Here’s Why You Should Love the Annuity Number, Not the Carrier Name

Here’s Why You Should Love the Annuity Number, Not the Carrier Name

Stan Haithcock
Sep 6, 2016

Annuities should be owned solely for their contractual guarantees. It’s important to shop all carriers for the highest guaranteed number and to treat all annuity types as commodities.

Annuities should be owned solely for their contractual guarantees — not who sells it. It’s important to shop all carriers for the highest guaranteed number and to treat all annuity types as commodities.

The new Department of Labor (DOL) ruling on financial advice will hopefully force the annuity industry’s hand on this common sense buying approach, but all consumers should be aware of how income annuities work. Here’s how and why what’s important are the terms of the deal and not who you make it with:

Lifetime Income Is an Actuarial Bet

Annuity income guarantees for life is nothing more than an actuarial bet with the issuing carrier. They are on the hook to pay regardless of how long you live, and that’s the primary benefit proposition. It’s a pension, pure and simple.

Even if you outlive the actuarial projection for your life and your annuity account is at zero, the income will continue as long as you are breathing. That’s the benefit proposition of an annuity income guarantee.

There’s No ROI Til You Die

Return on Investment (ROI) is an obsessive compulsive fixation with stock market investors. However, with lifetime annuity income guarantees, there’s no ROI till you die. Up until that point of your demise, that annuity lifetime income stream is a pure transfer of risk.

I always tell people that at their funeral, I will reveal the Return on Investment (ROI) percentage on their income annuity to their beneficiaries. Of course, that is after I sing my tear-jerking solo (“There’s no U-Hauls behind hearses”) at the ceremony!

Return of Principal + Interest = Annuity Income

Regardless of the annuity type, income is a combination of return of principal plus interest. If your income annuity is inside of a Traditional IRA, then all the income is taxed at ordinary income levels. If annuity is in a non-IRA (i.e. non-qualified) account, then only the interest part of the income stream is taxable.

This partial taxation of the income stream is called the “exclusion ratio” because part of that income is excluded from taxes. Another reason to shop all carriers is because exclusion ratios differ between annuity companies.

Potential Doesn’t Pay the Bill

Too many annuity buying mistakes are made by consumers who fall for the empty sale pitch promises of back tested, hypothetical, theoretical, or potential return scenarios. Annuities are contracts between you and the issuing carrier, so base your decision on that contractual guarantee.

Never buy an annuity for what it might do. Many agents and advisors try to steer consumers to high commission indexed and variable annuities as a one size fits all solution based on inflated proposal numbers. Don’t fall for the non-guaranteed hype. Always purchase an annuity for what it will do. That “Will Do” is the contractual guarantees.

Claims Paying Ability Is the Only Real Variable

Annuity guarantees are only as good as the issuing carrier backing them up. After shopping all carriers for the highest contractual number that solves for your specific situation, you should then focus on the ratings (A.M. Best, Moody’s, S&P, Fitch) and corresponding COMDEX rankings to confirm the financial stability of the carrier you choose.

Most carriers provide detailed financials on their website, or by phone or email request. In addition, your agent can obtain any information needed for you to make an informed decision. This includes a preliminary copy of the application, and a specimen policy of the actual contract to read before signing. Don’t be afraid to ask. It’s your money!

There’s No Such Thing as “the Best Annuity”

If an agent or advisor proclaims that they have “the best” or “the top” annuity available, walk out of the room or hang up the phone. As I mentioned previously, annuities are commodities and you should demand to see three-to-five different carriers that all contractually solve for your stated goal. Force that salesperson to show you the top national numbers, then you can start discussion the specific carrier names.

Shopping for Your Annuity Income Plane Ticket

Most of us shop all airlines when deciding to purchase a plane ticket, in order to find the best price available. Do you really care about the logo on the side of the plane? Of course not. The same strategy applies when shopping the for the best income annuity available for your specific situation, and there are no frequent flier points with annuity companies.

Whether you are looking for immediate income using a Single Premium Immediate Annuity (SPIA) or future income guarantees using a Qualified Longevity Annuity Contract (QLAC), Deferred Income Annuity (DIA), or Income Rider, always fall in love with the highest contractually guaranteed number. It’s the only way to annuity shop.