The Current State of Annuities (2023)
In this podcast episode, Steve Walther and Eric Ojeda from Alliance Group dive deep into the world of annuities, emphasizing their relevance and importance in today's market.
The Current State of Annuities (2023)
Steve Walther and Eric Ojeda highlight their recent attendance at an annuity sales camp, emphasizing that while annuities might not always be the flashiest topic of discussion, their evolution in the market presents various options that can suit different financial needs if utilized correctly. Discussing living benefits, the duo draw a comparison between annuities and IRAs, elucidating that while IRAs are like a "cereal bowl," annuities can be the "cereal" inside, underscoring the significance of understanding their basic functions. The podcast further educates listeners on the distinctions between various annuities, such as the MYGA (multi-year guaranteed annuity), SPIA (single premium immediate annuity), and SPDA (single premium deferred annuity). Eric points out that choosing a particular annuity depends on individual needs, whether it be for safety, income, or as a tax-efficient saving mechanism. The discussion culminates in emphasizing the importance of understanding the cost implications of different riders within annuity contracts. Diving further into the intricacies of annuities, Steve and Eric elucidate how annuities can serve different purposes. They break down the functioning of a SPIA, stressing the importance of educating clients about the lack of control they might have over their finances once they choose this option. On the other hand, SPDA offers a flexibility that caters to those unsure of their future income needs. The episode underscores the myriad options and riders available in annuities and stresses the need for understanding these to leverage their benefits effectively. With the world of annuities ever-evolving, Steve and Eric highlight the significance of agents staying updated and informed to offer the best solutions to their clients.
Speaker 1 (00:00):
Hey Steve, how's it going? Hey Eric.
Speaker 2 (00:02):
I'm doing great. How are you?
Speaker 1 (00:03):
It feels like a long time since I saw you.
Speaker 2 (00:05):
I know. Just like out the front door here,
Speaker 1 (00:07):
Right, right. No, but you and I recently attended an annuity sales camp with one of our carriers.
Speaker 2 (00:12):
We did, and it was really good to get together and see a lot of folks, and we had a lot of people from all over the country come in to learn more about the annuity products and what's happening in the annuity world.
Speaker 1 (00:24):
Yeah, I think it was just a great place to kind of get to the basics of annuities and what they offer and what they can do for clients as well as getting some of those advanced concepts that products might be a good fit for
Speaker 2 (00:37):
A lot of times annuities aren't the exciting thing that people get excited to talk about or want to work in that arena, but it really is something that has evolved the annuity market, there's so many different options and so many different types of annuities and different problems that annuities can solve it positioned in the right way.
Speaker 1 (00:57):
Yeah, I mean, we're so heavily into the living benefits of life insurance, but I think what a lot of people that aren't selling annuities don't understand is all the living benefits that go along with annuities as well. But before we get into that, I think when I was in a home office capacity talking with agents, I get the call and say, Hey, my client has an I R A. Do you guys have that? Can you guys help me get an I R A? And I think there's some confusion on what the difference between annuities and IRAs are. I mean, IRAs, the way I look at it are the serial that can go in a serial bowl. So the serial bowl could be an annuity. So what are your thoughts on that? Kind of give us the basics of what annuities are and what they're used for and what they're not used for.
Speaker 2 (01:39):
That's such a good point, and I hadn't really thought about it, but back in the day when I was working on the security side a lot, I meet with people all the time and they would say, oh no, I don't have an I R A, I just have mutual funds, or I just have mutual funds, but I don't have an I R A. And usually most IRAs have mutual funds in 'EM today. But like you said, the I R A itself is nothing more than a bucket, which you can put all kinds of different things or a bowl of cereal and you can change out and have multiple kinds of cereal in one bowl. It's funny you say that, and a lot of people don't know what they have and if they do have something they don't know why. And I think that's really important with annuities because annuities serve a purpose, but they certainly are not the solve all end all for everything.
