Well, the confusing world of annuities. Here. There's some topics in this teaching course that demand a full teaching course to cover the topic. Then there's other topics that we can do three or four minute teaching course. That's not the case of the annuities. annuities are confusing, and annuities are popular.

They're soaring in popularity, just consider this for just a second 220 $8 billion. That is what flowed into annuities in 2015. The first three quarters of 2016 160 $3 billion dollars flowed into annuities. Let's put that in perspective for just a second and talk about mutual funds the popularity of mutual funds. Let's look at the 2015 numbers of deposits four into mutual funds, and negative 100 and $2 billion. More money came out of mutual funds than went into mutual funds.

So the popularity is soaring. And the problem is, is that people are confused about annuities. And I say that because they think they've got one thing, and they really have another thing and they discover that three or four years into the process, and they're stuck. So what I want to do today is talk a little bit about some of the finer points of nudies clear up the confusion so that you have a good education on how they work. Now, here's the problem with the whole idea of, of annuities is that and if you if there's one thing I want you to take away, it's this. annuities are often more often sold than recommended.

And let me say it one more time, I knew these are more often sold than recommended. Think of it this way. If they're being sold, it looks like this. Here's the annuity. Here's the client. The advisor focuses on the sizzle focuses on the benefits of the annuity, but never connects it to the client.

The client likes the benefits. Client invest in the annuity, but it may not be the best option for the client. If the if the if the advisor recommends an annuity, then that means the the advisor went through the process of determining what the best annuity was for the client, whether the process of making sure that annuity met the client's needs, it looks more like this where there's they're connected. The client is very clear why they're investing into that annuity. But that's not often the case more often than cases like this, and there's that gap remains. So we want to clear up that gap.

And make sure that you are educated on how they work. Because in the risk averse world that we live in today, investors don't want to take risk. They went to the tech bubble 2000 2002 lost a lot of money, gained it back then went through the financial crisis of 2007 2009. And they're done with stocks are done with equities. I've never I've seen a time where people were more risk averse, and annuities fit that profile. annuities are the best, at least at the time of this shooting, or the best guaranteed rate investment that you can get.

But once again, they're clearly misunderstood. So let's talk a little bit about this. There's three different types of annuities that we want to address today. There's the fixed annuity, which is very simple to understand. There's the fixed indexed annuity, which is not so easy to understand, which is confused, confusing, and the problem with the fixed indexed annuity is simply that that's the most popular type of annuity that's being recommended and sold today. Then there's the variable annuity the variable annuity we won't spend much time on because I have a belief that it's going to be extinct within a couple of years.

The popularity is declining on those those products. Insurance companies aren't pushing those products as much. They're not being recommended as much. So let's start off with the fixed annuity. Very easy to understand think of a fixed annuity as a as similar to a CD with a couple of differences. The first major difference between a fixed annuity and a CD is simply that the fixed annuity has got a pretty big, pretty hefty surrender charge period.

So if you take that money out within the first, let's say 10 years, seven years, whatever the number of years the contract, you take a pretty big penalty. That's the first difference. second difference is that fixed annuities, the growth of a fixed annuity is not taxable. It's it's tax deferred until you take it out. Whereas with a CD, you're paying taxes along the way unless you're in a retirement account. So other than those two big differences, they're really pretty much the same.

So what you want to find out is what is the fixed guaranteed rate? What is the surrender charge period? You really want to be comfortable with that. And what is the liquidity provisions because these annuities also have ways that you can take money out without being charged a surrender charge. Typically, it's one of two ways. It's either 10% of the annuity contract for that year, or it is interest only.

Now, here's the next question that I really believe you have to ask yourself, are you investing for the right reasons? And why I pose that question is I watched as investors have gone through a period of investing, taking some risk, got burned, or had a bad experience. And so immediately, they went from being able to handle some risk to a situation where they don't have the mindset for risk anymore. And that's problematic because what they end up doing is they go from here, where they're taking risk way over here where they won't take any risk at all. Now, there's nothing wrong with the risk profile like that. Except that I think that if you at one point in your life had a mind mindset that you could take some risk you Figure out what went wrong and what you would do differently and take another risk again, instead of going all the way too far to the right.

Now, if you're just wired that way, if you're what I call the prudent money, DNA for risk is risk averse, then you're risk averse, that the challenge, though, that you run into, is that you've got to take some risk, because it's tough to grow your money at 3% per year, and get to your financial goals. So it's important to be able to take a little bit of risk. But once again, if your risk profile is such that you don't want to take any risk at all than that, that is what it is. Have you shopped rates. The reality is, is that if you looked at a rate sheet of go of the going rates of fixed annuities, you would see a big difference. You would see companies that are paying 3%, you would see companies that are paying 2%, so you want to make sure that you're going with the best rate.

