December 16, 2021 • 43 mins
Annuities are something that often gets paired with Life Insurance if you are ever discussing it. What is it? What kinds are there? Is this the right or best thing for me? Let's go into details about these things so you can make an informed decision whether early in your career life or wrapping up.
Also we show our ignorance in different languages. If that's your thing.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Chris Holling (00:00):
This is the truth about investing back to basics
podcast where we want to helpyou take control of your
personal finance and long terminvestments. If you're looking
for a way to learn the why andhow of investing, then you found
the right place. Thank you fortaking the time to learn how to
(00:23):
better yourselves. I guess Ishould I should introduce us
maybe. Welcome back, everybody,ladies and gentlemen, to another
episode of The Truth aboutinvesting back to basics. My
name is Chris Holling.
Sean Cooper (00:41):
And I'm Sean Cooper.
Chris Holling (00:42):
And I want to apologize for a little bit of a
hiatus we had we are still inthe same season. But I mean,
holiday season kind of happened.
We had some other stuff kind ofhappened at home in our life.
Everything is okay, calm down.
Nothing, nothing a little, longterm therapy won't fix. And and
(01:04):
we're still finishing outthrough the rest of this process
where we're talking about lifeinsurance, but into annuities
today, and we are touching onannuities today. Right, Sean?
Sean Cooper (01:15):
Right. Yeah. I might actually get some
transcripts up for, you know,the handful of people that care
about those two.
Chris Holling (01:22):
Yes, both of them.
Sean Cooper (01:24):
Yes.
Chris Holling (01:25):
And
Sean Cooper (01:26):
Does two qualify as a handful,
Chris Holling (01:29):
you know,
Sean Cooper (01:29):
I guess it depends on the two right?
Chris Holling (01:31):
We talked about that, where they're like a
bushel meant, like 56 pounds.
And then there's like, I usemurder for every opportunity. I
get like a Murder of Crows likea flock of geese.
Sean Cooper (01:42):
Which doesn't actually apply to anything else.
But that's fine.
Chris Holling (01:45):
Oh, it's great. That's why I think
it's hilarious. Like, Oh, canyou can you grab a? Can you grab
that? That murder of leaves overthere? Yeah, it's a big, it's a
big pile that murder over. I wastalking to Andrew, you know,
Andrew, Andrew, the other day,and we were having a
conversation about that. Andthere was shoot, I think I'm
(02:07):
gonna look it up for sure. Justso that I'm not completely
making it up. I thought therewas a group of something called
a rude
Sean Cooper (02:17):
I believe there is.
That's the one I always losesight of our can't remember a
bale.
Chris Holling (02:24):
a bale of hay.
Sean Cooper (02:26):
Yeah, except it's a group of turtles. So every time
somebody says, we're off, like aherd of turtles. It's actually a
bale. Yeah.
Chris Holling (02:37):
Dang it, I can't find it. Well, anyways, there's
some group of animals that isknown as a rude and we'll just
for the same purpose. We'll justwe'll just say it's turtles. And
then we were talking about howthat group of animals so in this
case, turtles would go by belike, Oh, it's a rude of
turtles. And instead of likesaying that entirely the animals
(02:59):
would go by and you go, Oh, thatwas rude. So the rest of the
time that we were hanging out,we'd, we'd see like a group of
people, or a group of animals,or something would go by, and
instead of like, Oh, look atthat murder of turtles be like,
Oh, that was rude.
(03:21):
So now so that's, that's what Ido now. When groups of whatever
go buy me a. That was rude.
Okay, well, this
Sean Cooper (03:28):
now we really digress. Anyway,
Chris Holling (03:30):
we're not. This is not that podcast. So I think
the best way to introduce ourprocess into annuities is
actually worded pretty well inthe same conversation we had
briefly right before we startedrecording this where Sean Sean
said, Hey, Chris, do you? Do youhave any? That's my Sean
(03:51):
impression. Do you have anyexperience with annuities? I
said, Well, if I can remember ifyou if you tell me what they
are, how much how muchexperience I got with them. So
I'm not I'm not feeling tooconfident on this one. But it's
(04:11):
a distinct possibility. I atleast know what they are. Maybe.
So, I would assume based on theword annuity that by definition
(04:33):
would dang it investor came upimmediately.
I was hoping
Sean Cooper (04:37):
Investopedia no use Investopedia
Chris Holling (04:40):
no but I want okay, Investopedia
Sean Cooper (04:47):
Are you are you looking for a
Chris Holling (04:49):
I was gonna find the root word of
annuity from annual meaningyearly and it t meaning so
that's That was the route I wastrying to get
Sean Cooper (05:01):
Gotcha.
Chris Holling (05:03):
According to Investopedia, the term refers to
an insurance contract issued anddistributed by financial
institutions. With the intentionof paying out invested funds and
a fixed income stream in thefuture. investors invest in or
purchase annuities with themonthly premiums or lump sum
(05:24):
payments. The holdinginstitution issues a stream of
payments in the future for aspecified period of time or for
the remainder of the annuitantslife. Annuities are mainly used
for retirement purposes and helpindividuals address the risk of
outliving their savings.
Sean Cooper (05:45):
Yep.
Chris Holling (05:47):
Thank you, this has been the truth about
investing back to. Okay.
Sean Cooper (05:52):
So now that you know the definition,
Chris Holling (05:54):
now that I know the definition, I have done
absolutely nothing withannuities.
Sean Cooper (06:00):
That's fair
Chris Holling (06:01):
personally. But you know, also, for whatever
it's worth, I don't feel likenot that I went looking for it,
but I don't feel like I ever hadthe opportunity. Like I never
had anybody that was like, Hey,are you interested in also
partaking in annuities? EvenEven though I've had life
insurance forever? If that makessense,
Sean Cooper (06:20):
no, it does
Chris Holling (06:21):
Iike has never come up.
Sean Cooper (06:21):
i It's a little surprising, but at the same
time, I can explain why itwouldn't have come up based on
your life insurance experience.
Chris Holling (06:30):
Because it's Term Life, and I'm just part of the
the cogs in the wheel part ofwell on the hamster wheel
Sean Cooper (06:38):
more specifically, because depending on what type
of annuity we're referring to,so life insurance only requires
to be sold only requires a lifeinsurance license in your state.
Whereas annuities depending onthe type of annuity typically
require some kind of FINRAexamination Series Exam. Six, I
(07:02):
think six is the one that getsyou that fixed annuities
possibly indexed annuities, andthen you have to have the seven
to do variable annuities. So ifthey have an insurance license,
but they do not have one of theseries examinations, then they
they're not bringing upannuities because they can't.
Chris Holling (07:21):
Right. Sure. I guess that makes sense.
Sean Cooper (07:26):
They don't have tools in the tool belt.
Chris Holling (07:28):
Right.
Okay. Well, fair enough. Sothat's why I've never come
across it before. So apart fromjust the the open textbook
definition, why don't you giveme a Sean definition? How's
that? Or is this the Seandefinition?
Sean Cooper (07:44):
No, that was just an explanation. Yeah, so there's
a couple different factors.
Basically, an annuity is acombination of an in investment,
and insurance annuities areoffered, in fact offered by
insurance companies, becausethere is typically some form of
guarantee depending on whatstage of the annuity, what type
(08:05):
of annuity, what riders aretacked in there, but there's
typically some side type ofinsurance built into it or added
to it. So it is the combinationof the two, and but outside of
those that insurance link, theother aspect of it that people
(08:28):
often relate to annuities is thetax deferral. So it is as you
pointed out, designed to be aretirement vehicle to provide an
income stream in retirement andbecause of that the government
does offer some tax benefit, notthe same level of tax benefits
(08:48):
that you would derive from yourtypical retirement accounts like
your 401k IRA or SEP simple 457403. B etc. You know, where you
either get a tax deduction whenyou make the contribution or it
comes out tax deferred when youwithdraw it as you would as it
would be with a Roth. But insideof that it does grow. Your
(09:13):
retirement accounts grow taxdeferred, and that is where an
annuity is somewhat similar inthat the investment earnings do
grow tax deferred, you don't geta tax benefit. When you make the
deposit. You don't it doesn'tcome out tax free when you
withdraw it, but it does growtax deferred. And depending on
how you pull the money out, youcan get it make it somewhat more
(09:35):
tax favorable, if you will, whenyou pull out the money, but
that's not a guarantee and it'sit's definitely not tax free
when you pull it out. So justthe tax deferral is the other
advantage as far as what peopleassociate with annuities.
Chris Holling (09:55):
Is this something that's only available to you in
whole life?
