, Conceicao went, went broke, but bankers life, the insurance company owned by Conceicao did not go broke.

Same thing with AIG, AIG real problems, but the AIG life companies did not. Um, does that answer your question? I'm trying. One thing it means is that if you hear on the news, something about your insurance company, you don't have to panic. You, you, you examine further what happened.

Yeah. The insurance regulators are, are very much. And then I'll talk to the rating agencies, the rating agencies. Those rating agencies are, um, examining the there's, there's frequent contact between the insurance company and the rating agencies every quarter. A full set of financial reports and usually additional supplementary interrogatories is sent from the insurance company to the rating agency.

So they have a full open view. Um, I was the primary contact with the rating agencies for part of my time at the company. And, uh, they would each come to our offices once a year and want to sit down with the CEO and the CFO and the chief investment officer and the chief people officer and those kinds of things to see face to face eyeball to eyeball what's going on.

Um, they have the right to, um, make special requests at pretty much any time of the company as to what to do. Um, they also, when they rate a company, having adequate capital, strong capital is by no means the only thing required for a strong rating. You need to have a good depth of management.

You need to have a good diverse marketing plan. You need to have good, um, asset liability controls. You need to have good risk management. You need to have all kinds of things in order to get a good rating. Insurance rating agencies also value diversity of business. They don't like a company.

It's term life insurance only or migas only. They'd much prefer a company, very diverse lines of business where it can be offsets or something is down in one side and it's up in the other. So they prefer that. And so the higher ratings will go to companies that have by definition, strong capital, but also have strong management, strong marketing plans, maybe strong brand names if they're a national company.

So, so those kinds of things, um, that it's a rating agencies don't always get it right. You know, there are times for companies that are, that are well-rated do fail. Colorado bankers had a B double plus rating from AM best before they went in the can. So it does happen.

Um, but, uh, the rating agencies certainly try to stay abreast of things and, and, uh, come down once a year and then update their, they take their ratings into the analyst to a report back to a committee, the committee will decide based on slotting this company in with the rest of their universal companies, how does this company fit into that slot, uh, compared to other companies that are pure companies, it's a fairly intrusive process.

Very interesting. One question in the chat was, is there a real difference between a rating of a plus a B plus plus B minus, et cetera, is there much of a difference between an eight plus and a B minus, a significant one that we would, um, that would cause us to not buy a product, for example?

Yes. I would, I've said on the forum personally, I'm not going to buy a policy from a B from a B plus company. That's just too low. I would restrict my purchases of my goes with B double plus companies to, uh, to, uh, uh, three years or less. I just don't want to take that risk.

Other people can vary, uh, trying to think I might go and amend the, uh, or append onto the slide presentation, the, uh, ratings thing from a and best. If I can figure out how to get it in there, showing the default by, um, by rating category and by years of exposure.

For example, if a company is rated B plus on a certain date, what's the chances of default in one year, in two years, in five years, in 10 years. Now, of course we don't operate on averages. We operate on a policy on a company. And so, you know, there've been very, very few insurance defaults, but, um, you know, things do happen sometimes and companies do go down sometimes.

So, uh, yes, I would not buy it from a B plus company. I'd buy if it was New York life, which I regard as the king of the industry. I'd buy an any amount. I mean, New York life actually has a, has a rate band. You can get a higher rate on Omega if you put $10 million with New York life.

And I don't have $10 million, but if I did, I'd feel comfortable with New York life's credit. Interesting. Any other questions, any raised hand Jean from the chat? Yeah. From the chat. Can there be an annual withdrawal rider on a SPIA for small emergency cash needs? Not to my knowledge.

You'd have to ask an agent about that. Not to my knowledge. Let's be a, you got what you got. Yeah. That's kind of what I guessed. And then another question, what would be a use case for buying an annuity with an IRA other than a QLAC? Well, I will say, as I've said on the forum publicly that I have almost all of my Amigas in my IRA.

And the reason is because I personally and others on the forum will disagree, but I like the certainty of knowing that I will have, you know, X thousand dollars available from this Amiga in 2027 from hell or high water. Now I don't need the money until 2027. And so I'm happy deferring until that date, but I don't with a bond fund.

If I put money into a bond fund today, I don't know what it would be worth in 2027. I know what my, my Michael will be worth in 2027. So tell her me silly. I like the certainty of the known amount of principle that I'll have at a certain future date.

You can get that same certainty with other things like individual bonds, individual treasuries, uh, defined maturity ETFs, bank CDs. Those all have those same characteristics. I find that usually the migrates are, are attractive compared to the rates available elsewhere. So yes, it's, it's like any other fixed cum fixed income within a, um, IRA, which I think typically is where Vogel had say, you ought to put a lot of your fixed income is in your, your IRA.

I like an annuity in an IRA because of the, um, because of the characteristics. The only unknown factor in that is inflation, right? Well, you have inflation everywhere, right? It's the bond fund is the same type of thing. Yeah, sure. Yeah. Very similar. Okay. Miriam, back to you. You got another one out there?

Yeah. Do any raised hands? Anybody in the audience want to ask a question? We do have a question in the chat from Gorey. He says, he asks Wayne in general, Wayne, uh, do you think annuities are underutilized by folks who have sufficient assets and they have sufficient non-annuity income sources?

