Which would you rather buy: An annuity or guaranteed income for life?
Sure they’re the same thing, but not in the minds of many Americans. Annuities have long had an identity problem, with many people having a negative perception of the term itself, thinking an annuity is an overly expensive and complicated financial product.
Despite the advantages that annuities can offer to many prospective and current retirees, they remain relatively unpopular. Researchers at Morningstar wondered whether some of the barriers to purchasing annuities are psychological. To pursue this curiosity, Morningstar conducted an experiment in which they manipulated the label of this insurance product and whether the problem that it’s trying to solve—running out of money in retirement—is on one’s mind.
A total of 1,067 American adults ages 30 and over participated in this study (the median age was 49), dubbed the Annuities Experiment. The full study can be downloaded here.
Morningstar manipulated the frame of the product by labeling it as either an “annuity” or a “guaranteed stream of income,” per random assignment, in a set of questions assessing willingness to purchase the product, comfort with an employer purchasing the product using one’s retirement funds, the portion of retirement savings one would be willing to exchange for the product, and preference for an immediate over a deferred product. As an example, the question used to assess willingness to buy the product was:
I would exchange a portion of my 401(k) balance for [a guaranteed stream of income or an annuity] that starts at retirement and ends at death.
The study participants were (slightly) more willing to exchange a portion of their retirement savings when the product was called a “guaranteed income stream” than when it was called an “annuity.” The variance was about 2%.
But researchers said it shows that a guaranteed income appeals to people. That is, labeling an annuity by its intended purpose, a guaranteed income stream, can give people incentive to purchase the product as part of their retirement preparation.
A second key finding of the study was that thinking about running out of money during retirement increases preferences for deferred over immediate annuities.
Study participants generally desired immediate over deferred annuities. “Approximately 78% of our participants preferred to pay $100,000 for lifelong cash payments immediately at retirement than to pay $29,000 for lifelong cash payments that begin at age 80. Still, participants who thought about the possibility of running out of money during retirement were 8.6% more likely to prefer a deferred annuity,” a Morningstar commentary about the study notes.
“What this finding teaches us is that people tend to want cash now, and they are willing to offer a hefty lump sum for it. Yet, this preference for immediate payments may be grounded in shorter-term thinking, given that eliciting some longer-term planning (that is, all the way to age 80) shifts one’s financial focus from the now to the later; people may be more willing to wait for money if their patience translates into security at a later age.”
I am sure that consumers would also prefer ‘Guaranteed, income tax free payment at death” to “life insurance”.
(Caveat, not an agent.)
I don't see this as a particularly useful article for either insurance agents or consumers.
My insurance agent training on Insurance Forums suggests that successful agents, at least those who sell Final Expense and cross sell to other products, are already using this approach to prospective customers.
From the perspective of the consumer, I think a very complex subject has been dumbed down and simplified to a point where the comments are not useful.
When I tried to look at annuities a few months ago I was soon overwhelmed and complexed out of the market.
First: I think there are some annuities that guarantee payments for terms of less than a lifetime.
Second: I would have to believe that there may be a significant number of prospective annuity purchasers who would want a guaranteed income stream over more than one life.
Three:
I found the "entire process" of an annuity to be very complex and I couldn't understand it. There is the "buying stage" which seems to be filled with all kinds of choices and difficult to understand financial techniques. There is a "storage stage" where your money disappears for awhile. Then there is the "usage stage" where your money reappears and comes back to you in periodic payments.
All the fine points of financial technology involved in the buying stage and storage stage are most unclear to me. Same for understanding how the money flows between the three steps.
The article talks only about one possible result, using a helicopter view. So, as I said I don't see it as of much use to either sellers or buyers of the product.
(Caveat, not an agent.)
I don't see this as a particularly useful article for either insurance agents or consumers.
My insurance agent training on Insurance Forums suggests that successful agents, at least those who sell Final Expense and cross sell to other products, are already using this approach to prospective customers.
From the perspective of the consumer, I think a very complex subject has been dumbed down and simplified to a point where the comments are not useful.