Sean Cooper (09:59):
No, it has Nothing to do with your with life
insurance.
Chris Holling (10:02):
Okay, I was just I mean rereading the definition
when it was saying it refers toan insurance contract issued and
distributed. I was trying tofigure out if it pairs with it.
And that's, that's why we'retrying to mix it into the
season. So where it's anadditional insurance contract?
Is that what you're saying?
Sean Cooper (10:19):
It would be a completely separate contract?
Chris Holling (10:21):
Separate contract?
Sean Cooper (10:22):
Yeah.
So
Chris Holling (10:24):
I'm talking to the guy, I'm sorry,
Sean Cooper (10:25):
you, I was just gonna say that
annuities and their, theirprimary, one of their primary
goals is to provide an incomestream for life. So throughout
the life of your throughout yourretirement. So in that regard,
it is designed to insure againstlongevity risk, so insure
(10:46):
against outliving your assets.
So from that standpoint, it isactually the exact opposite of
life insurance, where you'rewith life insurance, you're
insuring against prematuredeath, essentially, with an
annuity you're insuring againstliving longer than your assets.
Chris Holling (11:11):
Okay.
Sean Cooper (11:12):
And that also depends, because not everybody
uses an annuity in that way. Butthat is, what part of what the
insurance side of it is designedto do.
Chris Holling (11:24):
Okay. And, and so that's a, I'm talking to the guy
that is selling me lifeinsurance, or that I'd like to
buy life insurance from, andthey also offer annuities. And
so then we discussed thepossibilities of payout in
death, as well as thepossibility of exceeding a, a
(11:49):
level of assets and it helpscushion some of that. Beyond
beyond living out assets. Isthat what you're? I'm, I'm kind
of trying to piece it alltogether. What is, is a reverse
mortgage, an annuity? Or is thatlike a different approach that
people are trying to use inplace of an annuity?
Sean Cooper (12:09):
It would be a different approach in place of
an annuity. It's the reversemortgages designed to use for
income, potentially inretirement and hopefully, can
should be used. Hopefully, youcan't be out live, depending on
(12:30):
how you pull the money out.
Again, it depends, but it wouldbe an al an alternative, if you
will.
Chris Holling (12:37):
Sure. And that's and that's what we talked about
before I was just I was seeingif it was like a different
wording for that, or if it'ssomething that's completely
unrelated.
Okay,
Sean Cooper (12:45):
yeah, completely, completely different, but they
are alternative means ofgenerating cash flow in
retirement, potentially, again,the annuity also has an
accumulation piece to it. That'sthe investment side of it. So
Chris Holling (13:04):
and so to meet the criteria of an annuity, I'm
assuming you're, you're payinglike I could buy annuities
currently, right? And pay untiluntil a certain age or do I just
pay it?
Sean Cooper (13:20):
Ah, see, so you're getting at an aspect of it, and
that is that there are two basictypes of annuities. There are
immediate annuities and deferredannuities now and you and you
can pay for each of them inwell. Both of them can be paid
(13:41):
in as a lump sum. However, thedeferred annuity can also be
paid in stages. So with animmediate annuity, it has to be
paid as a lump sum, you have topay into it as a lump sum or buy
it as a lump sum, because thereis no deferral portion to it.
Whereas the deferred annuity,you can potentially invest in it
(14:05):
over time. So however often youwant to put money into it,
whether that's monthly,quarterly annually, whatever.
But yeah, so basically, there'simmediate annuities and
deferred, so the annuityannuitization actually refers to
the the product from an incomestream standpoint. So when you
(14:28):
actually start takingwithdrawals, so if it's an
immediate annuity, you have todeposit all the funds upfront,
because you're going to starttaking withdrawals right away.
And there's no point in takingwithdrawals and also depositing
funds at the same time. That
Chris Holling (14:44):
right
Sean Cooper (14:44):
doesn't really make sense. So and there's a number
of different ways. So typically,if it's an immediate annuity,
you're you're using it for aguaranteed stream of income
either for a set period of timeor for your life or for your and
your spouse's life or for yourlife and a set period of time.
(15:09):
There's a variety of differentoptions. But basically, the
annuity Company takes your moneyand says, Okay, this is the
interest we can earn on thismoney. This is your life
expectancy, if you want to takethis money as a guaranteed
stream of income for your life,this is the amount we'll pay you
on a monthly quarterly or annualbasis
Chris Holling (15:32):
based on the lump sum,
Sean Cooper (15:34):
correct.
Chris Holling (15:35):
Okay,
Sean Cooper (15:36):
exactly. But they're guaranteeing that so
they are taking on yourlongevity risk and the potential
market risk. So that's where theinsurance side of that comes
into play. As opposed to youtaking that same lump sum
investing it, however you yousee fit, and then withdrawing
money as needed, and you riskingthat you run out of money, the
(16:00):
insurance company is taking onthat risk for you. So that's
where it's an insurance contractin that you are transferring
risk. Okay, so obviously, you'repaying for that in some way.
Typically, when they're doingtheir analysis, and they say,
Okay, well, we can earn thismuch, by investing your money.
(16:25):
If it's an immediate annuity,it's probably in some sort of
fixed income. investmentvehicles. In fact, they have
some fairly strict guidelines,they have to follow from the
federal level to qualify. But atany rate, whatever they're
getting, is not what's beingapplied to your account in your
(16:48):
withdrawals, there's a cushionthere, that they're making sure,
again, that they have a profitand can stay in business. That's
where the actuaries come in. Sobut they're taking on that risk
of you, outliving your actualassets for you, because even if
you do outlive your lifeexpectancy, by, you know, such
(17:13):
an extent that your assets wouldhave dried up, the insurance
company is on the hook tocontinue paying if you took that
lifetime income option.
Chris Holling (17:24):
And I imagine the amount that you're paying the
premium or whatever it is, isdepend on how much of a risk you
are that you're going to run outof assets. Is that also part of
it?
Sean Cooper (17:37):
Yeah, they don't do, they typically don't do the
same extent that a an insurancecompany would per se, it's like
for for life insurance, I mean,but yes, there's, it's still
going to be based on your age,it's going to be based on your
sex, which impacts your lifeexpectancy, that sort of thing.
(18:00):
So that is going to be takeninto account. So where, and that
again, is kind of where it's alittle bit different. So for
example, for a woman, if she'sbuying life insurance, her
insurance premiums are going tobe lower than a man's because
her life expectancy is going tobe longer. So if we're talking
about two people that are thesame age, roughly the same
health, the woman's lifeinsurance premiums are going to
(18:23):
be lower because her lifeexpectancy is longer with an
annuity. Because we're insuringagainst the exact opposite, her
payout on an annuity is going tobe lower than a man's because
it's more likely that the manwill die earlier and therefore
have money leftover in theaccount.
Chris Holling (18:40):
Sure, yeah, that makes sense.
Sean Cooper (18:41):
So it's the exact opposite in that regard, which
is also why so if you, we talkedabout these options that we
talked about, for you can have astream of income for a set
period of time. So say 10 yearsversus your life, depending on
when you start that the 10years, you know, if you're 65,
and your life expectancy is 80,then the 10 year is going to
(19:05):
have a higher payout then basedon your life, then your life
expectancy would,
Chris Holling (19:11):
right.
Sean Cooper (19:11):
Similarly, if you ensure joint lives, so you
ensure you and your spouse,that's going to have a lower
payout than you alone.
Chris Holling (19:19):
Sure.
Sean Cooper (19:20):
And then again, if you you do your life plus a
period certain so that 10 yearsin our example, or 20, or
whatever you do, that's going tohave a lower payout than your
life alone is well.
Chris Holling (19:34):
Yeah, I mean, it all make sense.
Sean Cooper (19:35):
So, but that's just the annuitization phase. That is
when you actually start pullingthe money via annuitization. And
that it and that applies whetherit's an immediate annuity or a
fixed or a, sorry, a deferredannuity that just doesn't
address the accumulation phaseof a deferred annuity. So a
(19:58):
deferred annuity It actually hasa phase in which the account can
grow. So with the the immediate,you dumped in a lump sum, they
took it and they said, Okay,this is the income stream, we
can provide you based on yourselections of how long it's
supposed to last, right. Withthe deferred annuity, you're
(20:19):
investing either a lump sum oran amount plus monthly
contributions, annualcontributions, what have you,
and it grows over time. And thenlater on down the road. So
deferred, is when you decide,Okay, do I want to take this
money out as a lump sum? Or do Iwant to annuitize it, so get you
(20:41):
back to that same phase. Butthose are the two basic types,
so immediate and deferred. Andthen within the deferred realm,
there are three additional basictypes of annuities. So that can
be broken down into threeadditional types. And that would
be a fixed annuity, a fixedindexed annuity, or a variable
(21:02):
annuity.
