The Fixed Annuity
When markets are controlled, volatility is orchestrated. America’s retirees were burned badly in 2000 and again in 2008.
As of this writing, a 10-year Treasury bond is paying less than 0.75% and the 30-year is less than 1.5%. Does it make sense to be there when income annuities offer guaranteed payouts of 6% to 8% and even higher based on one’s age? In addition, all of a bond’s interest (excluding Muni’s) is taxable whereas an income annuity contains the exclusion ratio. Its principle is not taxed when it is received unless qualified money is used.
Not only does money in a fixed annuity never go backward, but it is also guaranteed annual growth. The five year period of 2007-2012 saw an essentially flat return (.07%) in the stock market. In its worst year, when stocks lost 43.7%, fixed annuity accounts experienced no loss and actually increased in value.
These accounts have continued to grow from their undiminished 2008 values as markets rebounded. Their monetary values will actually increase throughout any stock-market crash.
Obviously, retirement income annuities are increasingly attractive today.
Indexed fixed products were created to combine the growth of the stock-market with insured protection against loss of principal during market declines. Investors can sleep securely knowing that a significant portion of their retirement nest egg is contractually linked to the assets of one or more well-managed and highly-rated multi-billion dollar institutions.
U.S. life-insurance companies, in an industry of historically questionable public integrity (see a bibliography of books since 1877, including my own in 1980), are now aggressively selling variations of cash-value “life-insurance” called by different names, Universal Life (UL), Indexed Universal Life (IUL), and (formerly) Equity Indexed Universal Life (EIUL), pitched by illustrating an accumulation of retirement funds within a “permanent” (lifetime) life-insurance policy.
These varieties of life-insurance introduced following my widely read trade book, are sold regardless of the need for lifetime life-insurance and are predicated upon cash-value accumulations that I, along with many fiduciaries, consider highly problematical. For a comprehensive financial analysis of this issue, see this article. If you purchased such a policy and feel that it was misrepresented by the selling agent, for legal help see this website.
The financial analysis article referenced above addresses the inefficiency of combining savings in a new generation life-insurance policy versus meeting mortality risk by purchasing low-cost term insurance and funding one’s savings separately in market index funds. We could not agree more while bearing in mind that index funds (unlike a flexible-premium annuity, for example) are fully subject to market volatility risk that triggers the sequence of returns problem potentially devastating to older investors.
There do exist appropriate uses for cash-value life-insurance, such as paying final expenses without relying upon others or one’s other assets. Life insurance may also be used for the tax advantage of one’s heirs (“legacy planning”) in addition to its basic use in providing the tax-free difference between one’s improbable-death estate and one’s debts. We can help you in both of these areas, with CPA participation.
Whereas CD’s address the volatility issue, their yields are minimal compared to those credited to deferred fixed annuities, shorter terms of which offer considerable liquidity. This is a very different product from a “variable” annuity that is subject to market risk and in which money can be lost.
Wall Street’s commission-paid salesmen may be reluctant to place customers’ assets into fixed annuities. Money that has been positioned safely in a fixed annuity is no longer available to them for selling commissionable “equities”, many of which contain ongoing expense charges such as the 12b-1 fees in most mutual funds.
We are speaking of accounts that can never lose money due to market risk and that investors can rely upon to produce income for the rest of their life.
Stockbrokers and competent advisors correctly point out that indexed annuities limit the gains that an investor would receive during upswings in the stock-market. Fixed annuity products were created to combine a guaranteed growth, often together with periodically declared additional interest or an amount of growth that is a function of the increase in a market index. They protect against any loss of principal during market declines, thus solving the sequence of returns problem.
In today’s world of high market volatility and periodic crashes, astute investors ought to be able to sleep securely knowing that a significant portion of their own retirement nest-egg is contractually linked to the assets of one or more multi-billion dollars (A-rated) institutions.
This is an area in which I have years of experience. It is critical today that your own situation and goals be addressed with appropriate financial products.
It is advisable to have any annuity(s) purchased in past years reviewed by us in terms of safety, yields, and policy riders. That holds true for life insurance policies as well.