Annuities Bullet-Proof Guarantees

The Baby Boom generation—a whopping 76 million individuals who are steadily marching through middle age and into the ranks of senior citizens are looking for secure, safe investment vehicles that provide stable income for their retirement while providing competitive returns.

With the stock market in a long-term consolidation phase, chopping up & down, but actually going sideways this past decade, frustrated investors are perplexed as to where to put their money.

Today the average investor is left sitting on the fence with their money.  In the 1990s, the perception was that the S&P 500 was the ticket to retiring rich and young, but that went out the window in 2000. 

In the early 2000s, real estate offered the get-rich-quick strategy of owning a few houses, then living in one and getting rental income from the others, but that hasn’t worked out either.

After the devastation many accounts experienced during the market crash of 2008, many investors realize that they cannot afford to take such huge risks with their retirement nest eggs. So many pre-retirees and retirees alike watched their investment account balances get cut in half during the downturn. Some retirees had to go back to work, and pre-retirees have had to delay retirement for several years.

This market experience has led many investors to seek some type of bullet proof guarantee for their investment.  With the market volatility over the last several years investors have looked for more conservative products that provide stability and growth. Those objectives can be met with the use of products like the equity indexed annuity.

Fixed annuities and equity index annuities sales are continuing to double each year as the population trend in the United States continues to age. An indexed annuity pays out a rate of return on your money that’s tied to an economic index, such as the S&P 500. It’s considered a hybrid of the fixed and variable types because you receive a minimum guaranteed payment, but can also enjoy a higher return when there are gains in the broader market.

More Interest When Stock Index Goes Up; No Loss When Index Goes Down:  “Fixed Index Annuities” help you capture more interest if market index(es) you choose go up. The interest adds to your account. It is not taken away if the stock index(es) go back down.

This is the best alternative to take advantage of increases that occur in the stock markets without taking any chance of loss if the markets go down. Periodically, you can adjust which stock market index(es) excess interest is calculated with. In that way the opportunity to still plan for market swings to gain extra interest is possible.  By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.

We know of no other investment that provides the kinds of benefits and protections annuities do. The deal you make with the annuity and insurance companies is that they will provide the increased benefits if you promise to keep the money in the contract for the agreed term.  

Annuities offer some wonderful investment and saving options in certain situations. Yet annuities come with mixed bag of pros and cons. When researching the Fixed Indexed Annuities PRO’s and CON’s there is a one con that is most usually discussed as a huge problem regarding these products: The “CON” is stated as such:

The problem is that a contract’s crediting method—the formula that determines how much the investor earns—can change each year at the whim of the issuer. Over 95% of index annuity sales are in products that may change at least one element of their interest crediting methodology after each reset period.

The ultimate determining factor in setting index participation in future years is not the interest rate environment or the cost of options, it is what carrier management decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any returns ultimately subjective.

Unless I misread the product, it seems reasonable to wonder why any advisor or trusted agent would advise a truly risk-averse investor—the target market for FIAs—to invest in something so unpredictable.  End Quote!

Is this true?  What would happen if we said the same argument comparing another product: “Home Ownership”:

In researching the PRO’s and CON’s of Home Ownership and have come to the conclusion that there is a one huge problem regarding these products:

The problem is that a home’s property tax method—the formula that determines how much the investor pays—can change each year at the whim of the Government. Over 95% of Home sales are in counties that may change at least one element of their tax methodology after each reset period.

The ultimate determining factor in setting taxes in future years is not the interest rate environment or the cost of the home, it is what the Government decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any future taxes ultimately subjective.

Unless I misread the tax code, it seems reasonable to wonder why any advisor or trusted real estate agent would advise any American—the target market for Home Ownership—to invest in something so unpredictable.

This argument can be used with all products not just annuities.  However the answer to the “CON”?  Fixed Indexed Annuities? Why? Because annuities is the best alternative and you can Bullet-Proof your retirement better than any other financial product offers.  

How do Annuites Bullet-Proof your investments? 

You do not invest in a fixed annuity. You pay a premium for its insurance protection. That protection is a minimum guaranteed interest rate and at least one guaranteed lifetime income option. Without question, the guarantees are valuable – arguably more so now than ever before, which is why there is an explicit internal charge for them. This charge is used to operate a comprehensive risk management program which ensures that the product provider is able to meet the guarantees.