They're a solution for a certain set of situations. Typically annuities, people buy annuities whether they know why they're buying 'em or not. But typically people buy annuities for safety because they can have a zero floor in an index or they can have a fixed rate. There are some variable annuities that can go up and down with the market, but typically people are buying annuities for safety, and if it is a variable annuity, they might be buying it for the safety of a guaranteed income rider, even though the account value may go up and down, they're buying it for some sort of a guarantee on the rider or the death benefit or the income. The other reason people buy annuities is for income, it's in the definition itself. If you look up the definition of annuity, it is to put money away for a guaranteed income for life or some specific amount of time. So safety income. And then last but not least is the rainy day money that you want to put to the side accumulates on a tax deferred basis, but you don't think you're going to need it, but you might. But if you don't, then you want to be able to pass it on to your kids.
Speaker 1 (03:25):
And then the whole thing with tax deferral, there's so many, I think clients out there that think the only way you can get tax deferred money is through 4 0 1 K through some sort of I r a Roth I R a. And then with all of those, there's a limitation. So sometimes people have excess money, whether it's on a monthly basis or a lump sum that they don't need now and they want to put away for that tax deferral purposes. So an annuity could be a perfect thing for that.
Speaker 2 (03:51):
Annuity can be a great thing for that. That's one of the attributes that make annuities so good. And what they do is that tax deferral, you put the money in, it grows tax deferred, and then when you pull it out, you pull the gains out and then into your basis after that. And what that means is the basis is the amount of money that you put in originally. So annuities can be a very attractive vehicle for money that you don't need right now, and you want to put it off to the side. As an example, if you just put the money into a brokerage account or into a cd, into a CD every year when it matures, you have to pay the tax on it and then you can roll it into another one. But it's being chipped away as it grows. Where a brokerage account too is you buy and sell stocks inside of that account or mutual funds, you have to pay taxes along the way. There may even be some dividends along the way that are taxed. Well, an annuity, when the money is in that annuity bowl of cereals, as Eric so eloquently put it, that tax is put off. The growth keeps compounding on top of each other until you pull it out. So from that perspective, it's very efficient from a savings perspective.
Speaker 1 (04:55):
When thinking about annuities and cereal, I like Lucky Charms like Cocoa Puffs. There's so many different types of cereal, but there's different types of annuities. So within the Alliance group and the companies that we work with, each of those carriers have their own type of annuities. So we have ss P D A F P D A explain some of the differences between fixed and index and how this all works.
Speaker 2 (05:17):
Yeah, I'm glad you asked that question because it is very confusing. And for agents that aren't typically in the annuity market or especially for clients that don't really know what an annuity is, there's kind of a lot of different ways that you can put it together. And it doesn't have to be one, you don't have to stick to one kind of cereal. You can have lots of different kinds of cereal. As an example, if you want to put money aside, the income isn't as important. You can just do a guaranteed rate of return. It's called a iga, multi-year guaranteed annuity. And what that means is you're going to put it in for three years, for five years, for 10 years, and the insurance company is going to guarantee they're going to pay you that interest for that amount of years no matter what the end of that period, it'll renewal whatever the renewal rate is, or you can take it out and roll it into something different.
The other use of an annuity is income now. So that's called a spi, a single premium immediate annuity. And what that does is it annuitize your money immediately. So you put in 250,000 and the insurance company based on your age will pay out an income monthly or annually or quarterly for as long as you are alive. The downside to doing a life only payout is when you diet stops, you can do a joint life where it can be on a husband and wife and it'll keep paying that income as long as they're both alive. Now, a joint income is a little bit less than a single income single person income, single life income because the likelihood that one person's going to live longer than the other, whereas a single life income is, there's a chance that that person could die sooner. So the path's going to be a little bit higher.
Speaker 1 (06:56):
Yeah, I think with aspe A, there's some things to remember. I guess the lack of control, if you're using ASPE A, so as SPE a often makes sense if someone has maybe a lump sum of money they want to use to funnel that into possibly a life insurance policy and pay premiums. So you can have a SPI do that and take the responsibility off the client. Or if someone has money, they want a guaranteed income for a period of time or their lifetime and they don't care what happens after they pass away. They don't have beneficiaries, they don't have heirs, they don't have family. So they're fine if that 200,000 isn't paid out eventually. So you just got to be careful on using aspea and really explain to your client, Hey, you're kind of giving up control, so let's make sure this is the right decision for you.
