Debunking Annuity Objections

 March 30, 2012 by Sheryl J. Moore                 

When I started in the insurance business, I was an indexed life insurance expert. I worked in a home office for years before I even learned what an annuity was. Once I learned that an annuity was just a retirement savings vehicle that provides an income you can never outlive, I wondered: why didn’t EVERYONE have annuities?

It turns out there are folks that have a vested interest in discrediting the annuity. Those that sell mutual funds, stocks, bonds and certificates of deposit (CDs) compete against these annuities for the same retirement dollars being offered by pre-retiree consumers. These individuals are often called on to be media sources and frequently provide garbage objections in an attempt to sway people against annuity purchases.

For this reason, I want to address some of these nonsensical objections below:

“Annuities lack liquidity.”

Have you ever received something in exchange for nothing? Probably not. Likewise, an annuity cannot offer credited interest to the purchaser, without some kind of tradeoff. The insurance company has to make a profit on the annuity transaction too.

Surrender charges, the period when a penalty will be imposed if the annuity owner takes out more than a specified amount of their annuity’s value, provide a disincentive for the annuity purchaser to cash out their annuity early. If the annuity owner withdrawals more than the anticipating amount, the insurance companies’ investments fall out-of-whack.

You see, when an annuity purchaser makes a premium payment into a fixed annuity, the insurance company uses that premium to purchase bonds. Generally, the bonds are high quality and mature at the same time the surrender charges expire on the purchaser’s annuity (i.e., I buy a 10-year surrender charge annuity and the insurance company then purchases 10-year Grade A bonds to cover my annuity’s guarantees). This provides a relatively safe investment vehicle for the insurer to make enough interest off of in order to earn their spread/profit and still credit interest to the annuity.

But note that, like the annuity, there is a penalty for cashing out bonds early. If the annuity purchaser cashes out their annuity prior to the end of the bond’s maturity, the insurer suffers a financial loss from cashing out the corresponding bonds earlier than anticipated. Therefore, surrender charges on annuities merely provide a method for insurance companies to mitigate their risks associated with early withdrawals of the annuity’s value.

It should also be noted that annuities provide a plethora of alternatives for liquidity, above cashing out the contract. Most annuities allow for at least 10 percent of the annuity’s value to be withdrawn each year, without facing penalties. A vast majority of annuities also allow for funds to be accessed without penalty should the annuitant become confined to a nursing home, disabled or terminally ill.

In addition, annuities provide a guaranteed income that cannot be outlived if the purchaser elects to annuitize the contract or commence income payments under an optional guaranteed lifetime withdrawal benefit (GLWB). And did I mention that most annuities pay the full account value to the beneficiaries on death? Facts being what they are, I think we can all agree that the liquidity provisions on annuities are more than fair.

“You shouldn’t use an annuity for your IRA.”

An Individual Retirement Account (IRA) is a type of retirement plan that provides tax advantages for retirement savings. A vast array of products can be used as a vehicle for an IRA: CDs, government bonds, mutual funds and more.

Annuities can be used as the vehicle for an IRA too. An annuity, however, provides tax advantages all on its own. Because of these duplicative tax incentives, some financial advisors argue that it is “silly” to use an annuity as the vehicle for your IRA.

Yet annuities have many benefits that are not offered by the free-standing IRA, much less by CDs, bonds, mutual funds and the like. The guaranteed return-of-principal on fixed and indexed annuities is not to be ignored; such guarantees are not offered in securities products such as mutual funds and stocks.

Want a guaranteed rate of return in addition to your principal? Securities products cannot offer that either. While CDs do offer a guaranteed return, their credited rates are currently averaging a mere 0.34 percent per year! Fixed annuities, on the other hand, offer guaranteed annual interest rates as high as 3.50 percent today.

And what if my primary motivation for purchasing an annuity is to guarantee that I won’t run out of money before I die? An annuity is the only product that can guarantee the purchaser a paycheck for life, no matter how long they live. For this reason alone, it may make A LOT of sense to use an annuity as the vehicle for your IRA.