Chris Holling (21:05):
Alright, and that's all based off
contributions or, sorry, I'mgetting ahead of it. What does
what do they mean, Sean?
Sean Cooper (21:13):
So those have nothing to do with the the
contributions that you make.
They have everything to do withhow the annuity grows, the they
have do with how it accumulates,aside from your contribution. So
you can still you still haveflexibility on your
contributions, whether you do afixed annuity, a fixed indexed
annuity or a variable annuity,the contributions are still up
(21:33):
to you. Whether you do a lumpsum or contributions along the
way, and you don't you don'teven have to have set
contributions like it doesn'thave to be I'm going to
contribute this amount on amonthly basis. You can go okay,
well, I have this much thisyear, I'm going to throw that
much in next year, next month, Ihave a little bit less, I'll
throw that in. So you have thatflexibility on the contribution
(21:56):
side, regardless, but not withthe immediate annuity, of
course, but with any of thesedeferred annuities, where the
fixed, the index and thevariable annuities differ is how
they grow. So with a fixedannuity, it is very much what it
sounds like your account valuewill grow at a fixed rate, a
(22:21):
stated interest rate guaranteedby the insurance company, now
that I use, stated and rate andguaranteed somewhat
interchangeably, because theinitial stated rate on a fixed
(22:42):
annuity contract is not alwaysthe guaranteed rate on the
annuity contract, meaningmeaning they might say, Okay,
we're offering a fixed annuityat 5%. So it will grow at 5%,
the guarantee is one and a halfpercent. So the insurance
(23:03):
company will make every effortto continue to pay the 5% on
your account. But if things gopoorly, they can reduce that by
a set amount annually and bydown to whatever that guaranteed
rate is now that guarantee,again, is backed by the faith
(23:27):
and paying ability of theinsurance company. So if they go
bankrupt, that guarantee isstill potentially out the
window. Now there there thereare reinsurance companies that
will then step in most insurancecompanies are required to pay
for reinsurance. And thenthere's other factors that come
(23:51):
into play, but the guarantee isbacked by the full faith and
claims of claims and payingability of the insurance
company. So, you want to makesure they are a strong company
that will actually be able topay their Guaranteed Rate
preferably a strong enoughcompany to pay their stated
interest rate whatever theyconvinced you to buy it at that
(24:14):
fixed rate also can be somewhatvariable in that many insurance
companies will offer a types offixed annuities where they pay a
higher rate up front or theythrow a bonus in initially to
essentially entice you to tojump on and then the stated rate
(24:36):
after that is lower. So
Chris Holling (24:43):
okay.
Sean Cooper (24:46):
But that that's the fixed annuity. So a somewhat
fixed but also somewhat flexiblefixed rate guaranteed by the
insurance company, fixed indexannuity would have an aspect of
(25:09):
the fixed annuity as it sounds,in that they have a stated rate
that the contract will pay onyour investment. And that that
stated rate is going to betypically quite a bit lower than
a fixed annuity. And the reasonis that the company is taking on
some additional risk in that thesecond aspect, the indexed
(25:33):
portion of the annuity allowsyou to participate to a certain
degree in market gains. Sotypically, your investment can
also be tied to an index likethe s&p 500. Okay. And so the
way that works is basically theytake and track the index, the
(25:55):
s&p 500. In this scenario, thereare other indexes that that you
can be tied to. Anddepending on how much it goes
up, they will credit that toyour account. Now, if it goes
down or does doesn't go up by asmuch as the guaranteed amount,
they will credit that instead.
(26:16):
So that's the the other aspectof the insurance potentially is
your guaranteed growth.
Chris Holling (26:26):
So the idea is that, you know, they say, we're,
we're going to make sure thatyou match up with the s&p. And
if you were we're always goingto give you 2% No matter what,
but if the s&p does 5%, thisyear, then you get 5%. Is that
what you're saying?
Sean Cooper (26:43):
To an extent? Yes, that is the idea. Yeah, so you
get a little bit more, you getthat market participation for a
little bit more upside than youwould on a fixed annuity. But
your your guarantee is alsolower. So you're accepting more
risk for the potential of moreupside in
Chris Holling (27:02):
where your fixed might be a guaranteed 3%
instead of a 2%.
Sean Cooper (27:06):
Right.
Chris Holling (27:07):
Okay.
Sean Cooper (27:08):
Right. So, yeah, yep, you're giving up some, some
guaranteed growth forpotentially more non guaranteed
growth.
Chris Holling (27:19):
So I imagine the variable is something that's
exactly
Sean Cooper (27:24):
Before you get to that, actually, you're getting a
little bit ahead of me, because
Chris Holling (27:29):
I'm feeling so smart right now, Sean, I'm just,
I'm feeling it, the groove is,
Sean Cooper (27:33):
if you can hold on to it for me, hold on to it for
me. So because there's a veryimportant aspect of the fixed
indexed annuity that people needto understand, and that is, in
almost no scenario, are yougoing to get to participate in
all of the upside of whateverindex you're tied to?
Chris Holling (27:54):
Okay,
Sean Cooper (27:55):
okay, they almost, I have yet to see an annuity
contract that doesn't tetheryour upside, in some way, shape,
or form. Typically speaking,we're talking about a cap, a
market participation rate, or aspread, or potentially even a
combination of those of two ormore of those. And, you know,
(28:17):
insurance companies may havecome up with new fangled words
for these or new methods oftethering your performance as
well. But it's important tounderstand this when you're
buying a fixed index annuity,because your your upside is not
the full upside of whateverindex you're tied to. So to
(28:37):
explain this further, with acap, typically speaking, they're
putting a set amount to themaximum that they will credit
your account in a given year. Sosay for example, an 8% cap, if
the index is up 15% You'recredited 8%
Chris Holling (28:59):
Gotcha. Okay,
Sean Cooper (29:00):
if the index is up 5% You get the full 5% Okay, the
second would be marketparticipation rate. So, you get
a participate in a setpercentage of the market. So for
example, say 80%. So, if theindex is up that 15% we talked
about before you get 12%. If theindex is up 5% You get 4%.
Chris Holling (29:27):
And then and then just to reiterate on the on the
strict fixed side, it's just apercentage like if you do 15% in
the market, then you're stillholding it whatever your agreed
upon percentages.
Sean Cooper (29:41):
With fixed fixed annuity. You are not in the
market at all.
Chris Holling (29:45):
Okay, that's what I thought, okay.
Sean Cooper (29:46):
Yeah, the insurance company pulls everybody's money
and they invest it in basicallyfixed income investments. You
are no longer tied to themarket. Personally. The
insurance company is taking yourmoney, they're investing it in
their general account andcrediting you whatever their
(30:09):
their fixed rate is. And, yeah,market's no longer relative to
relevant to you at that point.
Chris Holling (30:15):
Whereas if it's a variable.
Sean Cooper (30:17):
No, one more one more
Chris Holling (30:19):
Dang it
Sean Cooper (30:20):
No, we covered the cap, we covered the market
participation, rate? There'salso the spread. So
Chris Holling (30:26):
okay,
Sean Cooper (30:27):
the insurance company could impose a spread on
what you're credited. So forexample, a spread of say, 2%. So
if the markets up 15%, you getcredited 13%, if the markets up
5%, you're only credited 3%. Sothey always take their 2%.
Chris Holling (30:43):
Okay.
Sean Cooper (30:44):
Lastly, if they were to mix some of these, so
say, for example, they did aparticipation rate of 80% with
an 8%. Cap, then again, in ourexample, 15%, we, you would get
the 8%, because you're of the 8%cap, so you get credited
whatever the lower of the twois, so in that case, 15%, you
(31:05):
get eight, but if you it's 5%,you get four, so the 80%
participation rate kicks in.
Chris Holling (31:13):
Okay,
Sean Cooper (31:14):
so all that makes sense?
Chris Holling (31:16):
Yes, I think so.