Speaker 2 (07:40):
Whenever I try to make a decision with a client as to what's best for them, I like to do a T-chart and the pros and the cons. And for aspea, the pros are it's a guaranteed income. Now, I referred to the life payout option earlier, but what about maybe I only need it for 10 years. So you can guarantee an income for 10 years, you can guarantee it for 10 years and life, which means that if you happen to pass away before those 10 years are up, it'll pay that to somebody else. So there's a multitude of different options that we're not even diving into. But under that pluses a negatives T chart. What I like to do is look at the negative and the positive. So the positive is a guaranteed income, and let's say you are already getting social security and maybe you have some rental income, something like that in retirement.
You just want to know how much you're going to have every month no matter what. There's some of those other things that you have might be adjusted for inflation a little bit, but you want to have that base. And a single premium media annuity is a great way of creating that. Guaranteed, as Eric put it, the downside is lack of control. You give up any flexibility in three years down the road, you want to change your mind, you're out of luck. So you really want to make sure that is what you want to do forever with that money as opposed to other types of annuities where you can put it in and then change it later on. So we talked about the iga, the multi-year guarantee, and we talked about the S pia, which is predicated on income. And then the last is a single premium deferred annuity.
Basically it is that bowl of cereal where you put the money in it and the money grows. Let's say it's an index, if the market goes down, it doesn't go down. If the market goes up, it goes up and it continues to grow tax deferred. And then at some point in the future, you can either withdraw and take all the money out. There's going to be some taxes on the gains, obviously, but if you do want to start an income from it, you have different ways of taking that income. If you chose an annuity that has an income rider that allows you to take out a specific amount of income, and if maybe the market didn't grow like you anticipated, there's some writers that will step up automatically every year to give you a higher payout rate. Other ones will guarantee a certain percentage growth on that percentage every year.
So there's lots of different ways that it can happen and lots of triggering mechanisms. But in general, those writers allow the owner of the contract via the life of the annuitant, pull out money out of that contract later on. A couple things to be cautious about is the single life, joint life, you want to make sure if it's a married couple, that aspect, you can do that with the writers as well. The other thing too is picking out those writers sometimes come at a cost which can have a drag on the cash value. So it's important to pay close attention to the cost of those writers. So for somebody that's putting this money away for a rainy day, maybe I want income, maybe I don't. It makes a great deal of sense because you have the ability to do both. Yeah.
Speaker 1 (10:47):
So when thinking about the S P D A, especially like some of the index annuities that our carriers offer, and having these rider that create a guaranteed income stream for those listening that don't sell annuities. Now, I would say if you're selling an I U L and it has a lifetime income rider where you can take distributions, even if your cash value runs out, those distributions continue for your life. This is the same thing. Your annuity, even if it runs out of value, you still have an income stream for your lifetime. So it's same exact concept that you're talking about on the I U L sells.
Speaker 2 (11:19):
Exactly right Eric, and that well, taking the guesswork out of it is what a lot of people like that no matter what happens with the index going up and down, you're guaranteeing with that rider, you're guaranteeing that you're going to get an income for life. Now, there's one thing to dive into with regards to some of the new products that are coming out right now. Some of the carriers we have at available to our agents at the Alliance group have some really unique features, and one of those is the dollar cost averaging. So one of the things if we're dealing with indexing is if you were just to dump 250,000 into an annuity, you live and die by that date that you put it in. So if you just happen to end after waiting for a year or two years for that index to come to maturity before the next one rolls into the next one, if you just happen to hit it down day in the market, your whole year can be off.
