An Introduction To Annuities with Victoria Gibbs

In this episode, George is joined by Measured Wealth's resident annuity and life insurance specialist, Victoria Gibbs, CFP®, and Chartered Life Underwriter®. Together, they break down the fundamentals of annuities, including fixed, fixed indexed, variable, immediate, and deferred income annuities, while explaining key features, benefits, and potential drawbacks. Whether you're evaluating an existing annuity or considering one as part of your retirement strategy, this conversation provides a practical overview of the options available and the factors to consider.

Resources

 🌐 Our website: https://www.measuredwealth.net/

 📞 Phone: 603-431-1444

 🔎 Explore our range of services: https://www.measuredwealth.net/services

 📅  Schedule a meeting with our team: https://www.measuredwealth.net/contact

Transcript

0:01

Annuities aren't just one product. They're a whole category, and the differences between them can really matter. Today, we're unpacking the key types so you can better understand your options. The information and opinions presented in this podcast, including the views of guests not affiliated with measured wealth, is for general informational and educational purposes only and should not be considered investment, tax, or legal advice. Any references to specific securities, products, or services do not constitute a recommendation or endorsement. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Listeners should consult their own financial professionals before making any financial decisions. Measured Wealth Private Client Group is registered with the Securities and Exchange Commission. This registration does not imply a certain level of skill or training. Welcome to Financial Futures, a Measured Wealth podcast powered by the team at Measured Wealth in beautiful Portsmouth, New Hampshire. Each episode, we're bringing you fresh insights on retirement, investing, and everything you need to take control of your financial future. Whether you're preparing for retirement or already living it, we're here to help you make informed choices with confidence. To kick off today's conversation, here's your host, certified financial planner and chartered financial analyst, George Zaharopoulos. Hello everyone, I'm George Zaharopoulos. Today I'm joined by Victoria Gibbs. Vicky is the Measured Wealth Resident annuity and life insurance go-to person. Vicki is a certified financial planner and chartered life underwriter. We're colleagues, and Vicky will be joining quite a bit as a guest in the near future. This episode is part one of two on annuities. We've got a lot to cover, so grab your pen and paper. Vicky, are you excited? I can hardly contain myself. Excellent. So uh we got a lot to cover today. This is going to be an exciting conversation. Uh we're talking about annuities. Uh there's a lot to understand. Annuities can be complex. Let's just start out with very broad, and then we'll kind of narrow down, go into a little bit of detail. But let's start with the parties to an annuity. What parties are there when it comes to an annuity contract? Well, so an annuity contract to kind of even step back a little further, it's a contract between you and an insurance company. So we have the insurance company who issues the contract, and then we have for the parties on your side, we have who's the owner, who is the annuitant. Could be the same person. Is there a joint annuitant? Who are the beneficiaries? Yeah. Is there a definition of an annuity? What would be the definition? So basically being the insurance contract, the definition is it is a contract where you are providing to the insurer either a premium payment as a lump sum or a series of premiums, and in return, the company is guaranteeing you a guaranteed stream of regular income payments either immediately or at a future date, depending on what kind of annuity you're going for. Let's start with a few types of annuities. There's the fixed annuity, there's a fixed indexed annuity, there's immediate and deferred income annuities, you also have variable annuities. Tell us about the fixed annuity, which is also known as a multi-year guaranteed annuity. And uh also tell us about the fixed indexed annuity. Yeah. So let's start with the fixed. That's probably the the easiest to digest, the simplest place to start. So a fixed annuity, as it sounds from the name, the company is guaranteeing a fixed, predictable rate of return on your money, and it's for a fixed time period. So say current rates right now, if you were looking at a three-year fixed annuity, you can probably get something around 5%. So you're giving the company your money, they hold on to that for three years, it is growing at, say, 5% or whatever that particular rate is. And at the end of the three years, you have the option to roll it over, take it out, move it to another company, whatever you need to do at that time. But you know for sure, three years, you're gonna get that interest rate. So there's no surprises there. Fixed index annuities. Um, actually, I should take a step back with the fixed. So you're you're guaranteed the downside protection. With a fixed annuity, you're not in the market really. So you're just getting that fixed predictable interest rate. With a fixed index, there's potential to tie your earnings in that contract to a specific market index, like the SP 500, while also still offering that level