Sean Cooper (31:17):
So basically, what it is, is the insurance company,
because they're offering stilloffering you a guarantee, but
still allowing you toparticipate in the market to a
certain degree, they still haveto make their money. So they're,
they're getting a portion ofwhatever your participant, your
(31:37):
market gains are in order tooffset. So
Chris Holling (31:42):
it makes sense
Sean Cooper (31:42):
now, now you can fire away,
Chris Holling (31:44):
whereas if it's a variable? Well, no, I actually
just wanted to say that it'sinteresting, because I have not
had personal experience withwith annuities like we were
talking about, like we assumed,but I do have family members, I
do have people that I work withthat, that are involved in
annuities that have looked intothese things, I just didn't know
(32:06):
that there was a title attachedto it. And specifically, I know
that the fixed indexed annuityattracts a lot of them. So
that's, I just never had a nameto it before. So that's, that's
good to know. And so a variablewould be where you're literally
just ridding the market, Iimagine they probably have like
(32:27):
a cut off of like, you know, 1%or something on the low end, but
I guess I don't know that forsure. It's probably just a,
whatever happens to the markethappens to you kind of kind of
Gambit, I would guess.
Sean Cooper (32:39):
Yeah, yeah, to a certain extent, a variable you
are invested in the market. Soyou have basically two
components, the primarycomponent is the variable sub
accounts. So you're actuallychoosing what you invest in, or
potentially the insurancecompanies still choosing to a
(33:02):
certain degree,
Chris Holling (33:03):
sure,
Sean Cooper (33:04):
but you can actually choose amongst their
sub accounts, you can choosewhat you invest in. Oftentimes,
with a number of restrictions,but you have that flexibility,
you are actually participatingfully in the markets less the
many costs associated with anannuity. But that that gives you
(33:25):
the most upside potential of thethree.
Chris Holling (33:31):
Okay.
Sean Cooper (33:33):
Now, the second component is you can also, you
know, some some of thesevariable annuities will still
have some basic level ofguarantee baked in, but more
likely, you actually have to addthose on as a rider to the
contract. So you pay extra forsome sort of guarantee on top or
in conjunction with yourvariable market returns. And
(33:59):
typically, the way that works isthe company will evaluate your,
your performance and if youYou've done well, in the market,
you often will have some sort oflock in of your market gains and
those are known as step ups inbasis.
Chris Holling (34:19):
Okay.
Sean Cooper (34:20):
And then your your guaranteed rate is really only
relevant if the market doespoorly.
Chris Holling (34:28):
Sure,
Sean Cooper (34:28):
now, the guarantee can potentially work off of it
depends on the contract, but thethe guaranteed rate will often
work off of whatever yourstepped up basis is. But if the
market does poorly, initially,like in early years of the
contract, the chances of gettingmarket based step ups in the
(34:48):
future is greatly diminished andyou end up reliant on the
whatever the guaranteed rate is.
But yeah, you've got the basicidea is you're This has the most
upside potential withpotentially the least amount of
guarantee or insurance in termsof growth unless you tack on a
rider which can actually giveyou even more of a guarantee
(35:11):
than some of the the otheroptions out there, but you are
paying for it. And the other.
The other thing to keep in mindis, like I said, although you
have flexibility in terms of thesub accounts that you are
investing in, so the investmentsthat you're actually choosing to
(35:33):
put your money in, most annuitycompanies are still going to put
restrictions on that becausethey don't want too much risk on
their books. And so they mightput a restriction of saying that
your your overall account cannotbe more aggressive than say 60%
equities or stocks and 40% bondsor fixed income, or it might be
(35:55):
like an 8020. So 80% equity, 20%fixed income, that's fairly
typical. Now to most of the timethose aren't, those restrictions
are tight, tied in with a riderso you buy a rider for a
guarantee, they're gonna say,Okay, well, we're going to
restrict how you invest youryour assets to try to limit
(36:18):
their, their the risk that theyare taking on, even though
you're paying for it. As far asI know, there's only one
insurance company that used to,and I'd have to check to even
find out if they still do, butonly one insurance company that
offered unrestricted investmentoptions, regardless of whether
or not you put a rider on thecontract for a guarantee or not.
(36:42):
And personally, if you'reputting a rider on a guarantee,
or a rider on an annuitycontract for a guarantee, your
goal is to try to get as muchstep up in basis as possible,
which would lend itself sotowards being more aggressive,
which is exactly why they putall the restrictions on there to
(37:03):
prevent you from being moreaggressive.
Chris Holling (37:06):
Sure.
Yeah, that makes sense.
Sean Cooper (37:08):
So yeah, that is so immediate
annuities, deferred annuities,fixed annuities, fixed indexed
annuities and variable annuitiesin a nutshell.
Chris Holling (37:23):
Yeah, it's fun to say by the way, annuities in a
nutshell. Annuities, annuities.
Anyways,
Sean Cooper (37:31):
turtles in a half shell
Chris Holling (37:33):
two bits. No, that's perfect. Actually, I
think it's a it's a nice coverfor it. We did and we're gonna
wrap up here, everybody, I thinkunless there's something else
that you were,
Sean Cooper (37:44):
no, that's fine. I think we should save the rest of
our annuity conversation, youknow, when they make sense.
Chris Holling (37:50):
And that's that's what I was gonna say you Sean
Sean Cooper (37:52):
Sorry, I'm taking all your
Chris Holling (37:54):
So, yeah, we, I've got like one job here.
And you're just gonna take it?
No, we, we were talking aboutearlier. And we wanted to get
over the basis of what we'relooking at on what annuities are
the different possibilities ofthem, and what different
potentials of them meant. Andthen in the future, we want to
go over the actualconsiderations that you might
(38:16):
want, you know, what might bebest for you? What, what
different, you know, if thereare any things to watch out for,
and what types of things towatch out for. And that's why we
wanted to break this up, whichis why we're gonna stop it here.
That's all I was gonna say. Youwere gonna say the same thing.
That's all I was gonna say. It'sfine.
Sean Cooper (38:32):
Yeah.
Chris Holling (38:35):
But if you feel like we've covered all the
bases, then we're gonna wrap itup and have everybody come back.
What do you think, Sean?
Sean Cooper (38:43):
Sounds good to me.
Man. You don't have any otherquestions. It all makes sense.
Chris Holling (38:47):
I mean, I no actually, I think I think my
questions came organicallytoday. And
Sean Cooper (38:53):
Perfect
Chris Holling (38:54):
hit so well. I'm sure we'll have more on the
future one. So let's get uswrapped up. Thank you, everybody
for coming back out to yourphone. I immagine. And, and
listening to us to learn moreabout annuities today on the
truth about investing. Back toBasics. My name is Chris
(39:17):
Holling.
Sean Cooper (39:17):
And I'm Sean Cooper,
Chris Holling (39:19):
and we will catch you next time. Podcast
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(39:43):
just as much as we enjoyedmaking it.
Sean Cooper (39:46):
All content on this podcast and accompanying
transcript is for informationpurposes only opinions expressed
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Holling is not affiliated withfit financial consulting LLC nor
do the views expressed by ChrisHolling represent the views of
Fit financial consulting LLC.
This podcast is intended to beused in its entirety. Any other
(40:09):
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(40:29):
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(40:49):
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(41:11):
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Chris Holling (41:26):
What's that?
Sean Cooper (41:27):
Amarello isn't that yellow?
Chris Holling (41:30):
I think I think you're right. I definitely
thought of an armadillo when yousaid it though
Sean Cooper (41:37):
Naranje Is that orange? Or, or is that
the actual fruit? Or is it thesame thing? We're showing our
ignorance of the spanishlanguage
Chris Holling (41:46):
Well, I'm gonna show you exactly what I do
whenever I'm in this situation.
Donde esta la biblioteca
Sean Cooper (41:54):
Does that get aou out of a lot of asituations
Chris Holling (41:56):
anytime I'm backed into a corner in Spanish,
I just I stare them straight inthe face with that accent. And I
say that and normally people getit and they laugh. Move on. But
one time I had this mechanicgive me directions to the
library. He knew it too. But hewas and then he gave it to me in
(42:19):
Spanish.
Sean Cooper (42:22):
So the question is then did you understand the
directions?
Chris Holling (42:25):
Um no
Sean Cooper (42:28):
cerca de la.
Chris Holling (42:31):
But then after he said that I said something else.
equally ridiculous. But with adecent accent. And then he
apologized and said no, sorry. Ithink I think I'm spent. Like he
he was also showing his colorswhich was fun.
This is the truth about investing back to basics
podcast where we want to helpyou take control of your
personal finance and long terminvestments. If you're looking
for a way to learn the why andhow of investing, then you found
the right place. Thank you fortaking the time to learn how to
(00:23):
better yourselves. I guess Ishould I should introduce us
maybe. Welcome back, everybody,ladies and gentlemen, to another
episode of The Truth aboutinvesting back to basics. My
name is Chris Holling.
Sean Cooper (00:41):
And I'm Sean Cooper.