Well, one of the things that one of our carriers allows us to do is allow ongoing, excuse me, they put the money in once and then it spreads it out over the year, holds it in the fixed account, goes into the index over the course of a year. So you really have 12 buckets by the end of the year. And every year going forward, you have 12 buckets. So you have 12 different end dates with the possibility of ending on a big day, or if it is a down day, the whole bowl of cereal doesn't go down. Just that one little segment, that one 12th of a segment. Well, this
Speaker 1 (12:37):
Is a great way for diversification, especially if you're competing against a variable annuity, which allows plenty of diversification amongst the sub-accounts or mutual funds, whatever you want to call it, that someone can choose from. So with index annuities in the past, you've been limited on that live by the day and die by the day, or maybe not die, but maybe that's a bad word, but your serial goes down the disposal I guess. So here you do have that diversification that you're allowing your client to diversify with these different months or crediting periods. And also they have the safety of not losing money like they would in a variable annuity.
Speaker 2 (13:12):
Well put. That's a fantastic point.
Speaker 1 (13:15):
So get this question. A lot agents will call in and say, Eric, love the index annuities that your carriers offer. My clients don't have 20,000, they don't have 50,000, they don't have a hundred thousand. Do we have products at the Alliance group for those people that have a hundred dollars a month or $200 a month? Not
Speaker 2 (13:32):
Only do we have products, but we have a carrier. We have two carriers that are very unique that have a product for that because very few carriers do. And we call those in the industry, a flow annuity, which means it allows ongoing contribution. So when people want to start saving into something, maybe they don't have a qualified plan at work, maybe if there's something that prohibits them from doing an I R A on their own, or you could do one of these inside of an I R A, again using that as your bowl. With the annuity being the cereal in the bowl, a flow annuity allows for ongoing contributions. So going back to the first one, the MIGA is a single premium fixed annuity and you put the money in, it pays a fixed rate. The single premium deferred annuity is one where you put the money in and it grows, but you can't put any more money in.
Some of them have really short time periods that you can put the money in, whether it be a month, 60 days, 90 days. There are a few carriers that allow up to a year depending on if the money's coming in from other sources or where it's coming from. But usually it's a very, very short window. You have to make your contributions into that annuity where a flow annuity, you can put it in as often as you want, you can put it in quarterly. There's no limits Where we talk about life keeping it from becoming a modified endowment, we have rules that prohibits for putting too much premium in on a flow annuity. There are no rules such as that. And it allows people that typically maybe didn't have a savings vehicle and a conservative one gives them the option to participate in something, a savings vehicle that maybe otherwise they wouldn't do anything.
Speaker 1 (15:12):
And if it's non-qualified, meaning not an I R A or Roth, the sky's the limit on what you can put in. So if they're doing a hundred dollars a month now and then all of a sudden severance pay comes in, which happens a lot these days and they have 30,000 that they don't need, they can just dump that in.
Speaker 2 (15:27):
Speaker 1 (15:29):
So when thinking about how do I get into annuities, what are the best prospects? I mean, I would love to hear your take. I can easily say as soon as you have a client or a friend or a prospect that left their work got laid off or they went somewhere else, they probably have a 4 0 1 K. That's probably the biggest opportunity to put money into an annuity, an index annuity, roll it over into an I R A plan. So that's a huge opportunity. Why wouldn't they move it into their new 4 0 1 K? That's a good question. Why wouldn't they do that? And I think the main reason is they give up control. As long as money sits in a 4 0 1 K, that client technically has no control, even if they've left their employer, because somebody would say, I'm just going to leave it where it's at.
Why would I move it? Well, if they ever changed their investment options, if they ever changed the plan, if they ever changed anything to do with that 4 0 1 K, the client has to go with it. If they're no longer working there, no longer getting a match or a contribution, why would they want to leave it there? Why wouldn't they want their own control? So rolling something into an annuity makes sense. So the other question is why wouldn't they put it with their new employer? Again, that's their money from their old employer. Why would they want to give it to someone else to have control? So no-brainer.