When I tried to look at annuities a few months ago I was soon overwhelmed and complexed out of the market.
First: I think there are some annuities that guarantee payments for terms of less than a lifetime.
Second: I would have to believe that there may be a significant number of prospective annuity purchasers who would want a guaranteed income stream over more than one life.
Three:
I found the "entire process" of an annuity to be very complex and I couldn't understand it. There is the "buying stage" which seems to be filled with all kinds of choices and difficult to understand financial techniques. There is a "storage stage" where your money disappears for awhile. Then there is the "usage stage" where your money reappears and comes back to you in periodic payments.
All the fine points of financial technology involved in the buying stage and storage stage are most unclear to me. Same for understanding how the money flows between the three steps.
The article talks only about one possible result, using a helicopter view. So, as I said I don't see it as of much use to either sellers or buyers of the product.
"Which would you rather buy: An annuity or guaranteed income for life?"
An inflation-indexed guaranteed income for life. Is such a product available?
Several. Some are true inflation (tied to CPI) others are tied to indexed or market returns.
Athene has both on their Ascent Pro product.
Sure. But those are normally used in more complex planning scenarios.
Many carriers offer this option.
This is a very confusing and inaccurate description. The only product where your money "disappears" before receiving income is a DIA (deferred income annuity) and there are few carriers that do any meaningful business in those.
Variable and fixed annuities (w/ lifetime income riders) provide you with statement values, internet access to your account, and an opportunity to grow your money both before and while receiving income.
The heading was senseless to me.. Back in the dark ages when I sold annuities, we sold them to provide a guaranteed income for life.
We do a lot of business in the "accumulation only" space. MYGAs, FIAs, etc.
The clients never desire income, only rate/return.
I know, but when I was selling them,(many years ago) it was almost always with the idea of it would provide a guaranteed income when they retired.
I like the ones that are 90% liquid rather than the ones with a 10% penalty.
I think that the concept of periodic payments is the traditional meaning of the word annuity.
There may be more sophisticated nuances modern investors will attempt to apply to the word.
annuity | Origin and meaning of annuity by Online Etymology Dictionary
That was a thing that flummoxed me in a discussion with a financial advisor about an annuity when I asked him for investment suggestions for my wife. He talked to me about a 3% return in an initial period and a guaranteed return of 1% for some time period after that. That was his discussion to me about an annuity. I thought an annuity was payments to us. My understanding of where my money was going, what control we might have over after it left my possession and when and how periodic repayments to us would occur was non-existent. (The first issue there was likely that, after 3 visits, I had come to think this person was a slick salesperson but that his interest in his share of my money was going to come well before any interest he had in my share of my money. (Would that be a failure to build trust?))
It seems the only things annuity agents want to talk about these days is yield, ROI, etc. The idea of providing a guaranteed income that will last as long as you do appears to have been forgotten.
Lol, "dark ages", lol. At the bottom right is rousemark writing up an annuity agreement.
When Athene (the current #1 seller of FIA in the country) first launched a lifetime rider, 90% of their sales were in that product and they were doing 4-6 weeks worth of sales per day.
Definitely not dead. It's probably the most talked about strategy in the market, still today.
You should really stop googling definitions to learn about insurance/annuity planning.
Some insurance examiners don't even understand how some annuity products work.
There are several different types of annuities.
It sounds like you were pitched a deferred fixed annuity which is like a CD.
What you were expecting is a SPIA (based on your comments).
There are lots of options. You need someone who knows your objectives AND annuities to best explain your options.
Both products pay terrible commissions vs. other products so I doubt money was the motivator.
You likely just met with someone who either didn't understand what you're looking for or didn't understand their products.
Not unless he has already written up the life insurance policy.
Buy term, invest the difference!
He (Charlemagne) only had 14 more years so I'm not sure if that worked for him.
For this thread: "Buy income and invest the difference." – Curtis Cloke
A good reminder that effective communication requires us to speak in such a way our future clients can comprehend.