Chris Holling (00:42):
And I want to apologize for a little bit of a
hiatus we had we are still inthe same season. But I mean,
holiday season kind of happened.
We had some other stuff kind ofhappened at home in our life.
Everything is okay, calm down.
Nothing, nothing a little, longterm therapy won't fix. And and
(01:04):
we're still finishing outthrough the rest of this process
where we're talking about lifeinsurance, but into annuities
today, and we are touching onannuities today. Right, Sean?
Sean Cooper (01:15):
Right. Yeah. I might actually get some
transcripts up for, you know,the handful of people that care
about those two.
Chris Holling (01:22):
Yes, both of them.
Sean Cooper (01:24):
Yes.
Chris Holling (01:25):
And
Sean Cooper (01:26):
Does two qualify as a handful,
Chris Holling (01:29):
you know,
Sean Cooper (01:29):
I guess it depends on the two right?
Chris Holling (01:31):
We talked about that, where they're like a
bushel meant, like 56 pounds.
And then there's like, I usemurder for every opportunity. I
get like a Murder of Crows likea flock of geese.
Sean Cooper (01:42):
Which doesn't actually apply to anything else.
But that's fine.
Chris Holling (01:45):
Oh, it's great. That's why I think
it's hilarious. Like, Oh, canyou can you grab a? Can you grab
that? That murder of leaves overthere? Yeah, it's a big, it's a
big pile that murder over. I wastalking to Andrew, you know,
Andrew, Andrew, the other day,and we were having a
conversation about that. Andthere was shoot, I think I'm
(02:07):
gonna look it up for sure. Justso that I'm not completely
making it up. I thought therewas a group of something called
a rude
Sean Cooper (02:17):
I believe there is.
That's the one I always losesight of our can't remember a
bale.
Chris Holling (02:24):
a bale of hay.
Sean Cooper (02:26):
Yeah, except it's a group of turtles. So every time
somebody says, we're off, like aherd of turtles. It's actually a
bale. Yeah.
Chris Holling (02:37):
Dang it, I can't find it. Well, anyways, there's
some group of animals that isknown as a rude and we'll just
for the same purpose. We'll justwe'll just say it's turtles. And
then we were talking about howthat group of animals so in this
case, turtles would go by belike, Oh, it's a rude of
turtles. And instead of likesaying that entirely the animals
(02:59):
would go by and you go, Oh, thatwas rude. So the rest of the
time that we were hanging out,we'd, we'd see like a group of
people, or a group of animals,or something would go by, and
instead of like, Oh, look atthat murder of turtles be like,
Oh, that was rude.
(03:21):
So now so that's, that's what Ido now. When groups of whatever
go buy me a. That was rude.
Okay, well, this
Sean Cooper (03:28):
now we really digress. Anyway,
Chris Holling (03:30):
we're not. This is not that podcast. So I think
the best way to introduce ourprocess into annuities is
actually worded pretty well inthe same conversation we had
briefly right before we startedrecording this where Sean Sean
said, Hey, Chris, do you? Do youhave any? That's my Sean
(03:51):
impression. Do you have anyexperience with annuities? I
said, Well, if I can remember ifyou if you tell me what they
are, how much how muchexperience I got with them. So
I'm not I'm not feeling tooconfident on this one. But it's
(04:11):
a distinct possibility. I atleast know what they are. Maybe.
So, I would assume based on theword annuity that by definition
(04:33):
would dang it investor came upimmediately.
I was hoping
Sean Cooper (04:37):
Investopedia no use Investopedia
Chris Holling (04:40):
no but I want okay, Investopedia
Sean Cooper (04:47):
Are you are you looking for a
Chris Holling (04:49):
I was gonna find the root word of
annuity from annual meaningyearly and it t meaning so
that's That was the route I wastrying to get
Sean Cooper (05:01):
Gotcha.
Chris Holling (05:03):
According to Investopedia, the term refers to
an insurance contract issued anddistributed by financial
institutions. With the intentionof paying out invested funds and
a fixed income stream in thefuture. investors invest in or
purchase annuities with themonthly premiums or lump sum
(05:24):
payments. The holdinginstitution issues a stream of
payments in the future for aspecified period of time or for
the remainder of the annuitantslife. Annuities are mainly used
for retirement purposes and helpindividuals address the risk of
outliving their savings.
Sean Cooper (05:45):
Yep.
Chris Holling (05:47):
Thank you, this has been the truth about
investing back to. Okay.
Sean Cooper (05:52):
So now that you know the definition,
Chris Holling (05:54):
now that I know the definition, I have done
absolutely nothing withannuities.
Sean Cooper (06:00):
That's fair
Chris Holling (06:01):
personally. But you know, also, for whatever
it's worth, I don't feel likenot that I went looking for it,
but I don't feel like I ever hadthe opportunity. Like I never
had anybody that was like, Hey,are you interested in also
partaking in annuities? EvenEven though I've had life
insurance forever? If that makessense,
Sean Cooper (06:20):
no, it does
Chris Holling (06:21):
Iike has never come up.
Sean Cooper (06:21):
i It's a little surprising, but at the same
time, I can explain why itwouldn't have come up based on
your life insurance experience.
Chris Holling (06:30):
Because it's Term Life, and I'm just part of the
the cogs in the wheel part ofwell on the hamster wheel
Sean Cooper (06:38):
more specifically, because depending on what type
of annuity we're referring to,so life insurance only requires
to be sold only requires a lifeinsurance license in your state.
Whereas annuities depending onthe type of annuity typically
require some kind of FINRAexamination Series Exam. Six, I
(07:02):
think six is the one that getsyou that fixed annuities
possibly indexed annuities, andthen you have to have the seven
to do variable annuities. So ifthey have an insurance license,
but they do not have one of theseries examinations, then they
they're not bringing upannuities because they can't.
Chris Holling (07:21):
Right. Sure. I guess that makes sense.
Sean Cooper (07:26):
They don't have tools in the tool belt.
Chris Holling (07:28):
Right.
Okay. Well, fair enough. Sothat's why I've never come
across it before. So apart fromjust the the open textbook
definition, why don't you giveme a Sean definition? How's
that? Or is this the Seandefinition?
Sean Cooper (07:44):
No, that was just an explanation. Yeah, so there's
a couple different factors.
Basically, an annuity is acombination of an in investment,
and insurance annuities areoffered, in fact offered by
insurance companies, becausethere is typically some form of
guarantee depending on whatstage of the annuity, what type
(08:05):
of annuity, what riders aretacked in there, but there's
typically some side type ofinsurance built into it or added
to it. So it is the combinationof the two, and but outside of
those that insurance link, theother aspect of it that people
(08:28):
often relate to annuities is thetax deferral. So it is as you
pointed out, designed to be aretirement vehicle to provide an
income stream in retirement andbecause of that the government
does offer some tax benefit, notthe same level of tax benefits
(08:48):
that you would derive from yourtypical retirement accounts like
your 401k IRA or SEP simple 457403. B etc. You know, where you
either get a tax deduction whenyou make the contribution or it
comes out tax deferred when youwithdraw it as you would as it
would be with a Roth. But insideof that it does grow. Your
(09:13):
retirement accounts grow taxdeferred, and that is where an
annuity is somewhat similar inthat the investment earnings do
grow tax deferred, you don't geta tax benefit. When you make the
deposit. You don't it doesn'tcome out tax free when you
withdraw it, but it does growtax deferred. And depending on
how you pull the money out, youcan get it make it somewhat more
(09:35):
tax favorable, if you will, whenyou pull out the money, but
that's not a guarantee and it'sit's definitely not tax free
when you pull it out. So justthe tax deferral is the other
advantage as far as what peopleassociate with annuities.
Chris Holling (09:55):
Is this something that's only available to you in
whole life?
Sean Cooper (09:59):
No, it has Nothing to do with your with life
insurance.
Chris Holling (10:02):
Okay, I was just I mean rereading the definition
when it was saying it refers toan insurance contract issued and
distributed. I was trying tofigure out if it pairs with it.
And that's, that's why we'retrying to mix it into the
season. So where it's anadditional insurance contract?
Is that what you're saying?
Sean Cooper (10:19):
It would be a completely separate contract?
Chris Holling (10:21):
Separate contract?
Sean Cooper (10:22):
Yeah.
So
Chris Holling (10:24):
I'm talking to the guy, I'm sorry,
Sean Cooper (10:25):
you, I was just gonna say that
annuities and their, theirprimary, one of their primary
goals is to provide an incomestream for life. So throughout
the life of your throughout yourretirement. So in that regard,
it is designed to insure againstlongevity risk, so insure
(10:46):
against outliving your assets.