Speaker 2 (16:44):
Exactly. Right. And also by taking it out of the 4 0 1 K on the side, first and foremost, what Eric said, the control is an important aspect of it. But secondly too is it's a great way to take some chips off the table and it's something that has only upside potential, no downside risk. So you do have longevity risk and you have to earn and outpace inflation, which I think with some of the indexed annuities, you can do that. So if it is a longer term from the time that you put the money into when we're going to turn on for income. Another thing too is the fact that the way annuities are structured, so many people, they don't take full advantage of those writers and take advantage of what can be done with them. And combining them, it is a good base because a lot of times they'll leave an employer and maybe they're going to another one that has a 4 0 1 K, well, let's take that off and put it in this more conservative arena or bowl.
Speaker 1 (17:46):
Don't have your cereal on one bowl, right? Yeah,
Speaker 2 (17:47):
Exactly. And then you can continue to be aggressive with maybe in the one that your company maybe is matching or something like that. So it does give you more options and more not everything in one place.
Speaker 1 (18:00):
And then, correct me if I'm wrong, so 4 0 1 Ks don't have guaranteed income, right? Or there anything like that? So if a client puts that money into an index annuity, some of these carriers have products that your benefit base starts here, but you could also get a bonus tied to that, and that's growing and growing and growing. And then when it's time to retire, if you want a guaranteed income stream, it could be a great setup. People
Speaker 2 (18:21):
That are getting into retirement, they want to know how much they're going to make. They want to know what they can do, the lifestyle that they can live. And an annuity is a great way to at least set the stage where here's a baseline, what you're going to have, you're going to get this amount. Anything else that happens with some of your other investments, that's up to market returns and where you have it invested. So from that standpoint, annuity really takes some of that risk and that unknown off the table.
Speaker 1 (18:45):
Great. Great. And then there's of course all types of designs for products, whether somebody's looking for income soon or income later. So you just got to study the carrier's products, find out what's going to be the best fit for the consumer to meet their needs and go from there. Any suggestions? Yeah.
Speaker 2 (19:04):
Well, a couple of things I get asked all the time is what is the best annuity? And there is no right answer. I mean, there is the best annuity for your situation, for your time horizon, your risk tolerance, and what your legacy plan is. So the best annuity is the one that fits and solves the problems that are in front of you. So there really isn't one I would say is the best. It's the best for that situation. So it's important to take a step back. Now the other thing too is because you are taking money up and there's time durations on the miga and then there's the deferred annuity, you have to hold 'em. There's some surrender periods if you want to get out of 'em earlier. I do think that most of the people that buy annuities are 15 and older. If you're out trying to market annuities to 30 year olds, it's a difficult uphill battle because they want to be a little more aggressive. So keep that in mind when you're looking at that as
Speaker 1 (19:58):
Well. And there's rules. There's rules. If you're under certain age, just like qualified money, there's i r s guidelines on when you're taking money out. So a younger person that needs the money within 15 years might not make sense,
Speaker 2 (20:08):
Might not make sense. So it's important to ask those questions is why do you want an annuity? But that leads us to another really important aspect of annuities is it's an opportunity to go back to your clients that you have that have annuities that maybe they weren't sold for you, but when you're doing your fact finding, ask 'em. So do you have any annuities? And they say, well, yes we do. Ask 'em why do you have this annuity? And if they can't answer it, there's a very high probability that annuity might not be the best for them. But ask 'em the questions. Maybe it is. Maybe they do want to take some risk off the table. Maybe they do want maybe to turn on income later on. But if they don't, using that money as a pure legacy play, then it's not the best vehicle.
If you have a mom and dad that are 62, 65 years old, 70 years old, and they're both healthy and that money is there for their legacy to leave to their heirs or to leave to charity or to do something like that, and they really don't need income and they really don't need that asset, it's just a place to defer the taxes. A life insurance policy would do a much better job. It would also give them living benefits, which is leveraging the death benefit, not the cash value, but most importantly, it'll give them, if they put in a hundred thousand single premium, it might buy 'em 200, 250,000 of death benefit. And how long will it take a hundred thousand to turn into 250,000 on the gross side a long time. So again, it's a way, and now you're leveraging 250 for the living benefits as opposed to your cash value at just a hundred thousand. So getting back to that fact finding and asking the questions, what do you need? Why do you need it? When do you need it? What do you need it for? All those kinds of things are really important ask on the front end.