“Annuities are taxed as ordinary income, once income commences.”

Many argue that annuities are not attractive because they are taxed as ordinary income. This means that once you begin taking money out of your annuity, you are taxed at your regular tax bracket on those funds (currently 10 percent – 35 percent, based on your annual taxable income). Some investments, other than annuities, are taxed at a capital gains tax rate of a lesser (current) 15 percent. If you are in the 25 percent – 35 percent tax brackets, this seems like a big argument in favor of retirement products other than annuities, doesn’t it?

In reality, it is; but only for a minority of our nation. The IRS indicates that nearly two-thirds of the U.S. fell below the 25 percent tax bracket as of 2009. This means that the ‘ordinary income’ argument is only of concern to about 33 percent of our nation. It must not be a concern to the Obama administration; they are exploring the use of annuities to guarantee retirees’ incomes, not other retirement products. With so much uncertainty regarding the future of federal income taxes, nobody really knows what will be ahead for the taxation of all retirement income products.

Regardless, some will never endorse annuities for a single one of their clients; that’s okay. Statistics, however, show that since 1950 there has been a 2,200 percent increase in the number of Americans who are age 100 or older. Today, Americans’ number one fear is outliving their income. That being said, those who don’t embrace annuities will one day live in poverty –trying to scrape-up enough cash for prescriptions, not enjoying their retirement.

Meanwhile, the “annuity haters” can envy those of us that own annuities and have guaranteed income that we cannot outlive. We’ll be happy, not struggling and rocking out every minute of our twilight years.

Indexed Annuities: Back to the Basics

July 31, 2012 by Sheryl J. Moore                 

For years, indexed annuities have provided a strong value proposition to those saving for retirement: guaranteed safety of principal while having the ability to earn limited interest based off of the performance of a stock market index. This must appeal to at least a few people; the insurance industry has experienced record sales of indexed annuities for four years straight. However, some financial professionals have lost sight of this proposition.

Recent changes in our economy have sent the participation rates, caps, and other rates on indexed annuities on a downward spiral. While the 10-year treasury (a large driver of fixed and indexed annuity rates) was floating above 5.00 in 2007, today it is barely hovering around 1.70. This relates directly to the attractiveness of rates on indexed annuities. Annual point-to-point caps on the products averaged upwards of 7.00% five years ago, where today these same indexed crediting methods are averaging a paltry 3.13%. This dramatic change has a lot of insurance agents asking, “How can I make a sale on a product that may receive zero interest, but no greater than 3.13%?”

It is absolutely true that indexed annuity rates are the lowest they have ever been today. Although there is a product with caps as high as 8.05%, there are many products with caps as low as 1.00%. I am not going to underplay the difficulty of making the sale of this product, as compared to the same product five years ago. However, I believe that we as an industry are “psyching ourselves out.” Psychology tells us that these products are now “unattractive,” and has us asking “who would buy a product with such low rates?”

Let me tell you who. How about the young worker who’s only alternative is the 0.58% that he is currently earning on his savings account? Perhaps the pre-retiree who has the bulk of her retirement dollars just sitting and earning 0.45% interest in her checking accounts? What about the little old lady next door, who has nearly a million dollars earning just 0.33% in certificates of deposit? Your parents? They just bought some Series EE savings bonds that are earning 0.60%. They could have purchased Series I bonds, but they are crediting a miniscule 0.00% with an inflation component of 1.10%.

The bottom line is that rates on indexed annuities may be crummy today, but they are relatively competitive as compared to other vehicles that provide guarantees and protection of principal.