Meaning if you don't need an additional income source, is there still a benefit from a cost-efficient perpetual optional income source with an annuity? Or is it simply better that annuities are for folks who need that income source? You used the word sufficient about four times there. And so with that, I'd say probably not, you know, I wouldn't buy annuity.

If I just simply had no need at all, if everything else was sufficient and I was highly confident that it would be, then I, then I wouldn't do it. But I think, uh, uh, plumbing use cases for annuities is as people, you know, the, uh, retirement system in this country has moved increasingly to a defined contribution retirement system where people have their IRAs and their 401ks and, uh, being able to easily, seamlessly cost-effectively convert that lump of money into a monthly income.

Might be attractive for a whole lot of folks. And to have that as a second stool of your leg, a second leg to your stool. Right. It's like you're creating, it's like creating your own pension. Yeah, it is. It's creating your own pension. And, and, uh, hopefully over time there'll be more, um, more people that have that access.

Yeah. Simon, do you have a question? Simon, you're, you are muted. Okay. Thank you, Wayne. Um, my question is about guarantee fund coverage. Uh, my state, uh, has limits that differ for an annuity in accumulation mode versus an annuity in, uh, in payout mode and the surrender value. Well, they talk about the limit of coverage by the guarantee association.

Um, and they still use the word surrender value. Um, what, what would be the estimation of a surrender value for something that's been in payout mode for 10 years? Um, I'd have to see what state it is. I'd be surprised if they used surrender value in connection with a payout annuity, because there is no surrender value on a payout annuity.

Right. But I think what they would, I don't have, thankfully I've never been an employee or worked on an insolvency, so I can't tell you exactly how they do it. But it would seem to me that, uh, what they would do if, if for policyholders who had payout annuities of, uh, an insolvent company is that they would do evaluation of those annuities using kind of first principles, you know, what's the present value using actual principles of a stream of a thousand dollars a month for a person who, for a male age 75, you know, whatever that is.

And that's how they would come to the value that's covered by the guarantee fund. It is not uncommon. It's it is common for there to be different dollar amounts of coverage for payout annuities and for accumulation or news that's common. Yeah. Thank you. Um, I'll, I'll go back and read it more carefully.

Thank you. Yeah. And Jean. Um, I've got one from the chat. Does cost of insurance allow insurance companies to take most of the interest earned away? Well, the cost of insurance would not apply to a, um, a, uh, annuity. Uh, the only kinds of things that are even remotely close to a cost of insurance would be writer fees on an annuity cost of insurance that term is used almost exclusively when you're talking about life insurance and specifically universal life, universal life has explicit cost of insurance charges and the relationship of cost of insurance on a universal life policy to the interest just really depends upon what is the amount of insurance that you have and what's the amount upon which you're earning interest.

You know, so there are two entirely separate concepts. The interest earned is the amount earned on the account value. The cost of insurance is based on your age, sex, and amount of insurance. And the two can be very close to the same or dramatically different, but there's really no linkage at all between the two.

They're two separate concepts, but that applies to life insurance, universal life, not to annuities. Excellent. Wow. You really know your stuff. 43 years. It shows. Thank you, Wayne. Good job. He likes the Vogel head for him. Cause he has an opportunity to get, you know, talk about all this stuff.

Well, I'll tell you, uh, as pure mortals out here who came along later in life and tried to figure this out, we appreciate it, Wayne. Good job. Yeah. Um, Wayne, I must, must say that, um, Melinda has posted on the chat. A very nice, um, he says outstanding presentation, Wayne.

Thanks so much for being an experienced straight shooter in an industry that's right with misinformation to enhance sales. That's very nice. Thank you. But in closing, I'll say that, you know, I didn't know what I was going to kind of do in retirement. I'm five and a half years into retirement here and didn't really have kind of a passion.

I found I get personal enjoyment and satisfaction from being able to answer. And the best way that I can things that people post. And so I'd encourage anybody I, as I said at the start, I do try and weigh in on most, all the annuity threads on most, all the life insurance threads.

And if you want my input, either send me a private message and give me a heads up about a particular thread or send me a private message with your particular situation, my, it's a kind of a purpose that I have, and, and, uh, I hope that it's, I think it's been useful to a few folks and I hope to do it for a good while.

Um, one other possibility, possible use of an annuity is where I've read that. Let us say that we are, you know, younger and we are taking care of our elderly parents. And we have ourself the possibility of dying earlier than our parents, but we are taking care of them.

In other words, to use it as to buy an annuity for them, you buy an annuity for them so that if you pass away earlier, at least they have an income stream for them. Now there's also life insurance, of course, but what is, um, what would you say about that?

Well, you know, that would probably not a way you could structure that would be as part of your will to direct your will or your trust or whatever, I'm not an attorney by any means to buy an annuity on your parents at that point, it'd probably be less effective to go and buy one on you as you're a youngish person and to have it being paid out when you don't need the income, if your goal is to try and help out your parents, um, after your death, but it would be, it would be a way of doing things to direct that you're in your will, that part of the, your estate will be used to purchase an annuity on your parents.

That's that again, that there may be twists and turns there that I don't understand, but just in terms of raw kind of actuarial and mathematical things, that's a way that you. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)