So that's the fix To know, pretty basic, pretty easy that to understand. Now we get into the fixed indexed annuities. This is a little bit tougher to understand once again, the popularity of fixed indexed annuities is huge. It's the most it's the biggest type of annuity that that selling today. Think of a fixed to new, fixed indexed annuity this way. If you have your fixed annuity, this paying 3% think of a fixed indexed annuity as a way to increase the probability that you make more, it puts you in a position that you can make more now to be fair, you can make less.

It just depends on how the fixed indexed annuity works. You got to think of it in that in 12 month periods day one, you put your money in, and then they the last day of the 12th month, they value the contracts for that 12 months. You don't get individual statements. You don't get individual values. You just get for The 12 month period is is that is the value of the contract. Now, it's driven by a formula.

So you have day one, the money goes in. And then the formula dictates from that 12 month 12 month period, what you actually make in that fixed indexed annuity. So that's important to know. Now, let's talk a little bit about the three contract values. I told you this would be a little confusing. There's the contract value, which is the actual value of the contract.

There's the contract value minus surrender charges, which, if you were to take the money out my D, they would take, they would deduct the surcharges. That's what you get. And then there's the income rider value. I include that in there not that every contract has an income rider and an income rider simply means that at some point, you can turn your contract into an income stream and take and take money out. So The three different values sometimes confused, because the income, the income rider value cut, that part of the contract is always bigger, most in most cases than the contract value. And so what a an investor will do, they'll look at their statement, they'll see that bigger value, they'll think, well, if I did, if I took all my money out today, this is what I would get, that's not what you would get, you would get the contract value minus surrender charges, or if you were at the end of the contract, you would just get the contract value.

Now let's talk a little bit about the formula. The formula is linked to an index and there's a lot of different formulas a lot of different indexes. So let's definitely keep this very basic and very easy to understand. And we'll just say that the formula is linked to the s&p 500 index. Now, there's two ways that you value this formula. Sit let's start with day one, and go through to the last day of the 12th month.

Let's say that you have that your formulas driven by a cap. And let's say that you can earn up to 4% of the value of the s&p index between during that 12 month periods. Let's say during that 12 month period, you put your money in day one, it grows to the end of the 12th month, and the s&p 500. During that same time period grows 5% Well, you're capped at four, so you would have a 4% return. So let's say you started with 100,000. At the end of the 12 month period, you would have 104,000.

And then you start your new 12 month period, your new valuation period, your new formula period. So the let's say the s&p 500 earns 10%. Well, you'd still only earn 4%. Let's say that the s&p 500 to 3% you would earn up to 3%. You just can't earn more than 4% At what at the index loses? Well, that's the guarantee part of the annuity is that you would your hundred thousand dollars would still remain 100,000, you wouldn't lose, you're guaranteed not to lose something about guarantees that you need to know.

Every time an insurance company gives you a guarantees, they're taking something away from you. Because if they're going to take the risk of guaranteeing something, they're not going to they're going to reduce their risk, which reduces your reward. So you got to know that every time you take a guarantee, that's what happens. So what is the index? You want to know what that is? Oh, let me let me go back to participation driven.

If it's participation driven, then you earn a percent of the index. So let's say that you earn no cap up to 30% of the s&p 500 during that 12 month period. So the s&p 500 went up 10% you'd earn 3% but went up 20% you'd earn 6%. Once again, if the s&p 500 lost money, you would just not earn anything and your value. would stay at at the same as it was day one. What is the income?

How does the income rider work? These could be somewhat complicated to understand. So you want to know how the income rider works at what point that you can start taking income, what that income will be in. And here's the thing about the income rider that appeals to a lot of people it's guaranteed to pay out for the rest of your life. So if you live to be 100, or no, say you live to be 99. It's going to continue paying out every single year, even if you deplete the value of the contract.

It still pays out. So this is a pretty popular addition. And the other thing too, that you want to know is this going to cost me anything. Because some contracts, there's a cost for the income rider some some contracts that they included inside the contract. What is the surrender charge period? You want to know that window to liquidity provisions?

How does the death benefit work, the death benefit can be Limited, sometimes it can be restricted. Sometimes the death benefit could be that it's an enhanced death benefit. So you want to know what exactly how that works. Now, what is the minimum guaranteed return? Most of these contracts have guaranteed returns on them. So let's say that the guaranteed return is 1%.