of protection against any market losses. So with the the fixed indexed, you still have the downside protection, you're not going to lose any money. Your growth isn't a guaranteed rate, it's based on what the market is doing and what your specific allocation is. And those you generally have the option to review them at each contract anniversary and see if you want to make any changes to those allocation selections. Can those benefits be different with different annuity carriers? Yeah. So all the different annuity annuity carriers have their own different options on what they allow you to do. Say, um, you know, how long is your surrender period? What kind of withdrawals can you make while you're still within that surrender period? Should you need to access the funds? Um, generally, if you're funding it with qualified dollars, I think pretty much everybody will allow you to take out RMDs without penalties because you are required to take those. But other carriers, uh, a pretty common thing is they will let you take 10% of the annual contract value without any penalties. So there are ways to sort of access your funds during that surrender period without necessarily getting a huge hit with a penalty. How about annuities where you create income immediately or you defer the income for a number of years? Tell us about some options there, what what some payouts might might look like. I know there's life only, there's joint, there's period certain, but how do how do some of those things work? Yeah. So taking uh again a little step back, so the annuities basically go through the two main phases. There's the accumulation, which, you know, if it's an immediate annuity, you might not have any accumulation phase. You might just be turning on that income in a month or something. Whereas uh you go into the distribution phase, which is what we're talking about with the income. And then you can have, depending on the options that you select, there's the chance that you have guaranteed lifetime income payments for so long as you shall live, even if the account value goes to zero, they'll continue making that payment. Or there can be a joint income payments. So not just based on your own life, but based on you and a spouse. You can select a what's called a period certain. So you can say, okay, I want to receive the income for 10 years guaranteed or 20 years guaranteed or 15, whatever, whatever the number you select is. And if if I pass away, that income is still going to continue going on to the beneficiary. So there's different options, and it depends on, you know, your broader financial picture and what you're trying to accomplish. Okay. So a lot of what we talked about, the values are protected. They're not really, they're not really moving up and down with the market. There's some growth associated with some of those options you just mentioned, but there's also another annuity option called a variable annuity. This is where, you know, part of your premiums that you make into the annuity are divided up into what they call sub-accounts. And those sub-accounts can be invested in the market, you can invest in, you know, something that produces interest, or there's bonds in there. So, you know, your performance in that type of product is based on how you're invested and how well the market does. One of the main advantages to that is uh tax deferral. But with those products, there's also the potential to add on different rider options, meaning that you can add, if you choose, uh the ability to protect a future income stream whenever you decide to turn that income stream on. So it's kind of like creating yourself a pension, which is something you can also do with the fixed index annuity. We'll come back to that in a moment. But with that type of variable annuity with guaranteed income, it's important these days. Retirement income and secure income has become more important than ever these days, especially uh given the fact that there's not as many pensions out there from corporations. Um we have some uncertainties with social security. And uh these type of annuities have also become an important part of 401k options. Uh so they're becoming more mainstream where you can secure some income with even your 401k balance. That's not available in every plan. Um, it's probably not available in most, but it is an option that's being being added out there. So, you know, these are all important considerations. Uh we just talked about a rider on a variable annuity. There's considerations as far as cost involved in that. So generally speaking, when you purchase an extra rider or protection, uh, there's an extra cost. So all of that comes into play when deciding, when comparing one annuity product versus another. Yeah, I would say also with the variable annuities, when you're comparing one product versus the another, look at what the costs are behind the variable annuity, because those tend to have higher costs than, say, a fixed or a fixed index, because you have expense ratios from the underlying investments, you have administrative charges, you have um mortality charges. Uh so there could be a number of different things going in into it behind the scenes that are affecting what your overall performance looks like. And that's true. So the extra fees on our variable annuity is going to the insurance carrier. So that's so we know how they're making money on a product like that. Of course, you're paying