How to Effectively Communicate the Risks and Benefits of Annuities to Clients | 7FAS Podcast Ep 245

On this week's episode, we're going to talk about how to explain effectively to clients the risk and benefits to annuities.

Hello, everyone. This is Chad Owen, the annuity sales coach host with sometimes the most, sometimes nothing. Yeah. Oh, but I just got back from an incredible two weeks of. Well, we went to Cabo, hung out with my wife for four days, and then rented an RV and went out with five guys. And we just were pretty dumb and did a lot of fun stuff, and it was so great. I returned the RV this morning and I'm like, what if I just kept driving?

I have everything I need right here except for my wife. But it's just. I'm not ready to come back and work yet. Good news. I got four weeks and then I'm ready to go again on something else. So, yeah, that means I need a hustle these four weeks big time.

So, risks and benefits of annuities.

There are no risks. No, there is if you don't do the right thing for the right situation. But totally. Yeah.

Okay, we're gonna get into it. I do want to just preface.

Get into it.

We're gonna get into it.

Let's go. Right.

I wanna.

Outside. Let's go.

This morning I had. I need to let some steam off right now. Yeah.

This time of year, we walk outside. Wouldn't even have to do anything. We'd be dripping in sweat.

Well, it's only 90 today. Yeah, that's actually not bad. We have had a crazy, awesome spring. I mean, the temperatures are still pretty low. The wildflowers are going crazy. If you haven't been to Texas during the wildflowers, you are missing out. All the roads are lined with just beautiful flowers. Yeah. And so. Yep. Okay, cool.

So annuities, to recap very briefly, if you don't know a lot about annuities, you need to go back and watch last week's episode where we actually talk about the different classifications of annuities. But again, very briefly, you've got basically two different classifications. One's based on the risk that the annuity actually has in itself due to volatility, and the other is based on when annuitization would occur. So the idea is that an annuity. So a product that can be annuitized, which is converting to a stream of income of sorts. Client would lose control of the. The money when you annuitize. But there are different types of products that allow you to have income that you don't have to annuitize. Again, go back and watch last week's episode but for the sake of today.

Yes, even the most important thing, if you are watching these on you on YouTube, you're missing out. Okay, go like subscribe and Caleb will give you something for free. We'll pick a random, a random person and we'll give something for free. Like subscribe. Ring the bell? Well, doesn't tell when somebody does that.

Oh yeah, I guess that's true.

This is why I run the operation. Okay, go back to it.

So for the sake of the conversation today, Chad and I are talking about specifically fixed and fixed indexed annuities. Because when you're dealing with variable annuities, there, there are inherent risks outside of what we're going to be discussing. You've got risk to loss because the way that interest is credited is via a sub account. That sub account could be mutual funds, index, all kinds of different things that actually have volatility to them. So you could lose value in a variable annuity. That's risk in a roundabout way and typical risk that we're familiar with.

But specifically doing air quotes.

But specifically to fixed and fixed indexed annuities, that's what we're going to talk about today. And really the way I think of risk in a fixed or fixed indexed annuity, it's, it's often what I would classify as the consideration to the insurance company. So when you have a contract with an entity or an individual, you have consideration both ways, right? It's a give and it's a take. Well, it's the consideration for the insurance company that creates the risk. There it is to the client. And generally what we're thinking of when we're thinking about risk and a fixed indexed annuity is going to be surrender period, fees, inflation potential, things like that. Now some of these you can't escape from. But let's talk real quick. Surrender, period.

But the reality this is you talk about surrender period or inflation, anything we have, it could be that.

Correct.

You know, surrender period. Okay, so an annuity has a given amount even if you earn nothing for the next 10 years. Let's say you have a guaranteed amount that you know you can get even with the surrender charge.

Correct.

Tell me you can do that in stocks, bonds and mutual funds. You can't.

Right.

So do I look at this risk? No, I don't. Because if you do it right with the right fact finding, you're going to have a significant amount of emergency funds savings. So it's like, is that really risk? I say stocks, bonds, mutual funds, commodities. That's what you talk about, risk. Because at least even if the market did nothing for 10 years. Because if the market's doing nothing for 10 years in an annuity, I assure you your stocks, bonds, mutual funds, commodities are going to be in deep trouble. Right. Because the depression was nine years. So that means we went to situation far worse than the depression. So I mean, I hate using the word risk and I know why you did this, but to me it's just not a risk. Surrender schedule is not a risk if it's done right.

If it. And that's, that's the key.

Yeah, well, I mean we got a bunch of dodos out there that you know will write the wrong product, the right, wrong situ. Wrong situation. And that's I would say, okay, there's your risk being a stupid agent. That's it. Honestly, that is being someone who doesn't care about the clients needs, putting your commission ahead of their, their well being. That's where the risk is.

Right.

But surrender charges to me are not a risk because if you're doing it right, you know what your surrender charges at any given year. You also know at any given year what you will be getting even if it earns nothing. So that's not a risk because if you explain it properly as, as you should while you're going through the product information, you're. You would let the client know that. And then if you have a terminal illness or long term care, depending on the age, it's 100% liquid anyway. You already made sure they had plenty of emergency funds and savings.