So from that standpoint, it isactually the exact opposite of
life insurance, where you'rewith life insurance, you're
insuring against prematuredeath, essentially, with an
annuity you're insuring againstliving longer than your assets.
Chris Holling (11:11):
Okay.
Sean Cooper (11:12):
And that also depends, because not everybody
uses an annuity in that way. Butthat is, what part of what the
insurance side of it is designedto do.
Chris Holling (11:24):
Okay. And, and so that's a, I'm talking to the guy
that is selling me lifeinsurance, or that I'd like to
buy life insurance from, andthey also offer annuities. And
so then we discussed thepossibilities of payout in
death, as well as thepossibility of exceeding a, a
(11:49):
level of assets and it helpscushion some of that. Beyond
beyond living out assets. Isthat what you're? I'm, I'm kind
of trying to piece it alltogether. What is, is a reverse
mortgage, an annuity? Or is thatlike a different approach that
people are trying to use inplace of an annuity?
Sean Cooper (12:09):
It would be a different approach in place of
an annuity. It's the reversemortgages designed to use for
income, potentially inretirement and hopefully, can
should be used. Hopefully, youcan't be out live, depending on
(12:30):
how you pull the money out.
Again, it depends, but it wouldbe an al an alternative, if you
will.
Chris Holling (12:37):
Sure. And that's and that's what we talked about
before I was just I was seeingif it was like a different
wording for that, or if it'ssomething that's completely
unrelated.
Okay,
Sean Cooper (12:45):
yeah, completely, completely different, but they
are alternative means ofgenerating cash flow in
retirement, potentially, again,the annuity also has an
accumulation piece to it. That'sthe investment side of it. So
Chris Holling (13:04):
and so to meet the criteria of an annuity, I'm
assuming you're, you're payinglike I could buy annuities
currently, right? And pay untiluntil a certain age or do I just
pay it?
Sean Cooper (13:20):
Ah, see, so you're getting at an aspect of it, and
that is that there are two basictypes of annuities. There are
immediate annuities and deferredannuities now and you and you
can pay for each of them inwell. Both of them can be paid
(13:41):
in as a lump sum. However, thedeferred annuity can also be
paid in stages. So with animmediate annuity, it has to be
paid as a lump sum, you have topay into it as a lump sum or buy
it as a lump sum, because thereis no deferral portion to it.
Whereas the deferred annuity,you can potentially invest in it
(14:05):
over time. So however often youwant to put money into it,
whether that's monthly,quarterly annually, whatever.
But yeah, so basically, there'simmediate annuities and
deferred, so the annuityannuitization actually refers to
the the product from an incomestream standpoint. So when you
(14:28):
actually start takingwithdrawals, so if it's an
immediate annuity, you have todeposit all the funds upfront,
because you're going to starttaking withdrawals right away.
And there's no point in takingwithdrawals and also depositing
funds at the same time. That
Chris Holling (14:44):
right
Sean Cooper (14:44):
doesn't really make sense. So and there's a number
of different ways. So typically,if it's an immediate annuity,
you're you're using it for aguaranteed stream of income
either for a set period of timeor for your life or for your and
your spouse's life or for yourlife and a set period of time.
(15:09):
There's a variety of differentoptions. But basically, the
annuity Company takes your moneyand says, Okay, this is the
interest we can earn on thismoney. This is your life
expectancy, if you want to takethis money as a guaranteed
stream of income for your life,this is the amount we'll pay you
on a monthly quarterly or annualbasis
Chris Holling (15:32):
based on the lump sum,
Sean Cooper (15:34):
correct.
Chris Holling (15:35):
Okay,
Sean Cooper (15:36):
exactly. But they're guaranteeing that so
they are taking on yourlongevity risk and the potential
market risk. So that's where theinsurance side of that comes
into play. As opposed to youtaking that same lump sum
investing it, however you yousee fit, and then withdrawing
money as needed, and you riskingthat you run out of money, the
(16:00):
insurance company is taking onthat risk for you. So that's
where it's an insurance contractin that you are transferring
risk. Okay, so obviously, you'repaying for that in some way.
Typically, when they're doingtheir analysis, and they say,
Okay, well, we can earn thismuch, by investing your money.
(16:25):
If it's an immediate annuity,it's probably in some sort of
fixed income. investmentvehicles. In fact, they have
some fairly strict guidelines,they have to follow from the
federal level to qualify. But atany rate, whatever they're
getting, is not what's beingapplied to your account in your
(16:48):
withdrawals, there's a cushionthere, that they're making sure,
again, that they have a profitand can stay in business. That's
where the actuaries come in. Sobut they're taking on that risk
of you, outliving your actualassets for you, because even if
you do outlive your lifeexpectancy, by, you know, such
(17:13):
an extent that your assets wouldhave dried up, the insurance
company is on the hook tocontinue paying if you took that
lifetime income option.
Chris Holling (17:24):
And I imagine the amount that you're paying the
premium or whatever it is, isdepend on how much of a risk you
are that you're going to run outof assets. Is that also part of
it?
Sean Cooper (17:37):
Yeah, they don't do, they typically don't do the
same extent that a an insurancecompany would per se, it's like
for for life insurance, I mean,but yes, there's, it's still
going to be based on your age,it's going to be based on your
sex, which impacts your lifeexpectancy, that sort of thing.
(18:00):
So that is going to be takeninto account. So where, and that
again, is kind of where it's alittle bit different. So for
example, for a woman, if she'sbuying life insurance, her
insurance premiums are going tobe lower than a man's because
her life expectancy is going tobe longer. So if we're talking
about two people that are thesame age, roughly the same
health, the woman's lifeinsurance premiums are going to
(18:23):
be lower because her lifeexpectancy is longer with an
annuity. Because we're insuringagainst the exact opposite, her
payout on an annuity is going tobe lower than a man's because
it's more likely that the manwill die earlier and therefore
have money leftover in theaccount.
Chris Holling (18:40):
Sure, yeah, that makes sense.
Sean Cooper (18:41):
So it's the exact opposite in that regard, which
is also why so if you, we talkedabout these options that we
talked about, for you can have astream of income for a set
period of time. So say 10 yearsversus your life, depending on
when you start that the 10years, you know, if you're 65,
and your life expectancy is 80,then the 10 year is going to
(19:05):
have a higher payout then basedon your life, then your life
expectancy would,
Chris Holling (19:11):
right.
Sean Cooper (19:11):
Similarly, if you ensure joint lives, so you
ensure you and your spouse,that's going to have a lower
payout than you alone.
Chris Holling (19:19):
Sure.
Sean Cooper (19:20):
And then again, if you you do your life plus a
period certain so that 10 yearsin our example, or 20, or
whatever you do, that's going tohave a lower payout than your
life alone is well.
Chris Holling (19:34):
Yeah, I mean, it all make sense.
Sean Cooper (19:35):
So, but that's just the annuitization phase. That is
when you actually start pullingthe money via annuitization. And
that it and that applies whetherit's an immediate annuity or a
fixed or a, sorry, a deferredannuity that just doesn't
address the accumulation phaseof a deferred annuity. So a
(19:58):
deferred annuity It actually hasa phase in which the account can
grow. So with the the immediate,you dumped in a lump sum, they
took it and they said, Okay,this is the income stream, we
can provide you based on yourselections of how long it's
supposed to last, right. Withthe deferred annuity, you're
(20:19):
investing either a lump sum oran amount plus monthly
contributions, annualcontributions, what have you,
and it grows over time. And thenlater on down the road. So
deferred, is when you decide,Okay, do I want to take this
money out as a lump sum? Or do Iwant to annuitize it, so get you
(20:41):
back to that same phase. Butthose are the two basic types,
so immediate and deferred. Andthen within the deferred realm,
there are three additional basictypes of annuities. So that can
be broken down into threeadditional types. And that would
be a fixed annuity, a fixedindexed annuity, or a variable
(21:02):
annuity.
Chris Holling (21:05):
Alright, and that's all based off
contributions or, sorry, I'mgetting ahead of it. What does
what do they mean, Sean?
Sean Cooper (21:13):
So those have nothing to do with the the
contributions that you make.