Speaker 1 (21:41):
So in thinking about some of the other things that we covered in the annuity sales camp that we were part of, we've been focusing a lot on the individual side of annuities, but there is a huge opportunity, especially in small businesses with annuities. Can you touch a little bit about, without getting into the weeds a whole lot, but just kind of touch, when do annuities make sense for businesses?
Speaker 2 (22:02):
Well, right now, depending on which state you're on, there's a lot of states that have some new initiatives that are requiring businesses to provide some sort of a retirement plan for their employees. Some states have state sponsored plans, but they're requiring, if you don't do it, then there's, there's a penalty. So some of the states have their own plan and some of the states will let you do a plan something as long as you're doing something and it's a payroll deduction, annuities with the flow annuities, that's a great way to do that. It takes some of the risk and volatility out of the market for the employer. They can set it up individually. There's lots of different ways of doing it, but annuities right now are becoming very popular in that space. Great opportunity. Be on the lookout. And if you work with any small business owners, and if you're in those states, find out if you're in the state that is requiring this, ask 'em what are they doing for it?
And you have a solution. And the great thing about your solution is it's easy to manage some of the other things that you do. You could do a sap, a simple, lots of different things that companies can do. A 4 0 1 k, A 4 0 1 K can become expensive for the employer. It can be one more thing they have to do where just a payroll deducted I r a, when it comes out of the employee's paycheck and goes right into the carrier's annuity happens seamlessly behind the scenes to the employee. It's a great, great vehicle for a lot of companies.
Speaker 1 (23:33):
So I think what I heard you say was that the state sponsored plans are like grape nuts with a little bit of sugar. And what we can offer through our carriers is like fruit loops, so many different colors.
Speaker 2 (23:43):
I don't know. I prefer grape nuts. So not a good, I like that. I
Speaker 1 (23:45):
Grape nuts too. I like grape nuts. Even when S 10,
Speaker 2 (23:48):
But more importantly more than anything, it gives you the ability to pick and choose what makes sense for that business owner. And having a vehicle that's conservative, that is easy. Not a lot of costs turnkey. For a lot of business owners, that is the most important thing that they're doing something, but it doesn't eat into their time and the profits on the other side, because some of those ERISA plans are very expensive.
Speaker 1 (24:18):
I think we touched on a lot of the things that were covered in our sales annuity forum, class cam, whatever you want to call it. Is there anything else you think we're forgetting?
Speaker 2 (24:29):
Well, if you think that you want to learn more about annuities, I encourage you to some upcoming training and different things we're going to have on the Alliance group portal that you can go in and listen to. And then if you have a specific case that you're interested in, call your upline, give the alliance group a call and we'll help point you in the right direction and put you in touch with the folks that can help you on that front. I will say if your insurance license and not selling annuities, they're leaving a lot of money on the table because your clients may have them and there may be an opportunity to better some of the products that they have, some older ones, but also you're in the business of helping people. And sometimes annuity is the best way to help people.
Speaker 1 (25:10):
And we do have a couple videos out there, whether it's on the portal, your own website, YouTube, but there is a Migo one, and then there is an animated video about what is an index annuity. If you're new to annuities, let those videos do their work and start the conversation and let your prospect know what you're going to be talking to them about. If you're very new to annuities, just watch those at the very least to give you some idea of what you're going to be talking
Speaker 2 (25:36):
About and share them with your clients. You can share those videos with your clients as well.
Speaker 1 (25:39):
Speaker 2 (25:40):
Well, thank you everybody. We appreciate you listening to Eric and myself, and hopefully you're smarter than you were when we started and we didn't take you down a notch.
Speaker 1 (25:52):
Hopefully it wouldn't make you hungry for
Speaker 2 (25:53):
Cereal. I know, right? Let's go get some cereal. Alright, see you guys later. Bye.
Speaker 3 (26:00):
Listen to this interview and more on.
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