I am having flash backs to the 80's as I had a one year retail stint selling mattress in my younger days with two different "firms". The ad would hit Wednesday's and Saturday's and I would always ask if " Are you looking for a firm mattress with a soft feel or a soft mattress that feels firm?" Either way I was leading them to the "Heritage" life time warranty model.
Maybe the survey needs to be an ad because bait is bait.
You missed the point. People want what an annuity does… but they claim they dont want an annuity. Meaning they dont understand what annuities actually do.
Asking "do you want guaranteed income for life" is not baiting them. Its explaining in common terms how an annuity can benefit them.
You dont sell the product, you sell what the product does and how it benefits the client.
I'm kind a of slow.
Money (getting mine) was the entire motivator.
At the third visit I finally discovered his "real" fees for money under management were 1.5%.
He did stuff like this so he could talk about how his (average) fees were 1%. (ds4 and vic would have found me at my annoying best before I finally got the "real" fees and the "average" fees worked out.)
I was just verifying that the definition of the word annuity meant periodic payments and also discovered that it is based on a Latin root and has been in use in English for over 300 years.
I was not googling and presenting the adjectives applied to the word annuity or the mathematics and financial procedures relating to how an annuity might be computed.
Words can have different meanings and intentions over time.
Look up the word "liberal" (as it relates to economics and politics) and see how that has changed its meaning over time.
Your definition may be technically correct, and even deferred annuities allow for "annuitization" so that you can receive lifetime income, but the uses of an annuity are too varied to be so simplistic.
I wasn't trying to be offensive but realize that this forum is heavily read by both consumers and agents so posting such a narrow definition of what is a broad product set doesn't do anyone much good.
So I buy an old house. I go dig in the garden. I find $12,000 in cash in buried mason jars. Oceanview and Oxford appear to be out, but assuming I can find an MYGA that will let me put in $12K, what is the difference between buying an MYGA or going over to Equiniti and buying $12K worth of natural gas utility stocks, leaving the money in a dividend reinvestment program?
It looks to me like those are both investment schemes.
The two investment options carry substantially different levels of risk to your investment.
A MYGA guarantees a specific rate of return over a specific number of years. Guaranteed. It is a zero risk investment.
With stocks, even with dividends, you have no guaranteed return. You could lose 50% of your principal investment. Dividends are also not guaranteed. They have the right (as many did in the 08/09 crash) to suspend dividends or slash dividend payments.
So you are comparing a completely guaranteed investment. To a completely non-guaranteed investment that can go up, down, sideways, or suspend dividends at will. Its like comparing night vs. day on a risk scale.
(edit: I am referring to Common Stock, not Preferred Shares of a Company. Most discussions surrounding dividend investing assume Common Stock, since Preferred Stock is not liquid like Common Stock and structured similar to a bond in many ways.)
Thanks for the comments. Useful perspective.
(I'll take the spirit of the post and not argue about specific stocks. :laugh:)
Another question that comes to mind as I am trying to understand all this stuff, what is the difference between an MYGA and a deferred annuity?
They seem to me like the same thing, except the MYGA separates the investment activity and the "retirement payout back to me" activity into two separate portions of the annuity purchase.
(which could lead to another question, Do people do their MYGA "investing" with one insurance company, and their MYGA "annuitization" with another insurance company?)
All MYGAs are deferred annuities but not all deferred annuities are MYGAs.
A deferred annuity can come in many forms (fixed, indexed, fixed MYGA, deferred income annuity, etc.) the main differences being what type of crediting is offered and how much of that crediting is guaranteed.
A MYGA will guarantee the rate (like a CD) until you are out of the surrender period. If you decide that you need income, you can always "annuitize" a MYGA and receive a lifetime income.
Often, when people need income, they'll shop for the best option so if they were deferring and now need income, it's not uncommon to exchange their MYGA from one carrier for an income-producing instrument from another carrier.
And to add to the confusion, you don't always need to "annuitize" in order to receive lifetime income. Some fixed and indexed annuities offer riders that mimic annuitization (in some ways) and will provide lifetime income without sacrificing your principal.