for some guarantees, you're paying for some added tax deferral. Some products have lower costs than others, so it's important to to really do a side-by-side comparison. But on, say, a fixed indexed annuity, how how is an insurance carrier you know making money on that? I did a little dive into that myself, actually, and and noticed that um you know with a lot with with a heavy part of the premiums, they're investing in in secure bonds, highly, you know, high grade bonds. But they could also be writing some options on that money to generate premiums to be able to pay you know any interest credited. But it can take a while for an insurance carrier to to make a profit on that. Well, there's also there's also the pooled risk uh factor behind it. So with everybody buying contracts from this company, they're spreading the risk out between each person. So you might live until age 102 and they have to pay out income until 102. Another person might not be so lucky and and they might buy an annuity and only live until 70, 75, who knows. So part of the math behind that is the shared risk for the company. They're not they're not just placing all of their eggs in your basket. There's all of these people who are buying these contracts. So it's more averages. Vicky, what can someone do if they're in an annuity product now that may not be as advantageous as some new products that have come out recently? What can someone do in that situation? Aaron Powell Well, I would say the first thing is make sure that you have a recent statement for that annuity and maybe come talk to one of us. But the things that we would want to look at are how has that annuity been performing? Have you earned any interest in the last couple of years or has it been earning nothing? If that's the case, if the performance isn't what you're looking for, and maybe you're paying for riders that you don't need anymore, the next thing that I would question is, are you still in a surrender period? Because we don't want you to, you know, have to pay any penalties for perhaps taking a contract and moving it someplace else or just a straight-up surrender. Um so you want to make sure that while you're looking at the performance, you also want to make sure that you're not going to incur any penalties for doing something too soon. Um so another option if we're outside of that surrender period and the contract's not living up to your expectations of it is that you may be able to exchange it into another, a new annuity contract, which could be offering you better growth rates or better benefits that are more in line with what you're looking for at this stage in your life. Maybe you, maybe you're looking for something with a long-term care component that could be an option, or you want the guaranteed income, or you want it to double your benefits if you have a chronic illness. So there are new products that are coming out all the time and product enhancements to older products. So I would say that if you're out of that surrender period and you're not thrilled with what you've got, see what the options are out there. You may be able to reposition it without adding any other funds from your other accounts. You might just be able to move it over to another company and get something that's a better fit for your needs. That's a good reason to make sure you're working with someone who is knowledgeable about annuities because you want to really do that side-by-side comparison and make sure that you're not giving up benefits, lost benefits that are going to be lower, potentially lower than you know any benefits that you might be going into in a new annuity contract. So very important to weigh what you currently have versus what is potentially out there to determine whether that makes sense. Yeah. Some contracts even have uh like an enhanced death benefit. So your death benefit is higher than what just your accumulation value would be. So if that's something that's important to you, you know, you want to make sure that you're not losing something that you really want it to keep. Yeah, and I I I actually heard you mention something pretty interesting about a chronic illness type of feature. Tell us more about that. Yeah, so without going into specifics as to a particular company or product, there are products out there where if, say, you suddenly need assistance with it's generally two of the six activities of daily living, um, then there may be an option if you qualify. Of course, everything has a qualification, you would need a a doctor to certify that yes, you do need help with these things. But there are products where you can get kind of a bonus in the income that you're receiving from that annuity for a fixed amount of time. Um, some of them are as far as five years, but that could greatly increase your income stream from this annuity product at a time where you're suddenly having to pay a lot more because you need this help with your activities of daily living. So maybe you need somebody for home health care, or maybe you need to move into a nursing home. So that can be an important factor of the annuity helping to provide you with more income at a time when you really need the income because everyone knows long-term care and the cost of being older and getting medical help, they're steep. Yeah, that may not be a substitute for long-term care protection, but it could certainly help in that type of situation. Vicky, tell the