They have everything to do withhow the annuity grows, the they
have do with how it accumulates,aside from your contribution. So
you can still you still haveflexibility on your
contributions, whether you do afixed annuity, a fixed indexed
annuity or a variable annuity,the contributions are still up
(21:33):
to you. Whether you do a lumpsum or contributions along the
way, and you don't you don'teven have to have set
contributions like it doesn'thave to be I'm going to
contribute this amount on amonthly basis. You can go okay,
well, I have this much thisyear, I'm going to throw that
much in next year, next month, Ihave a little bit less, I'll
throw that in. So you have thatflexibility on the contribution
(21:56):
side, regardless, but not withthe immediate annuity, of
course, but with any of thesedeferred annuities, where the
fixed, the index and thevariable annuities differ is how
they grow. So with a fixedannuity, it is very much what it
sounds like your account valuewill grow at a fixed rate, a
(22:21):
stated interest rate guaranteedby the insurance company, now
that I use, stated and rate andguaranteed somewhat
interchangeably, because theinitial stated rate on a fixed
(22:42):
annuity contract is not alwaysthe guaranteed rate on the
annuity contract, meaningmeaning they might say, Okay,
we're offering a fixed annuityat 5%. So it will grow at 5%,
the guarantee is one and a halfpercent. So the insurance
(23:03):
company will make every effortto continue to pay the 5% on
your account. But if things gopoorly, they can reduce that by
a set amount annually and bydown to whatever that guaranteed
rate is now that guarantee,again, is backed by the faith
(23:27):
and paying ability of theinsurance company. So if they go
bankrupt, that guarantee isstill potentially out the
window. Now there there thereare reinsurance companies that
will then step in most insurancecompanies are required to pay
for reinsurance. And thenthere's other factors that come
(23:51):
into play, but the guarantee isbacked by the full faith and
claims of claims and payingability of the insurance
company. So, you want to makesure they are a strong company
that will actually be able topay their Guaranteed Rate
preferably a strong enoughcompany to pay their stated
interest rate whatever theyconvinced you to buy it at that
(24:14):
fixed rate also can be somewhatvariable in that many insurance
companies will offer a types offixed annuities where they pay a
higher rate up front or theythrow a bonus in initially to
essentially entice you to tojump on and then the stated rate
(24:36):
after that is lower. So
Chris Holling (24:43):
okay.
Sean Cooper (24:46):
But that that's the fixed annuity. So a somewhat
fixed but also somewhat flexiblefixed rate guaranteed by the
insurance company, fixed indexannuity would have an aspect of
(25:09):
the fixed annuity as it sounds,in that they have a stated rate
that the contract will pay onyour investment. And that that
stated rate is going to betypically quite a bit lower than
a fixed annuity. And the reasonis that the company is taking on
some additional risk in that thesecond aspect, the indexed
(25:33):
portion of the annuity allowsyou to participate to a certain
degree in market gains. Sotypically, your investment can
also be tied to an index likethe s&p 500. Okay. And so the
way that works is basically theytake and track the index, the
(25:55):
s&p 500. In this scenario, thereare other indexes that that you
can be tied to. Anddepending on how much it goes
up, they will credit that toyour account. Now, if it goes
down or does doesn't go up by asmuch as the guaranteed amount,
they will credit that instead.
(26:16):
So that's the the other aspectof the insurance potentially is
your guaranteed growth.
Chris Holling (26:26):
So the idea is that, you know, they say, we're,
we're going to make sure thatyou match up with the s&p. And
if you were we're always goingto give you 2% No matter what,
but if the s&p does 5%, thisyear, then you get 5%. Is that
what you're saying?
Sean Cooper (26:43):
To an extent? Yes, that is the idea. Yeah, so you
get a little bit more, you getthat market participation for a
little bit more upside than youwould on a fixed annuity. But
your your guarantee is alsolower. So you're accepting more
risk for the potential of moreupside in
Chris Holling (27:02):
where your fixed might be a guaranteed 3%
instead of a 2%.
Sean Cooper (27:06):
Right.
Chris Holling (27:07):
Okay.
Sean Cooper (27:08):
Right. So, yeah, yep, you're giving up some, some
guaranteed growth forpotentially more non guaranteed
growth.
Chris Holling (27:19):
So I imagine the variable is something that's
exactly
Sean Cooper (27:24):
Before you get to that, actually, you're getting a
little bit ahead of me, because
Chris Holling (27:29):
I'm feeling so smart right now, Sean, I'm just,
I'm feeling it, the groove is,
Sean Cooper (27:33):
if you can hold on to it for me, hold on to it for
me. So because there's a veryimportant aspect of the fixed
indexed annuity that people needto understand, and that is, in
almost no scenario, are yougoing to get to participate in
all of the upside of whateverindex you're tied to?
Chris Holling (27:54):
Okay,
Sean Cooper (27:55):
okay, they almost, I have yet to see an annuity
contract that doesn't tetheryour upside, in some way, shape,
or form. Typically speaking,we're talking about a cap, a
market participation rate, or aspread, or potentially even a
combination of those of two ormore of those. And, you know,
(28:17):
insurance companies may havecome up with new fangled words
for these or new methods oftethering your performance as
well. But it's important tounderstand this when you're
buying a fixed index annuity,because your your upside is not
the full upside of whateverindex you're tied to. So to
(28:37):
explain this further, with acap, typically speaking, they're
putting a set amount to themaximum that they will credit
your account in a given year. Sosay for example, an 8% cap, if
the index is up 15% You'recredited 8%
Chris Holling (28:59):
Gotcha. Okay,
Sean Cooper (29:00):
if the index is up 5% You get the full 5% Okay, the
second would be marketparticipation rate. So, you get
a participate in a setpercentage of the market. So for
example, say 80%. So, if theindex is up that 15% we talked
about before you get 12%. If theindex is up 5% You get 4%.
Chris Holling (29:27):
And then and then just to reiterate on the on the
strict fixed side, it's just apercentage like if you do 15% in
the market, then you're stillholding it whatever your agreed
upon percentages.
Sean Cooper (29:41):
With fixed fixed annuity. You are not in the
market at all.
Chris Holling (29:45):
Okay, that's what I thought, okay.
Sean Cooper (29:46):
Yeah, the insurance company pulls everybody's money
and they invest it in basicallyfixed income investments. You
are no longer tied to themarket. Personally. The
insurance company is taking yourmoney, they're investing it in
their general account andcrediting you whatever their
(30:09):
their fixed rate is. And, yeah,market's no longer relative to
relevant to you at that point.
Chris Holling (30:15):
Whereas if it's a variable.
Sean Cooper (30:17):
No, one more one more
Chris Holling (30:19):
Dang it
Sean Cooper (30:20):
No, we covered the cap, we covered the market
participation, rate? There'salso the spread. So
Chris Holling (30:26):
okay,
Sean Cooper (30:27):
the insurance company could impose a spread on
what you're credited. So forexample, a spread of say, 2%. So
if the markets up 15%, you getcredited 13%, if the markets up
5%, you're only credited 3%. Sothey always take their 2%.
Chris Holling (30:43):
Okay.
Sean Cooper (30:44):
Lastly, if they were to mix some of these, so
say, for example, they did aparticipation rate of 80% with
an 8%. Cap, then again, in ourexample, 15%, we, you would get
the 8%, because you're of the 8%cap, so you get credited
whatever the lower of the twois, so in that case, 15%, you
(31:05):
get eight, but if you it's 5%,you get four, so the 80%
participation rate kicks in.
Chris Holling (31:13):
Okay,
Sean Cooper (31:14):
so all that makes sense?
Chris Holling (31:16):
Yes, I think so.
Sean Cooper (31:17):
So basically, what it is, is the insurance company,
because they're offering stilloffering you a guarantee, but
still allowing you toparticipate in the market to a
certain degree, they still haveto make their money. So they're,
they're getting a portion ofwhatever your participant, your
(31:37):
market gains are in order tooffset. So
Chris Holling (31:42):
it makes sense
Sean Cooper (31:42):
now, now you can fire away,
Chris Holling (31:44):
whereas if it's a variable? Well, no, I actually
just wanted to say that it'sinteresting, because I have not
had personal experience withwith annuities like we were
talking about, like we assumed,but I do have family members, I
do have people that I work withthat, that are involved in
annuities that have looked intothese things, I just didn't know
(32:06):
that there was a title attachedto it. And specifically, I know
that the fixed indexed annuityattracts a lot of them. So
that's, I just never had a nameto it before. So that's, that's
good to know. And so a variablewould be where you're literally
just ridding the market, Iimagine they probably have like
(32:27):
a cut off of like, you know, 1%or something on the low end, but
I guess I don't know that forsure. It's probably just a,
whatever happens to the markethappens to you kind of kind of
Gambit, I would guess.