Most planners/agents will work backward rather than explain all of this. They'll analyze what you need, what you're trying to do, assess pros and cons, and then give you a recommendation (and maybe a secondary option).
That way, the consumer doesn't have to learn an entire industry in 2-3 meetings. They get a custom-built strategy designed just for them.
Dont take this as me being snarky. But its not a perspective.
I was stating facts that are technically accurate from an investment analysis perspective.
Stocks. Any stock. Carries an extremely higher amount of risk vs. a MYGA.
If your 5y MYGA pays 3%, at the end of 5 years you will have annualized 3%. For a total return of 15% over 5 years. No variables. Thats what you get, guaranteed, no matter what.
If your NatGas stock pays a 3% dividend over 5 years, you get the same 15% cumulative gain from dividends. However, your stock price could be down by 15%. Meaning you have a 0% net gain.
Even with Dividends, even if that Dividend were somehow guaranteed, there is still no guarantee of a positive return on your investment.
Assuming for a second that the old saying holds true about "stocks always rise eventually"… eventually is the key word. A MYGA guarantees a gain in a certain number of years. If you plan on utilizing those funds in 5 years, and the market takes a drop like in 08/09, suddenly your 5y time frame is forced to be extended to an 8 year timeframe.
Doesnt matter what stock or stocks you pick. The risk is exponentially more with stocks vs. a MYGA annuity. Its literally a question on the securities exam….
And again.. timeframe. Go look at some of the top NatGas stocks and see the ups and downs they have had over the years. When the end of your 5 year timeline falls on one of those major down years, you are looking at a negative total return despite dividends.
Then, to realize any gain, you are forced to hold your investment longer than planned… which exposes you to more risk from both a "time value of money" standpoint, and risk of holding a stock that has taken a hit in the hopes it goes back up (bagholding).
The difference from a risk perspective is like night and day. They are literally on opposite ends of the chart. However, from a reward perspective, the stock has the ability to give you a much higher potential return.
The two are dynamically different. What is right for you depends on your personal goals and tolerance for investment risk.
Perspective = concept of incorporating the idea of risk into thinking about savings.
I am having lots of vocabulary issues in trying to think about these things. One of the first ones is the "correct" definition of "annuity". I think my definition is right. Ray thinks his definition is right. That is not a productive conversation to continue.
But I am still left with a problem. Before I can talk to you and ray about annuities, I have to understand Ray's definitions. I can't. After rereading some Oxford Life MYGA literature several times, the closest I can get is this:
(Taking my passbook and $2.00 to Mr Carlson at the Building and Loan (age 12) ) + ("Annuity" is a lifetime monthly income in retirement) = (well sorta =) (some of Ray's definitions of "annuity")
Extending from that, my simplified thought processes went to:
(Taking my passbook and $2.00 to Mr. Carlson at the Building and Loan) = (Getting an annual return on an MYGA premium) OR ( Buying a natural gas stock and letting the money ride in a dividend reinvestment program).
Then (again in my simplified thought processes) you came back and said "NO, you can't do that." "You have forgotten about risk in 2 forms, the possibilities of loss of principal and fluctuation of interest (dividends) in the stock investment over the same period as the MYGA covers." (And you forgot to mention those pesky selling fees) (And yes, I am very much guilty of trying to make a 40 year return on a natural gas stock match a 5 year return. :laugh:)
Your short answer was (I think); LD, you MUST include the concept of risk when you are trying to compare other actions to "the savings process of taking your passbook and $2 down to Mr Carlson at the Building and Loan".
Useful perspective (as in standing place to view things from). Thank you.
Yes. You must take both risk and timeframe into your perspective when choosing the right investment.
The 5% 5y MYGA returned 5% annualized, 100% of the time after 5 years.
So to compare it to a dice roll (a 5y dice roll), every time you roll the dice you get 5%, guaranteed.
The 5% dividend NatGas stock did not return 5% annualized 100% of the time after 5 years. Hypothetically, 20% of the time, its a negative return. 20% a 5% return, & 60% over a 5% return.