Today, people are looking for safety. Thanks to extreme declines in the stock market in the years 2000 and 2008, too many savers have lost the bulk of their retirement nest eggs. While they could get this with a fixed annuity, they would only average 2.06% credited interest today. This isn’t bad compared to other fixed money instruments. Of course these savers want the ability to earn interest on their retirement dollars too. However, if they want those double-digit returns of yesteryear, they are going to have to compromise the safety feature, and risk losing money in a product such as a variable annuity.

The number one fear of Americans in 2011 was speaking in public. This year, it is outliving one’s retirement funds. That is no surprise since so many people lost so much money in 2008 AND people are living much, much longer today. In fact, there are 53,000 Americans today that are aged 100 plus; there were only 2,300 in 1950. A recent article indicated that the first person to live to age 150 is already walking the earth today! And wrap your head around this- the same reputable news magazine that provided those statistics indicates that Americans will have the ability to live forever within the next 20 years as a result of our medical advancements and the possibility of “growing” any human organ. With pensions disappearing and our nation’s social security system in limbo, people are looking for solutions to ease their fears.

Annuities are the only financial instrument that can provide a guaranteed income that you cannot outlive. Yes, they provide tax deferral, and the ability to earn additional interest. However, it is the guarantees offered by fixed and indexed annuities that resound so heavily with savers today.
Don’t psyche yourself out. There are products that can provide guaranteed preservation of principal, guaranteed protection from market losses and a guaranteed income that they cannot outlive.
 

The 'lost generation' of retirement planning

By Michael K. Stanley

October 4, 2013  

Despite dour prognostications regarding baby boomers’ retirement preparedness post financial crisis, a recent research report finds that there are other segments of the population who are in deeper trouble when it comes to retirement planning — like Millennials.

In its third annual research report on the state of U.S. employee retirement preparedness, Financial Finesse, an unbiased financial education company that offers counseling programs, found that Millennials have a significant risk of not being able to achieve retirement security.

With just 17 percent of Millennial employees surveyed stating that they anticipate being able to retire with 80 percent of their income goal, there is ample need for concern. Although baby boomers had the curveball of the financial crisis thrown at them as they were approaching retirement, Millennials will have to deal with myriad other issues that may pose an even greater challenge.

Systemic issues, such as rising health care costs and a possibly insolvent Social Security system will acutely impact Millennials. Couple that with the fact that many Millennials can expect to live longer than older generations and the prospect becomes even more unsettling.

Drawing a link between the generation that arrived home after World War I only to have to contend with the difficulties of a shifting cultural, political and financial climate, the research paper invokes “lost generation” when discussing the retirement challenges Millennials face.

The report finds that 87 percent of Millennials are saving for retirement through their employer-sponsored retirement plan, which the research suggests can be attributed to the fact that many employers utilize an automatic enrollment strategy. The concern is that Millennials could be taking a “set it and forget it” approach to retirement planning which could give them a false sense of security.

The report cites a Mercer study which found that individuals in automatic enrollment retirement plans defer on average 3.5-4.4 percent of their income into their plan compared to 7 percent of individuals who proactively contribute. Millennials are a generation, the report points out, that use automation to pay their bills, and similar systems could work well for them when it comes to retirement planning, but it would behoove them to take a more proactive approach.

The report also identified other groups who are at risk when it comes to retirement preparedness, among them, women and lower-income employees.

Just 17 percent of women surveyed were confident that they would be able to reach their income-replacement goal in retirement — an increase from 13 percent in 2012 — but still a number far too low, the report warns. Due to the fact that, on average, women both live longer and earn less than men, they need to make retirement preparedness a top priority.

Lower-income employees, defined in the report as those with total annual household income of $60,000 or less, experience setbacks in retirement preparedness compared to the previous year. A lesser percent reported:

Participating in 401(k) plans — 84 percent in 2013 compared to 86 percent in 2012;

Feeling confident in their retirement income-replacement goal — 10 percent versus 11 percent in 2012; and

Having calculated a retirement projection plan, 33 percent compared to 36 percent last year.

On a positive note, the report found that the overall state of retirement planning among employees has improved since 2011.