Yeah, there are products that don't have those benefits included automatically.

Just to clarify that's true. You do need to make sure that what is offered. I just talked to a client today about a long term care benefit. But I very clearly said if there's an account value.

Right.

You know, you have to clarify that. But I just, that's not a risk to me. A surrender charge is not a risk.

So I look at it as less about the charge because the charge means nothing if there's not an excessive withdrawal made.

Right.

And there are liquidity features built into it. You've got generally some kind of penalty free withdrawal, whether that's 5%, 10%, some weird one. Those are the two most common.

10%.

Right.

You know, there's a couple of times I've used the 5% because once again the product justified that particular limitation on the withdrawal rate. But obviously if I did that, I made sure they had more emergency funds and savings.

Right. So to Chad's point, if you're doing your Job. Right. And you're ensuring that they have more than enough in emergency funds and savings and then whatever is being placed into the annuity, you still have some kind of penalty free withdrawal benefit. There shouldn't be a situation in which the surrender fee was even a factor.

Yeah, exactly.

You, it really shouldn't be. But if it gets explained incorrectly, agents do things wrong, clients misunderstand and then they end up making some kind of withdrawal that is a partial surrender. Now you have quote unquote risk there. So I agree. It's, it's less about the way it's, it's, it functions and more about the way it's explained.

Yes.

And understood. We talk about fees too, right. We talk about there's all kinds of, I say all kinds, there's all kinds of different fees and variable annuities.

There are different kinds of fee fund fee, rider fee, admin fee, death benefit fee. I mean that's just some of them in a variable annuity.

Yeah. And you've got different types of fees on fixed indexed annuities. Even some MYGA products will not technically have a fee, but they'll reduce the rate to get a certain benefit, which.

Once again you have to look at that. What is the purpose of the benefit? Most of the time, if you ever take a MYGA and you have fees for certain benefits, you can find mygas that already have higher interest rates that don't have the deduction for particular benefits. The other thing I look at too is now I will never ever do an annuity that doesn't have some sort of withdrawal benefit. Sure, I won't. I mean there are, you're not going to lock it away. There's some that you'll have a penalty if you, if they die in the five years. I will not do that. The other thing look at too is when you're talking fees on a fia, the one thing I would caution you doing, I do not like using fees on indexes. Yeah, I think it's stupid. I think it's, you know, anytime we start to do stuff like that, we open the door for more regulation and you say, yeah, but look at the historical rate. Yeah, let's do that. Let's look at the historical rate. And yes, if you add the fee in there, supposedly it will make a little bit more, but in reality I haven't seen that as the case number one. Number two, I go back into. We have to be careful on what we allow in our products that will influence an outside organization's decision to try and regulate what we do. Hence the SEC. You know, when you look at the DOL rules, the 151A, when you look at all these, they are all trying to come after our product. And the more we try and look like a variable product, the more opportunity it is for those organizations to regulate us. So I think it's very important. I don't do fees on the indices. I would not do that. Fees for an income rider. Justifiable. You know, you're, you're doing something for a very specific purpose, but not on an indices.

Yeah, I agree. I think the more opportunity there are for losses due to volatility, the more aligned you become with the security. The more aligned you become with the security or the more similar you become, the more you position yourself for greater regulation. And other entities getting involved in an.

Insurance already trying to get hammered from all directions. So yeah, it's important. Let's just do what we do best. Safety, security, guaranteed income. You can never outlive with no risk to the market.

And I would argue that on the fee, if you're using index strategies that have a fee, I think it should technically negate your ability to claim upside potential with none of the downside loss.

Agreed. Because you will have a loss. Yeah. Now you could say what you do with an income rider. The income rider is a viable option. That is for a very specific purpose. A rider or a fee on an index that doesn't guarantee anything.

Right.

And so the income rider fee guarantees this. Sure. The rider on an indices guarantees nothing. So that's how I look at that.

You use the language, no risk to volatility. Yeah, but then the market's down in your point to point and you've got a 1% fee there. Well, they've lost 1% as a result of the volatility that took place. You can't really.

I would not do that.

The third one here is inflation risk. Now here's the thing though, is that you're not, you can't ever escape inflation risk.

No, there's nothing. Find me a stock bond, mutual fund, commodity, cd, anything that does true inflation protection.

Right.

You can't, because you know, they'll say, oh yeah, but we have the CPI index. Okay, so there was an 8.7, I think percent increase in Social Security which is supposed to be quote unquote tied to the CPI index. And the reality, we all know inflation was higher than that. True. I mean you had gas at $2 a gallon going up to $4 a gallon. And how did we end up with a 8% inflation. In reality it was so much higher. And then you got to remember shrinkflation.

True.