So each time you roll the dice, you have a 1 in 5 chance of losing money. 1 in 5 of making 5%. And 3 in 5 of making more than 5%.
Now. If you are on the casino floor and have that $10k in your pocket. Which option do you want to lay the money down on? 5 in 5 chance of 5%? Or 1 in 5 chance of losing money… with a chance of over 5%… ?
Im not saying the MYGA is better. Im just saying the risk is completely different. So what does that $10k "mean" to you? If you really did find it in the backyard, the riskier option might be fine with you. If it came from retirement savings needed to make ends meet… the riskier option probably isnt fine with you.
Risk is at the heart of investing. If you want greater return, you must take on greater risk. It could be the risk of losing a greater amount of money, or it could be the risk of being forced to hold an investment for longer than planned (or forced to liquidate when down and take a loss). Risk is why a junk bond (speculative grade) pays more than a AAA (investment grade) bond. And risk is why some companies pay much higher dividends on their stock than others…. especially in the energy sector… higher than average dividends can often mean a more speculative (riskier) company who's stock price is going to fluctuate much more than others.
Another major difference between the two strategies is that an annuity is a turn-key option that requires no maintenance on your part.
No need to research stocks and find the right one or ones.
No need to review those stocks quarterly to ensure they are still well positioned to do what you need. (if your not reviewing your portfolio quarterly you are taking a big risk)
No need to review your holdings to see if your principal is up or down.
No need to worry if market timing will be right to get your hands on that money in 5 years.
No need to pay extra fees to a stock broker to do all of this for you (you wont find one who will take just $10k unless you already have one… you might have luck at $100k with a run of the mill retail outlet like EJ or RJ or your local bank)
The portfolio of stocks takes 20x the amount of time and effort to start and maintain vs. the MYGA.
I take it you are familiar with a CD at the bank. MYGAs are essentially the CD of the annuity world. Or the Bond of the annuity world. It gives a guaranteed rate of return for a set period of time. After that time period you can take your money out and be done with it. Guaranteed is the key word there.
Ok. There are different types of annuities that do different things for you financially.
Income Annuities provide income and zero liquidity. These are often called "immediate annuities" because most pay the income immediately or sometime within the first year. Income is usually for life, but doesnt have to be. Some Income Annuities wait until after year 1 to pay income, these are called "deferred income annuities"… but they are basically a deferred annuity without liquidity… so they are seldom sold.
Deferred Annuities have 2 phases, growth & income. The income phase is optional, you can cash out your funds after the initially agreed upon growth phase is over. (called surrender period). Growth during the growth phase is what differentiates the various types of deferred annuities. Some (MYGA) guarantee a set rate over a set number of years. Others (Index Annuity) credit limited growth based on market indexes. Variable Annuities invest the funds directly into mutual funds and growth is based on that. A traditional "Fixed Annuity" credits a variable interest rate that varies based on carrier discretion. But all are the same in the fact that they grow funds, let you take out those funds free and clear after a certain number of years, and give you the option to create an income stream for life with those funds. Most, allow you to take 10% out per year regardless of early surrender charges. Most waive early surrender charges if you have a terminal illness.
Then, many Index and Variable Annuities offer an additional "Rider", usually at a cost, called a Lifetime Income Rider. This (usually) guarantees an even higher rate of return and an even higher payout rate for your lifetime income stream…. but you commit to the contract for life. You can still cash out, but you dont get the enhanced values of the income rider. (to make a long story short)
But all that is not for the consumer to really figure out to a large extent. As Ray mentioned, consumers go to an annuity expert and say "I want to accomplish this goal" and the expert fits them to the annuity that accomplishes that goal.
If you come to me and say "I want a guaranteed interest rate, but dont want to lock up my money for too long" … I would show you a 5 year MYGA. If you said, "I need to create a retirement income"… I would likely show you an Index Annuity w/ Lifetime Income Rider. If you said you wanted higher growth than what guaranteed rates offer, Id show you an Index Annuity without the income rider, just for growth. Make sense?
Could not agree more !