When it comes to guarantees, don’t assume anything!
A guarantee is a promise or assurance. While a written contractual guarantee strengthens your legal position, it’s only as solid as the person, government, company, insurer and court system standing behind it.
In our article “How Good Is Your Comfortable Retirement Guarantee?”, I assumed some investments were guaranteed, safe and worry-free; I was mistaken.
FDR reassured Americans about Social Security:
“We put those pay roll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”
My grandmother sang the praises of FDR’s “guarantee”. She collected until she died, just short of age 100.
Guaranteed? Not hardly!
There is no contractual guarantee; the government has a history of breaking its promise. The retirement age has been moved, premiums raised, benefits reduced, and the “damn politicians” are looking for more.
Most Americans will receive something – but when, how much, and the automatically deducted Medicare premiums are constantly changing. You MUST pay into the system, and you HOPE you live long enough to get some return. The courts have ruled – nothing is guaranteed!
What about other sources of guaranteed income? How good are contractual guarantees? Retirees need to know what they can expect and depend on every month.
I reached out to our annuity expert, Stan The Annuity Man. I wanted to find out about annuities. What is, and what is not guaranteed, and how solid is the guarantor?
DENNIS: Stan, thanks for taking your time to educate our readers. I want to begin with annuities in general, before talking about the company standing behind it.
You have said people should remove the rose-colored glasses and only look at the “contractual guarantee” that an annuity provides.
Please explain what you mean.
STAN: Annuities are contracts…not investments…in my opinion. There are many types…and each with their own unique, contractually guaranteed benefit proposition.
|Always make a buying decision for an annuity on the contractual guarantees of that policy. Never buy an annuity for non-guaranteed, hypothetical, theoretical, hopeful, back-tested return scenarios.|
Don’t buy the sales pitch dream; you will only own the contractual realities.
For example, if someone is pitching an indexed annuity with an upfront bonus with a promise of market returns with no downside…you can’t be the sucker at the table. The upfront bonus is just part of the contractual guarantee; what I call “candy for the stupid”. Indexed annuities were designed to produce normal CD-type returns.
There is NO product that can produce market returns and protect the principal; it does NOT exist. If it sounds too good to be true with annuities…it is…every single time…without exception.
As they say in Vegas, if you don’t know who the “rube” at the table is…it’s you! Focus on understanding the contractual guarantees when considering annuities.
DENNIS: Our social security checks were reduced for 2021 because the government raised our Medicare premiums; means-testing…. Can a private annuity company ever reduce your monthly check?
STAN: No. The contractually guaranteed income amount in the policy is backed in full by the issuing annuity company. No games are played. It’s a contract between you and the annuity company.
DENNIS: In my article, I outlined there is no one size fits all, perfect investment. Annuities will give retirees peace of mind knowing they can count on their regular monthly checks.
What should annuities do?
STAN: Annuities contractually solve for 4 primary goals. I use an acronym to describe those goals – P.I.L.L.
P. stands for Principal Protection
I. stands for Income for Life
L. stands for Legacy
L. stands for Long Term Care/Confinement Care
If you do not need to contractually solve for one or more of those items, then don’t buy any type of annuity.
Never buy any annuity for market growth or potential returns. Always own an annuity (regardless of type) for what it WILL DO…not what it might do. The “Will Do” is the contractual guarantee of the policy. It’s really that simple.
DENNIS: I saw something on the internet promoting an annuity with an 8% return. How could an insurance company do that in today’s investment world?
STAN: They can’t! It’s a misleading and fraudulent ad…and the reason that the annuity industry has unfortunately earned its bad sales reputation.
Those ads are run to attract “dreamers”. The leads are sold to agents who promote that sales pitch dream. Clients might buy the dream, but they own the contractual reality of the policy.
DENNIS: I tell readers to address inflation by diversifying and investing part of their retirement funds in the stock market. I’ve read where some annuities offer inflation protection. Inflation is already in double digits. Is it realistic to expect an annuity to cover that risk?
|“When the people want the impossible, only liars can satisfy.” — Thomas Sowell|
STAN: There’s not an annuity type on the planet that properly addresses inflation. That’s just a brutal fact…so if anyone pitches that dream to you…they are lying.
When any annuity type adjusts for inflation, the annuity company significantly lowers the initial payment to make up for any increase in the income stream.
Everyone already owns the best inflation annuity on the planet – it’s called Social Security. Yes, that is an annuity. It has flaws as you mentioned but that’s the annuity truth.
DENNIS: I know you like single premium, immediate annuities, with a death benefit. How does that work?
STAN: I’m a believer in all types of annuities…if they contractually fit the person’s specific situation. I ask 2 questions to determine if they even need an annuity – and if so – which type would provide the highest contractual guarantee.
1. What do you want the money to CONTRACTUALLY do?
2. When do you want those CONTRACTUAL guarantees to start?
If your answers are “I need a lifetime income stream” – and – “I need that lifetime income guarantee to start now or within 1 year”, then a Single Premium Immediate Annuity (SPIA) is appropriate and suitable.
SPIAs are the original annuity type – a personal pension that pays as long as you live. There’s NO ROI UNTIL YOU DIE; immediate annuities are pure “transfer of risk” strategies. You are transferring the risk to the annuity company to pay for life (single life or joint life).
You can contractually structure the SPIA so that 100% of any unused money is paid to your beneficiaries. The annuity company never keeps a penny under any circumstance.
The 2 best structuring choices for this death benefit goal is “Life with Cash Refund” and “Life with Installment Refund.”
DENNIS: While the benefits are “contractual guarantees”, that is only as good as the insurance company making the promise. I know states have programs that ensure the benefits will be paid.
Two-part question here. How does the system work? What is the history record?
STAN: Always base any annuity buying decision on the claims-paying ability of the issuing carrier. Every state has a “State Guaranty Fund” that backs up policies to a certain dollar amount. It’s certainly NOT as good as FDIC coverage, so don’t let anyone convince you of that, but the system has worked well. You can find your specific state’s coverage at www.nolhga.com.
Annuity companies aren’t smarter than banks, just more regulated in my opinion. They are handcuffed so they can’t make stupid decisions; the carrier must have 100% of your money available day one in investment-grade bonds. Because of these pro-consumer regulations, the State Guaranty Funds have never really been tested…which is a good thing.
DENNIS: I tell readers an annuity should be a component of a well-diversified portfolio. What are you telling your clients about diversification and spreading risk?
STAN: I used to work for Dean Witter, PaineWebber, Morgan Stanley, and UBS before deciding to become “America’s Annuity Agent” – Stan The Annuity Man.
I understand where annuities do and do NOT fit in a portfolio. Not everyone needs an additional annuity type to add to their Social Security. It all comes down to my 2 questions and the P.I.L.L. acronym.
DENNIS: On behalf of our readers, thank you for your time.
STAN: My pleasure
Dennis here. Stan’s advice is a good reminder that with any financial or insurance proposal, relies solely on the written contract, not commissioned agent promises….
Please understand, I have no financial arrangements with Stan The Annuity Man of any kind. I’ve seen too many agents, with fingers behind their back, promoting high commission annuities and misinformation.
I am happy to give Stan a forum to set the record straight for our readers.
Stan also provides a method where you can run quotes yourself, www.stantheannuityman.com/. I like it because you can go at your own pace and make comparisons without any hassle.Are You a Candidate For An Annuity?
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