listeners like what should they be looking out for when they look at an annuity carrier? Uh let's say they like the features uh of a certain annuity and they're thinking about purchasing an annuity. What should they be looking out for? Uh, what due diligence is really should happen? Yep. Well, if you've got your list of features that you like, um the next step I would say is, aside from having a discussion with a financial professional to make sure that you're considering all the options, you want to look at the financial strength of the company that's issuing this contract. So there are different ratings agencies and they all have their different sliding scales of how they rate things, but you generally want someone who's on the stronger side of the financial ratings because this contract, you know, especially if you're hoping for it to provide lifetime income for you, you want to make sure that company is going to still be around and that they have the finances to back up their guarantees and that they'll they'll be there when it's time for you to pay out all that income. I would say that just like you diversify with your investments, you can also diversify with your annuities. If you want different pieces, uh, so you can have one chunk where this is going to guarantee me this level of income for the rest of my life. Great. This one is going to provide some long-term care benefit pool number of dollars. Or it's just going to keep growing if I don't need those. Also great. Um, what else do you need? You could look at a qualified longevity annuity contract if you're in the situation where the RMDs that the IRS is requiring you to take out are more than you would really like, and your income is higher than you want it to be, and your tax bill is higher than you want it to be. There's an option where with the the qualified longevity annuity contract, which I will call it a QLAC from here on because that's too long of a phrase, you could take up to $210,000 of your qualified money, put that into a QLAC, and then you basically don't have to take the RMDs on that little chunk of funds until uh the latest age would be age 85. Um, so that's another little option with your planning. If you're layering different annuity products, maybe that's something to consider. All right, just to recap on that QLAC. So you can put up to 210 per the IRS, 210,000, into a deferred income paying annuity, and you can defer the income to begin until sometime up to age 85. And if it's post-RMD age, which is um 73 for some people born before 1960, or age seventy-five for uh individuals born after uh 1960 or later, they can defer or not have to not be required to take out a certain amount from their IRA to satisfy an RMD on that amount you put into the to the qualified longevity annuity contract, is that correct? Yep. The funds in the QLAC are excluded from your annual RMD obligation while it's in deferral. Okay. All right. Um and for everyone out there, you know, there's a lot of different annuities that we just talked about. I don't we didn't cover every single one of them, but what's important is that you know, if you work with a financial advisor, uh test it, you know, in a in a financial planning scenario. Okay. Determine if it makes sense, you know, to have an annuity, you know, where does it fit in your plan, and then uh determine the features that you want. You know, you've got side-by-side comparisons to do with uh one carrier versus another, one feature versus another. And you've got due diligence to do on any insurance carrier that you that you're thinking that you're considering using. So just to recap all of this, we've talked about you know a fixed annuity, also known as a multi-year guaranteed annuity that pays interest. Okay. Uh we've got fixed index annuities where you can allocate money to different indexes, participate in the upside, have some have protection from the downside. Again, you might be subject to caps on that. You've got variable annuities where you can allocate your money to investments that are going to move up and down with the market. There's riders that you can participate in on most annuity contracts. You've got income annuities, whether you start right away or you defer to a later day. So there's a lot here to consider. Vicky, did I miss anything? I think we've pretty much covered it. Just uh it comes down to there's a lot of different nuances. Well, Vicky, this has been great. We've covered a lot. Uh clearly annuities can be pretty complex, but the right advisor can help you review options and determine if an annuity is right for you and what type of annuity would be right for you. Um, do you already own an annuity? If so, speak to your advisor. Make sure that annuity still makes sense for your situation. If you have any questions for us, we'd love to hear from you. Vicky, thanks again for joining. It's been a great pleasure. And thanks everyone for tuning in to Financial Futures, a Measured Wealth Podcast. If you enjoyed today's episode, be sure to follow or subscribe on your favorite podcast app so you never miss an update. Want to learn more, get in touch, head over to measuredwealth.net where you'll find prior episodes, helpful financial planning guides, and more. You can also call us at 603-431-1444 or email at info at measuredwealth.net. That's info at measuredwealth.net. Thanks again for listening, and remember, the future will someday be the present.