Index crediting is how the company determines excess interest above and beyond the guaranteed rate. As for the subjective nature, you would have to look at the subjective nature of the Nation’s Federal Funds Rate. All interest rates in America are derived from this rate.

If you can guarantee what the Chairman of the Fed will do, Insurance companies could easily guarantee how they would respond. Without that crystal ball, the companies must have a device to change rates when the Fed changes rates.

After all, the index really has nothing to do with Index annuities since ZERO dollars are actually invested in the index. The Federal Funds Rate has everything to do with the adjustments because it drastically changes the reserve requirements imposed by our government.

Insurance Companies can protect you from just about any Peril they can calculate. Unfortunately, the subjective nature of the government and those that vote our representatives into office are not a covered peril!!

Insurance and annuity companies have been updating annuity designs to meet modern needs. Annuities continue to be safe while offering greater opportunity to earn and collect interest.  “Safety and Security” is built into Annuities. Mutual funds, bonds or stocks do not offer the same protections.

Modern annuities provide great security for investment. State insurance commissioners regulate annuities and testify to their security.  One of the most fundamental laws of economics – with reduced risk, there must be reduced expected returns.

Annuities are a financial product that has many lucrative offers, not only a – promising yield, but huge additional benefits and conditions that work to guarantee your investment –”PRO’s”.

• Annuities Require Reserves to Meet Obligations: State rules make the companies and their products very safe. The companies keep required reserves set aside to meet obligations.  They are audited to assure compliance with those rules. If a company were to go under, procedures have other companies take on the obligations to you so you do not lose your money in annuities.
• Annuities Have Suitability Requirements: States require annuities be sold only to people for whom they are suitable in the first place. The insurance regulators require completion of a specific form that gives the information to decide if it is a suitable investment for you. This means you get further help to evaluate the annuity contract and greater assurance it works for your needs and wishes.
• Annuities Provide Protection from Creditors: In some states, statutes protect money in an annuity or insurance policy from your creditors.  An Annuity is not often liable to garnishment or attachment in the favor of creditor of individual insured. That means annuity offers creditor protection.  Annuities also serve as excellent ‘asset protection tool’ in the case of bankruptcy.
• Annuities Have Income Tax Deferral: Annuity income is tax deferred.  Therefore, your interest can compound in a way that accrues more interest. Since fixed-annuity earnings are tax deferred, they are not marked on your tax-forms. This ultimately keeps your fixed-annuity investment off the tax record until you extract money. This gives you the required privacy feature.
• Annuities Does Not Increase Tax on Social Security:  Tax deferred interest in an annuity does not make that tax higher.
• Annuities Have Tax Favored Distributions:  When you take the money out of an annuity the distributions are treated in an income tax sensitive way. Only the portion of the payment that reflects interest earned on the principal gets taxed. The portion that is the return of your principal is not.
• Annuities Avoid New Health Care Surtax: Income in a non qualified annuity is not subject to the new 3.8% surtax that is part of health reform. It is investment income on which that tax is not paid.
• Annuities Bonuses on Your Premium:  Annuity companies often provide bonus additions to your interest bearing account for signing up. For example, if you deposit $100,000.00 into an annuity with a 10% bonus, the interest additions will be calculated as if you deposited $110,000.00. This increases compounding interest being accumulated in a deferred annuity; therefore, increasing your payouts down the road.
• Annuities Have Estate Benefits:  As the annuity is an agreement with a designated beneficiary, it offers two more protections after the death of primary candidate, including contestability and probate process. Contestability means no person can raise questions on your settlement as to who is going to get your fixed-annuity advantages after your death. The fixed-annuity investment moves immediately to the beneficiary, which minimizes the overall cost related with probating the money and avoids the characteristic holdup. This also keeps the money transfer private, which is another privacy feature.
• But what about “surrender penalties”?  Fixed annuities commonly offer penalty-free access of around ten percent of the purchase price annual. Also, annuity contracts waive penalties for withdrawals for expenses of terminal illness, long-term care and other reasons. Annuity contracts can be of different lengths, so “laddering” and other techniques can be used to plan and capture opportunities and assure needed liquidity is possible.

Annuities will not solve all retirees’ investment problems, but they can help alleviate some of the unnecessary strains caused by the market.