Sean Cooper (32:39):
Yeah, yeah, to a certain extent, a variable you
are invested in the market. Soyou have basically two
components, the primarycomponent is the variable sub
accounts. So you're actuallychoosing what you invest in, or
potentially the insurancecompanies still choosing to a
(33:02):
certain degree,
Chris Holling (33:03):
sure,
Sean Cooper (33:04):
but you can actually choose amongst their
sub accounts, you can choosewhat you invest in. Oftentimes,
with a number of restrictions,but you have that flexibility,
you are actually participatingfully in the markets less the
many costs associated with anannuity. But that that gives you
(33:25):
the most upside potential of thethree.
Chris Holling (33:31):
Okay.
Sean Cooper (33:33):
Now, the second component is you can also, you
know, some some of thesevariable annuities will still
have some basic level ofguarantee baked in, but more
likely, you actually have to addthose on as a rider to the
contract. So you pay extra forsome sort of guarantee on top or
in conjunction with yourvariable market returns. And
(33:59):
typically, the way that works isthe company will evaluate your,
your performance and if youYou've done well, in the market,
you often will have some sort oflock in of your market gains and
those are known as step ups inbasis.
Chris Holling (34:19):
Okay.
Sean Cooper (34:20):
And then your your guaranteed rate is really only
relevant if the market doespoorly.
Chris Holling (34:28):
Sure,
Sean Cooper (34:28):
now, the guarantee can potentially work off of it
depends on the contract, but thethe guaranteed rate will often
work off of whatever yourstepped up basis is. But if the
market does poorly, initially,like in early years of the
contract, the chances of gettingmarket based step ups in the
(34:48):
future is greatly diminished andyou end up reliant on the
whatever the guaranteed rate is.
But yeah, you've got the basicidea is you're This has the most
upside potential withpotentially the least amount of
guarantee or insurance in termsof growth unless you tack on a
rider which can actually giveyou even more of a guarantee
(35:11):
than some of the the otheroptions out there, but you are
paying for it. And the other.
The other thing to keep in mindis, like I said, although you
have flexibility in terms of thesub accounts that you are
investing in, so the investmentsthat you're actually choosing to
(35:33):
put your money in, most annuitycompanies are still going to put
restrictions on that becausethey don't want too much risk on
their books. And so they mightput a restriction of saying that
your your overall account cannotbe more aggressive than say 60%
equities or stocks and 40% bondsor fixed income, or it might be
(35:55):
like an 8020. So 80% equity, 20%fixed income, that's fairly
typical. Now to most of the timethose aren't, those restrictions
are tight, tied in with a riderso you buy a rider for a
guarantee, they're gonna say,Okay, well, we're going to
restrict how you invest youryour assets to try to limit
(36:18):
their, their the risk that theyare taking on, even though
you're paying for it. As far asI know, there's only one
insurance company that used to,and I'd have to check to even
find out if they still do, butonly one insurance company that
offered unrestricted investmentoptions, regardless of whether
or not you put a rider on thecontract for a guarantee or not.
(36:42):
And personally, if you'reputting a rider on a guarantee,
or a rider on an annuitycontract for a guarantee, your
goal is to try to get as muchstep up in basis as possible,
which would lend itself sotowards being more aggressive,
which is exactly why they putall the restrictions on there to
(37:03):
prevent you from being moreaggressive.
Chris Holling (37:06):
Sure.
Yeah, that makes sense.
Sean Cooper (37:08):
So yeah, that is so immediate
annuities, deferred annuities,fixed annuities, fixed indexed
annuities and variable annuitiesin a nutshell.
Chris Holling (37:23):
Yeah, it's fun to say by the way, annuities in a
nutshell. Annuities, annuities.
Anyways,
Sean Cooper (37:31):
turtles in a half shell
Chris Holling (37:33):
two bits. No, that's perfect. Actually, I
think it's a it's a nice coverfor it. We did and we're gonna
wrap up here, everybody, I thinkunless there's something else
that you were,
Sean Cooper (37:44):
no, that's fine. I think we should save the rest of
our annuity conversation, youknow, when they make sense.
Chris Holling (37:50):
And that's that's what I was gonna say you Sean
Sean Cooper (37:52):
Sorry, I'm taking all your
Chris Holling (37:54):
So, yeah, we, I've got like one job here.
And you're just gonna take it?
No, we, we were talking aboutearlier. And we wanted to get
over the basis of what we'relooking at on what annuities are
the different possibilities ofthem, and what different
potentials of them meant. Andthen in the future, we want to
go over the actualconsiderations that you might
(38:16):
want, you know, what might bebest for you? What, what
different, you know, if thereare any things to watch out for,
and what types of things towatch out for. And that's why we
wanted to break this up, whichis why we're gonna stop it here.
That's all I was gonna say. Youwere gonna say the same thing.
That's all I was gonna say. It'sfine.
Sean Cooper (38:32):
Yeah.
Chris Holling (38:35):
But if you feel like we've covered all the
bases, then we're gonna wrap itup and have everybody come back.
What do you think, Sean?
Sean Cooper (38:43):
Sounds good to me.
Man. You don't have any otherquestions. It all makes sense.
Chris Holling (38:47):
I mean, I no actually, I think I think my
questions came organicallytoday. And
Sean Cooper (38:53):
Perfect
Chris Holling (38:54):
hit so well. I'm sure we'll have more on the
future one. So let's get uswrapped up. Thank you, everybody
for coming back out to yourphone. I immagine. And, and
listening to us to learn moreabout annuities today on the
truth about investing. Back toBasics. My name is Chris
(39:17):
Holling.
Sean Cooper (39:17):
And I'm Sean Cooper,
Chris Holling (39:19):
and we will catch you next time. Podcast
disclaimer disclaimer. Thedisclaimer following this
disclaimer is the disclaimerthat is required for this
podcast to be up and running andfully functioning and moving
forward. This is going to be thesame disclaimer that you will
hear in each one of ourepisodes. We hope you enjoy it
(39:43):
just as much as we enjoyedmaking it.
Sean Cooper (39:46):
All content on this podcast and accompanying
transcript is for informationpurposes only opinions expressed
herein by Sean Cooper are solelythose of fit financial
consulting LLC unless otherwisespecifically cited. Chris
Holling is not affiliated withfit financial consulting LLC nor
do the views expressed by ChrisHolling represent the views of
Fit financial consulting LLC.
This podcast is intended to beused in its entirety. Any other
(40:09):
use beyond its author's intentdistribution or copying of the
contents of this podcast isstrictly prohibited. Nothing in
this podcast is intended aslegal accounting or tax advice,
and is for informationalpurposes only. All information
or ideas provided should bediscussed in detail with an
advisor, accountant or legalcounsel prior to implementation.
(40:29):
This podcast may reference linksto websites for the convenience
of our users. Our firm has nocontrol over the accuracy or
content of these other websites.
advisory services are offeredthrough fit financial consulting
LLC, an investment advisor firmregistered in the states of
Washington and Colorado. Thepresence of this podcast on the
(40:49):
internet shall not be directlyor indirectly interpreted as a
solicitation of investmentadvisory services to persons of
another jurisdiction unlessotherwise permitted by statute,
follow up or individualizedresponses to consumers in a
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investment advice forcompensation shall not be made
without our first complying withjurisdiction requirements or
(41:11):
pursuant an applicable stateexemption for information
concerning the status ordisciplinary history of a broker
dealer, investment advisor ortheir representatives, the
consumer should contact theirstate securities administrator
Chris Holling (41:26):
What's that?
Sean Cooper (41:27):
Amarello isn't that yellow?
Chris Holling (41:30):
I think I think you're right. I definitely
thought of an armadillo when yousaid it though
Sean Cooper (41:37):
Naranje Is that orange? Or, or is that
the actual fruit? Or is it thesame thing? We're showing our
ignorance of the spanishlanguage
Chris Holling (41:46):
Well, I'm gonna show you exactly what I do
whenever I'm in this situation.
Donde esta la biblioteca
Sean Cooper (41:54):
Does that get aou out of a lot of asituations
Chris Holling (41:56):
anytime I'm backed into a corner in Spanish,
I just I stare them straight inthe face with that accent. And I
say that and normally people getit and they laugh. Move on. But
one time I had this mechanicgive me directions to the
library. He knew it too. But hewas and then he gave it to me in
(42:19):
Spanish.
Sean Cooper (42:22):
So the question is then did you understand the
directions?
Chris Holling (42:25):
Um no
Sean Cooper (42:28):
cerca de la.
Chris Holling (42:31):
But then after he said that I said something else.
equally ridiculous. But with adecent accent. And then he
apologized and said no, sorry. Ithink I think I'm spent. Like he
he was also showing his colorswhich was fun.
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