But let's say you had a horrible time with this annuity for 10 years, you averaged half a percent. They bring you up to 1%, because that was the guarantee that you could that you could make on the product. A variable annuity. Like I said, I won't spend a whole lot of time on this because the variable annuity is I think, going to be extinct here within a couple of years. You know, the will the and the reason being is that it's a very expensive investment. The expenses are really high and a variable annuity, and I think that that outweighs the benefits of it.

You want to know what the sub accounts are sub accounts are simply the the way the money grows, like stock funds, bond funds, that type of thing international funds And they those sub accounts work a lot like mutual funds, but they their value different and they're referred to as sub accounts. You know, how does the income rider work? How does the death benefit work? You want to know all that as well if you're if you're getting into a variable annuity now pitfalls the annuities, it by advisor over sells the potential growth advisor doesn't explain the hypothetical realistically, advisor uses non guaranteed returns to show income advisor over sells the guaranteed income rider advisor doesn't explain the bonus. Now you can kind of see why this is problematic. And you go back to the example of annuities being sold rather than recommended.

There's a lot of pitfalls that you have to be to check to be aware of. And you know, I can sum all this up with a with a illustration that most of the time the advisor will give you what's called a hypothetical illustration you That is designed to show you what potentially the fixed indexed annuity formulas can do. It's very flawed, I believe. And I'll tell you why here in a minute. You know, I, the word hype, hypothetical, hypothetical, excuse me, comes from the word hypothesis, which is just an idea or a guess. And that's simply what it is.

It's a guess as to what could happen. But yet, the advisor will typically present this hypothetical, as more than just a hypothetical. This is what this really can do. And once again, it's not the not the case. So what you'll get on hypothetical illustration, in most cases, is a best case scenario, an average case scenario and a worst case scenario. So what they do, let's say they go back over the last 20 years, and they find the 12 month period, that this formula that you're that you're looking at, did the best, and it's gonna look good.

It's gonna be you know, six to seven. 7% rate of return on average, and you're really gonna like it, then the average, let's say is three and a half to 4%. And then you get down to the worst case, and it's like 1.5%. Now, from a human nature standpoint, I think what we do, we tend we have a tendency to gravitate to the best case scenario. And we just really hope that works out. Because after all, a guaranteed contract making six to 7% a year.

Pretty, pretty good. But what appears to be the problem is that all three of these scenarios assume that the formula doesn't change. And the advisor typically doesn't mention this because it's if the if an advisor is selling a product, we know once again, there's a big difference between selling a product and recommending a product. But if the adviser selling a product, then he or she is probably not going to mention That every year, those formulas can change. And it's designed that way to protect the insurance company. This is no newsflash, the insurance companies will look out for themselves before they're gonna look out for you.

That's just the reality of it. They're given those guarantees, they're going to protect themselves. So they have the ability to change that formula each year. Now, they're probably not going to change it each year, but they're going to change it enough to make that hypothetical illustration, not really valid. So you really have no way of knowing exactly what's going to happen. And then you'll see on the illustration, you'll see guaranteed versus non guaranteed values.

An advisor who's selling is going to gravitate towards the non guaranteed once again, it is a guess as to and they typically, they're a little bit overly aggressive on that guess as to what they could make. You want to be happy with the guaranteed values because after all, they are guaranteed. And I specifically talk about that in terms of the income rider contract. The income rider you want to if, if you look in year five, and you think, well, year five, I'm gonna start taking income out, look at the guaranteed number that is associated with the contract. If you're happy with that, then that's good. But if you're not, then maybe you want to look at a different contract, but always focus on the guaranteed because the non guaranteed is really oversold.

Now, here's another secret that you really need to know about fixed indexed annuities. Each annuity does one thing really good. It's not to say that they don't exist, but for the most part, annuities aren't designed fixed indexed annuities are not designed to do two things really good. So they're either designed to be a growth engine. They're either designed for liquidity or income or a death benefit. And actually I left when I was thinking about this earlier today I left off one other on that list, Long Term Care Benefit.

Sometimes these income streams can turn into Long Term Care Benefit if you need them to. So something that is geared towards growth is not going to have a good income benefit. Something that's geared towards income is not gonna have good growth benefit. And I'll give you a good example. Let's say that you're comparing two different and fixed index annuities. One is geared towards growth.

