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?
Saying this is stupid, and so are you if you believe that. (I thought about rescinding that last line, but I determined anyone that dumb probably is illiterate.)
Back to the point before I offended closed-minded individuals: If you believe in financial products and services, then what are you saying to the consumers when you condemn a product or service they purchased?
Look at it from their perspective. They at least partially liked the person who sold them the product and at least partially thought they were making a wise decision. It’s unlikely they thought the seller was a total jerk and that the product was total crap. Therefore, if you’re telling them, “Sorry, but you were duped, your instincts failed you, and your intellect was insufficient,” then how can they trust themselves to accurately vet you and your recommendations? They can’t. You proved that to them. Way to go.
The second reason you shouldn’t universally dismiss a product category is that, even though buying a particular product might not have been a wise decision when it was purchased, that may not necessarily preclude keeping it from being a wise decision now. For example, paying a one-time commission of 50% for a product is a really bad idea, but, if the ongoing fees are reasonable, then why wouldn’t you keep it now? Or, what about life insurance with a high cost per dollar of coverage? That policy might have been uncompetitive at issue, but, due to a change in the policyholder’s health, that might be the only coverage the policyholder can now qualify for. The policyholder should keep the coverage.
Even high-cost annuities can have a place. A while back I was at a conference, where the presenter was showing the audience a VA he had replaced. He hammered on its high costs. (It was expensive). And then things went south.
I’ll save you the back and forth, but the short of it was, an attendee (no, it wasn’t me — not yet) — asked the presenter if he was aware of the benefits of the annuity he had replaced. It became clear that he did not. Instead, he had universally accepted the proposition that all VAs should be replaced. It was then that I did something stupid. I don’t know if you’ve ever jumped into a fight that wasn’t yours… but I have, and I did. With both feet this time. I pointed out that the exact reasons he gave for replacement were exactly the benefits he gave up in the existing, high-cost VA, and that his client was worse off for it. It was at that time that the moderator had us take an unscheduled break. Interestingly, we never revisited that case study.
High-cost products aren’t inherently bad. Luxury autos are expensive. Are they bad? Highly touted school districts are expensive to live in. Are they bad? Kids are really expensive. Are they bad? No, the answer lies in utility. Does the consumer receive enough utility to offset the expense?
Not too long ago, since I always fly the same airline (shout out to United), I signed up for one of those proprietary, airline-specific credit cards. I used my trusty Blackberry, which, thanks to John Chen, is thriving (yes, thriving!) and completed the application. Not more than a few weeks later, I got my card and explanation of benefits, but it was not what I thought I had signed up for.
This card had an outrageous, nosebleed annual fee of $400. You’ve got to be kidding me. Not going to happen, I thought, so, I called customer service. The lady was nice enough, she said it happens all the time. Smartly, she didn’t blame me or my highly sophisticated piece of handheld technology. She said that she could fix it, but that she had to read me all the things I was going to give up. I thought, good luck lady, I’m still going to switch.
She explained that this card came with free flight upgrades, free bags for two (that’s up to $120 each way) and free access to the United lounge with, complimentary wine, beer and small plates. Wait, did she just say, free beer…? Yes, she did! Last year, I flew somewhere at least once every month but two. The overpriced, you-must-be-a-dope-to-keep-it credit card was worth it, for me. Not for most, but for some.
Could it be that, possibly, even a high-cost financial product, when used properly, for those who it was designed for, can also have positive results?
Insurance is about the way it makes you feel. Insurance is protection. Some consumers want more protection than others. Simply, protection provides comfort, and comfort comes with a cost. It’s more costly to divest more risk, but some people require this.
I wish we understood what Samuel Adams understands: The more consumers we get consuming any of our products, the better off we all are. And in this case, the better off the consumer is. Cheers!
— Read 8 More Dave Ramsey Myths Debunked on ThinkAdvisor.
Michael Jay Markey Jr. is a co-founder and owner of Legacy Financial Network and its associated companies. He has been a member of the Million Dollar Round Table member and a winner of Court of the Table and Top of the Table honors.