You know, why does that 16 ounce bag of chips now it's only 12 ounces but it still costs more people. Unfortunately when they're shopping, they don't look at the dollar, how much it costs per ounce. Right. And when we were super tight in money, and I still do that this day, I'll go, well, is it better to just jump up to the bigger size and I pay less per ounce? And yeah, it is. So I'm just, I don't care how much money you make, you want to be wise with your money, but you also got to be careful. You're paying for things that you don't realize. You're paying more for that. Once again, you just grab that bag of chips because you always have, and then you go, oh well, open up that bag now. That's why me is so important.

Sure.

You, you know how much it is per pound period. Yeah, it's not a guessing. You can't buy a 16 ounce steak. Well, let's be real, a 24 ounce steak and go, I got shrinkflation. No, you know the actual weight of that. So you can't just count inflation, you have to count shrinkflation.

Yeah, inflation, it's an inevitable thing. You can't escape it regardless of the product you're in. So an annuity, while you're not going to be subject, well fixed indexed annuity where you're not having index strategy fees, you are at least protected from the downside, you know, of the volatility.

Whereas in a market, right, in a, in a risk based type portfolio like last year, 2022, for example, we it was S and P down what like 20, 20 something 24% year to NASDAQ's.

Down 30, Dow's down 10. You know, I mean, but we have to look at that too. So you, you look at inflation. The way to help with inflation is to have more money than you need right now. In other words, to make more money than what you need right now helps with inflation. Then you say, well, things are going to cost more five years from now. Yeah, I can pretty much guarantee that. I mean, houses, everything, it costs more. So then you ladder annuities if you have to, or you have an annuity that has a high likelihood of increasing in income in small amounts over the next 10 years. That's really important. So you know, there's plenty of ways to do that. They used to do bond laddering, CD laddering, but now that doesn't work because CDs that are three years are the same rate as a five year. What used to be a CD that you get for three years was a lot less than what you get for a 10 year. And that's how they did CD laddering. But that doesn't work that way anymore. So be wise, do some income planning. And we offer that. You know, that's what our academy is all about is we have complete layouts of how you do income planning and teaching on that. You know, I can tell you I've done this now almost 19 years. I think July comes up on 19 years. And I can tell you the agents that are willing to invest in their education are always the most successful agents. And when you're talking about inflation, you need to have a plan. And the agent that comes in with that income laddering plan with a very clear, concise way of doing things is going to always get the deal over the agent that wings it.

I agree 100%.

100%.

100%. We're going to talk about that in.

I mean you agree with 99.9% of the things I say. If you do that, I'm going to have your head checked.

We're going to talk about process next week actually.

Okay.

Yeah. So yeah, a fixed indexed annuity. Fixed annuity, myga, variable stocks, bonds, mutual funds, none of them are perfect vehicles to prevent or hedge against inflation. But some can be better by not, not creating a scenario where you have a compounded loss. Right. When I think of what happened in 2022, okay, you talk about shrinkflation, that's essentially a loss in the value and an increase in the cost. Well, think about if you lose 20 something percent in a portfolio and you had an 8% inflation rate.

So your value wise a 2% fee on that Right. From your broker.

So value wise you're down over 30%.

Yep.

In an annuity.

Yeah.

Granted the annuities last year, I mean, most of which would have credited goose eggs or.

Well, unless you were at them in the fixed account. I put a ton of people last year in the fixed account and they all made their fixed interest rate, which they're very happy with.

Totally. When you compare that to a loss of 30 something percent in value, that's a positive small is just remember and.

Let'S clarify the 30%. If you lost 20% in the market, you had 8% inflation, you had a 2% fee, that's 30% loss. I mean we've got to look at numbers because once again numbers have no Emotions, they are what they are. They do what they do. They. You can't. You know, the motion only comes down to the emotion you put with it. Now, if you're a person, a retiree that's trying to figure out how to make money. Like, I had a client, she's 92 years old. She called me when I was on my vacation. And I, of course, talked to her because I do to my clients. And she's so concerned about outliving her money. And I'm going, okay, you're 92 and you have a ton of money. Yeah. Like, she has millions and. But she doesn't. They don't do a lot of things, so they probably spend $7,000 a month. And you have millions. I'm like, you're fine. But now I'm gonna go through and I'm gonna show her on paper just to give her some comfort and let her understand that. And I'm telling you, that's why when we talk about risk of annuities, indexed or fixed annuities, I just don't see a risk.

Yeah.

Now, could the company blow up and go away? Yes. But I go back to the same thing that nobody has been able to find for me. I personally, on a fixed annuity or fixed insurance company, I have not found any insurance company has disappeared since the latter 1800s. And why the latter 1800s? Because I couldn't find anything before that. Sure. So, you know, that might be a chat GPT question. Find me any. Well, but then I don't know if they're going to be able to define what a fixed insurance company. Fixed insurance company, to me, is somebody that just does fixed products. No variable. No variable life insurance, no variable annuities. And that's. That's hard to find. But I haven't found anybody and I haven't had anybody else find that either. So. Yeah. Yeah, I think that's it. Right.

That's all I've got.

Okay, good. Well, I hope this helps you guys. You have a great day and happy selling.

Sam.