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Dan's Blog

The Annuity Letter (Annotated) 📄

March 10, 2020

An annuity pitch letter forwarded to us has generated a lot of interest. It was the subject of my last blog post, and our latest podcast. By popular demand I have pasted the letter in its entirety below. We have, of course, stripped away the writer's name, firm and contact information. The one addition we have made is that my podcast partner, Scott Dauenhauer CFP®, has added some feedback. 

The Annuity Letter

"Coronavirus is Decimating Global Stock Market," "US Stocks are Plummeting in the Face of Corona Epidemic," "Corona Pandemic: Global Markets Brace for Decimating Losses"

These are just a few headlines you may have noticed in the last few days.  Sounds frightening!

Hi, this is XXXXXX XXXXXXXXXX from XXXX & Associates Financial Services. In case you haven't been following the financial markets lately, here are a few statistics to get you up to speed:

  • The S & P Financial Index has dropped around 13% in the last week and a half.The index has been down every trading day for 7 days in a row
  • The Dow Jones slide last week was the worst week since the 2008 financial meltdown. It's also the 5th worst week for the Dow in its 124-year history!
  • The Dow keeps getting slammed by fears that the Coronavirus will deliver a 'supply shock' that central bankers can't fix.The success of a company is dependent on its ability to receive supplies necessary to fulfill their demand. This will become a crippling problem if workers are unable to come to work!

The Coronavirus is saturating the news every day!

This virus has been spreading to many countries much faster than expected.  Currently, it has affected at least 59 different countries, and the number of cases is increasing rapidly!

So far, there have been multiple cases reported in the U.S., with two deaths so far.  However, experts predict it's only a matter of time until the Coronavirus makes a deadly impact on our country!

We've all heard tips on how to protect yourself physically from contracting this disease.

But what about your financial health?  Could your retirement savings be "decimated" by this super virus as well?

Well, instead of watching your retirement portfolio sink every week with the stock market… I have a great solution for you!

Annuities to The Rescue…

I'm talking about a group of financial products called Fixed Index Annuities. We'll refer to these as annuities for short.

Without going into detail here about what annuities are and how they work, here are just a handful of reasons why you may wish to own these investments:

SCOTT: Indexed annuities are by definition NOT "investments", they are savings vehicles. They are not considered securities and are not regulated by FINRA or the SEC.

Once you buy one of our recommended annuity products, its value can only go up! It's guaranteed not to lose money.

SCOTT: It's simply not true that fixed indexed annuities will only go up in value. Since their crediting rates are tied to a specific index, it's possible that the index does not increase in value (this has happened with Guggenheim) for many years. If this happens, it's possible for the return to be 0% on many products. This is unlikely, but possible. They are guaranteed to not lose money, however that assumes you do not surrender the product prior to the end of the surrender period, if you do, you could end up with less money than you started with. It's also true that fixed annuities are guaranteed, however the guarantee is only as good as the issuer. If the issuer of the annuity contract is weak, so is the guarantee. These products are not backed by the FDIC or any other federal agencies.

When the stock market goes up, its value goes up with the market. But if the stock market drops, it holds its value.

SCOTT: This statement is incredibly misleading, bordering on fraud in my opinion. Fixed indexed annuities are just regular fixed annuities, but instead of the insurance company declaring a rate that they will pay for a particular time period, the rate is determined by a formula that is linked to the performance of some sort of market index (generally the S & P 500, but increasingly esoteric indexes).

What is left unsaid is that the value of the FIA does not go up fully with the value of the market. The crediting rate does not include dividends and does include mechanisms that limit the amount of upside. In some cases the limited upside is just a fraction of the actual return, in other cases it's more substantial. Generally, commissions and company profits take most of the return opportunity, leaving the policyholder with a much smaller crediting rate.

While it's true that a fixed indexed annuity won't lose money if the stock market drops, it's only true because at no point in time is ANY of the policyholder's money invested in the stock market. Checking accounts don't lose money when markets go down, neither do savings accounts, savings bonds, certificates of deposits or traditional fixed annuities. None of these products advertise downside protection as a "feature" or "benefit" because none of these products are exposed to the stock market. Fixed indexed annuities aren't in the stock market, therefore advertising them as providing downside protection is an incredibly misleading claim.

Our recommended annuities include a guaranteed income built into the products, that will never go away! Compare that to your mutual funds…they have no guaranteed income, and of course, their value can drop if the markets tank.

SCOTT: This is an apples and oranges comparison. Mutual funds are investment products and are regulated by the SEC and FINRA and can fluctuate in value. Mutual funds have a variety of different investment options to choose from with varying characteristics from very conservative to very aggressive.

Mutual funds are not savings products, they are investment products, the comparison is again misleading.

As for guaranteed income, this can be purchased via an immediate annuity with mutual fund proceeds at anytime. People who desire guaranteed income don't need to buy a fixed index annuity to get it.

The cost to you is very low and often cost nothing at all!

SCOTT: This is misleading at best and fraudulent at worst. Have you ever heard of a product that has no costs? All products have costs, whether you can see or identify them or not is another story. Fixed annuities and their subcategory fixed indexed annuities do not have explicit fees, instead the costs are taken via what is termed by the insurance industry as a "spread".

Essentially, the insurance company credits you with less than the total return they make on your money. They generally target about 2% to cover commissions and costs, sometimes higher, sometimes lower. Just because you don't see this, doesn't mean the cost isn't there.

It's disengenous to say these products do not have costs.

In addition, if you want to get out of these products early, there is usually a surrender charge that is a percentage of the amount of money you contributed to the policy, it can range up to 18%, but is generally in the 8 - 12% range

These are just a few highlights to having an annuity be part of your portfolio!  There will be more benefits to owning our recommended annuities, depending on your marital and financial situation. I'd be happy to discuss these benefits with you next time we meet.

We can fit you with just the right annuity for your situation!

Wouldn't it be great to have more peace of mind about your retirement savings?

Please call my office at XXX-XXX-XXXX right away to set up an appointment, where I will personally go over all the options with you.

To Your Financial Health,