One is geared towards income, the one geared towards growth, you can earn up to 4% of the s&p 500 in any 12 month period, the one that's geared towards income, you can you can earn up to 2.25% of the s&p 500. I think to be fair, an advisor who you know is recommending doing the right thing Going through the right process should tell the client Listen, don't focus on the growth, your growth is not going to make you happy. Let's focus on what that income contract value is focused on what the income is, because that's why we're investing into this. If it has an enhanced death benefit, which some annuities do so if you have a, if you have a, your objective is, I've got this money, I want to grow it and I want to leave it for my family, well, then, an annuity that has an enhanced death benefit, a greater death benefit, than the contract value is going to appeal to you.

Once again, the overall growth of the contract, probably not going to not going to impress you, because that's not what it's designed for. So it's extremely important that you understand that aspect of it. Now, other things you need to know careful what the insurance company choose. Obviously you want to choose a an insurance company with good ratings, careful with the advisor. incentive programs, you have to know that insurance agencies and in combination with insurance companies will provide incentive programs that will encourage an advisor to sell their annuity. Now as, as you've learned, not every annuity is right for everyone.

You need to pick the right annuity that does the meets the objective in your needs. And it may not be the one that's linked to the incentive program. But if the advisor is selling the the one that's linked to the incentive program, then you're going to end up three or four years down the road unhappy because you didn't get into the right program. So for instance, let's say that if you sell $2 million worth of annuities, with this particular annuity with this particular company, then you win a trip to Hawaii. You can see the conflict of interest. It's it's not it's not good.

And I've I've come across agencies where they do this and they really pushed the annuity, they push the benefits that But once again, it's the sales process, not the recommendation process. The next one is make sure your advisor isn't going to check out. Now here's what I mean by that. Just because you start off investing into an annuity, a fixed indexed annuity, doesn't mean that you you know, every 12 months, you have to make a decision. You have to know what has changed in the contract. And you need advice on which formula because every contract has several formulas that's attached to it.

And you want to know what's what's the best what the advisor thanks for the best of the the advisor needs to stay engaged in the process. And unfortunately, most don't. annuities are sold more than recommended. We talked about that needs to be a good reason to absorb surrender charges. So if an advisor comes up to you and you have an annuity and they say to you that Listen, I know that you would take a 5% surrender charge Hit. But this annuity is so much better.

Now, truthfully investment companies have a real problem with this. But they still allow it to happen if the advisor can justify it. I, to me, it's a tough justification. It's a personal decision by the client to really want to take a hit like that. But this is the way they do it. They'll say, Listen, you you're going to take a 5% surrender charge.

But we're going to give you a 5% bonus over here. And careful with the bonuses because the bonuses, you know, you hear that you hear a woman to get a 5% bonus. Well, yeah, but listen, listen to it both from the standpoint of what are the restrictions on the bonus? Are there restrictions? Does that 5% bonus go to the contract value or the income rider value? I was talking to somebody who is about to invest into an annuity recommended by an advisor and he said I really liked the structure.

To this bonus, and number one, his main objective was a death benefit. The advisor was selling an A an annuity based on the income rider, which didn't even apply. And but the bonus caught his eye I talked about the sizzle. If you know if right here, remember right here where the annuity contract is being sold, and the advisor mentioned something that catches the eye of the client, then that's what they focus in on. So he was focused in on that that bonus, but I explained to them because I knew the contract that that bonus is associated with the income rider, not the contract value, and he had very, very different thoughts. Make sure you thoroughly understand and also know the advisor may not fully understand the product.

What ends up happening is the insurance company These products out, they do what's called a roadshow, they come to your town, the symbol hold a meeting, they'll teach you the product. And so, you know, the advisors will take notes, and they'll basically regurgitate what that what they were told. That's a lot of the way the sales process works. That doesn't mean they understand it. That doesn't mean that they're making good rep recommendations. So you want to be real careful with who you work with.

I said at the beginning of the teaching course, that 220 $8 billion flowed into annuities in 2015 and 163 billion in the first three quarters of 2016. It's a lot of money flowing into one type of investment. What troubles me about that is that so many of these investors are putting their life savings into a product they don't understand or putting up money into a product that is not been been explained one way and they I understood it to be another way. I used to have a big problem with annuities. And I used to say that and this was really back when they had a what's called an equity index annuity, which was an awful form of annuity. And there were lawsuits, complaints that came about it and they finally got rid of that.

And this fixed indexed annuity is a better product if it meets your profile. So not you know, the question comes down to are annuities good or bad? Well, they're not good or bad. It comes down to is it a fit for you? And it's important to make sure that you are investing in the right options.