What’s better, the guaranteed income from a variable annuity, a fixed index annuity, or a deferred income annuity? The answer is simple: Whichever one the consumer is most likely to implement. Yet, in this industry, we often explain the benefits of one product, while simultaneously savaging another.
Recently, I heard a Samuel Adams beer commercial that said something like, all beer is good, just some beer is better. If as an industry, we adopted this approach, then the end consumers’ trust and implementation levels would drastically increase.
(Related: The Drinker’s Guide to Prospecting)
A while back I found the website BlueprintIncome.com. After spending a good chunk of time on their website, I now get see tons of their ads, which most likely is a result of my browser habits rather than any reflection on their overall size. I think they’re relatively new, but they uniquely illustrate how to ‘buy’ future income through systematic contributions to a deferred income annuity (DIA). It’s actually a very cool way of illustrating the power of guaranteed income.
Unfortunately, they do what so many of us in this industry do: They offer one product and trash the others. I don’t want to go into their misuse of terms like fiduciary or maturity date, or their completely inaccurate description of how a fixed indexed annuity (FIA) works, I’ll save that for another time. Instead, I want to focus on how they inappropriately, through flawed logic, math, and comparison, derive the conclusion that one type of annuity is good, while others are bad.
Is the income for a DIA better than the guaranteed income available from a FIA or variable annuity (VA) with lifetime income benefit riders? What they miss, as I suspect many do, is that one flavor isn’t the best for everyone, and that there’s a cost for comfort. For example, even with the cash refund at death, which guarantees my estate would receive at least my deposit adjusted for income disbursements, I’m not comfortable losing all control over that asset nor the cash refund at death, since I realize this guarantee is less valuable the younger I am. Even if I’m not that young.
Like many in this industry, they state that, “Everyone should have financial security in retirement.” Which then, we must ask, if someone, like myself, is uncomfortable with the mechanics of a DIA, but comfortable with an FIA, then wouldn’t using an FIA be appropriate, even if it required a bit more premium? Wouldn’t this still achieve the same goal of financial security?
Further, does a DIA’s income guarantee surpass an FIA’s? The fellas at Blueprint Income say it does, but to answer this, I went to ImmediateAnnuities.com and used their same assumptions (55-year-old male deferring income until 70 years-old). I then compared it the guaranteed income from an FIA offered through a carrier I commonly use. The DIA with cash refund garnered $12,012 annually, whereas the DIA without the cash refund provided $13,344.
The FIA I used was — let’s just say that, before they started naming their annuities using an object commonly found in the HBO series Game of Thrones, they used to use a precious metal in their annuity names…
Using one of their products brought the guaranteed income, at the same age, to $13,328. In other words, if the annuity yields an annualized return of 2% above the income rider fee, then the death benefit is $34,000 greater than with the DIA.
Does this make the FIA a better product? No. That makes it a better product for this particular scenario. Aren’t annuities just a tool? Aren’t tools, by definition, amoral? They’re not good or bad; they’re simply used the right way or the wrong way.
Since VAs elicit a greater love-hate response than any other annuity, it’s important for me to give you full disclosure: I must tell you, I’ve never, not once, written, sold, or recommended a variable annuity. However, I’ve helped clients keep tens of millions in existing policies. Why? Because, although VAs often have high fees and are over-hyped, they sometimes make sense.
Be careful not to apply a preconceived opinion to an entire product category. Here’s why.
First, when you say, an entire product class is flawed, bad, or inappropriate, like variable annuities, then what are you saying about the regulators who approved the sale of these products? Aren’t you indirectly saying that you, brilliant you, knows more and knows better than every single insurance commissioner, in every state, for every year the product has been approved? No. Okay then, maybe instead of saying they’re all too stupid to see how bad the product is, you’re saying they’re all too corrupt to care? Is that it? What else could you be saying?