BS Annuity Illustrations
Introduction to Annuities and Expectations
This is a topic that should have been covered a long time ago. Annuities are a safe asset, so you get the protection in exchange for some yield. However, plenty of annuities will illustrate numbers that defy logic, and anyone who thinks it looks too good to be true is probably right. Any of the contracts that I like can illustrate extraordinary numbers as well, but I make sure to set conservative expectations that can potentially be exceeded. If you expect to see the crazy returns, you will most definitely be disappointed.
Case Study: Annuity Illustration Analysis
I picked this topic a few weeks ago based on a conversation I had with a guy who is a few years away from retirement. Since then, I’ve seen several others, but I had already marked up the annuity illustrations and redacted all personal info, so I’m sticking with it. I pick on Allianz all the time, and I’ll do it again here, but I also see companies like SILAC, Nationwide, Athene, etc., showing some pretty high-flying index returns. It’s nice to look at big numbers, but it’s irresponsible for any advisor to set your expectations there.
Concerns with Annuity Proposals
In this specific annuity illustration, my first concern is that the advisor proposed that this guy put all of his money into the contract. To me, that should invalidate any other recommendations the advisor makes because he’s so far off, suggesting that for a first-time annuity buyer. Some of my clients do have all of their money in annuities, but it’s not something that I suggested; rather, it’s something they decide to do over time. And that’s what I would suggest for any of you. Start with something sensible, and if you like it, you can get another one.
Illustration Details
Let’s just use the numbers anyway so we can stick with the exact illustration as it was presented. It had the guy putting $1.6M into the contract, taking withdrawals of $112K annually from years 6-15, and then no other withdrawals were taken over the illustrated 30-year period. The ledger showed a remaining balance of $18,198,031 after 30 years. Wow! That is exciting. But is it realistic? We have to dig into the details to figure out whether that outcome is likely.
Understanding the Effective Yield
Some companies list the internal rate of return, so it’s easy to get an idea of total yield, but this one didn’t. So I had to make an external amortization schedule to calculate the effective yield. In this illustration, the annual effective yield comes to 9.739%. If you don’t know how to do this, then ask your advisor. Anyone who makes a living in this business should know how to do it pretty quickly.
Index Options and Crediting Periods
The contract offers more index options, but the illustration only used Bloomberg. Half the money was allocated to a one-year crediting period, and the other half was allocated to a five-year crediting period. The contract owner would have to wait five years to see if they made any money on that half. I’ve seen some bad outcomes with contracts focused on two and three-year crediting periods because longer terms are riskier. Five years is too long, in my opinion. I think a small allocation to it is fine, but I’d never recommend using it with half the money. That’s just a matter of opinion, and anyone who disagrees is not necessarily wrong.
Potential Risks and Adjustments
In this case, we can see yields of more than 60% credited in every other five-year period, and that is clearly the reason for the fantastic numbers. The backtesting obviously produced a time period that would come with some big hits that make for a lovely outcome. If anything changes slightly, then the results will be dramatically different. There’s just one more detail to add, and I’ll show you how it works.
Table: Potential Impact of Changes on Annuity Balance
| Effective Yield | Ending Balance After 30 Years |
|---|---|
| 9.739% | $18,198,031 |
| 9.0% | Approximately $14,198,031 |
Final Material Issues
The final material issue is that Allianz can arbitrarily add an allocation fee to several of the index options, including the ones used in this illustration. Currently, the rate is 0%, so that adds to the great returns. But the company can take it as high as 2.5%, and that would absolutely crush the contract. Most people don’t like the fact that cap and participation rates are adjustable, but imagine how much worse it would be if the company could also add a fee. It’s just another lever the company can pull that will affect the outcome.
Alternative Recommendations for Annuities
I’m not here to say this is a terrible contract. To the contrary, it’s just fine, although I’m not interested in recommending it. The purpose is to illustrate how ridiculous the illustration is. If the index doesn’t perform, then it won’t work. If rates adjust or a fee is imposed, then it’s going to make a big difference. There are far too many things out of the contract owner’s control, and I find it hard to believe that anyone would insinuate it might yield close to ten percent.
Recommended Companies for Accumulation Contracts
- Midland National
- Mass Mutual Ascend
- Athene
All have similar contracts to the Allianz proposal. All have some index options that produce crazy results. With the same inputs, all of them eclipsed the final account value in this illustration by quite a bit. None of them have mandatory allocation charges.
Conclusion: Evaluating Annuity Proposals
A lot of annuity proposals are complete BS. I see it all the time, and it gives me just another opportunity to educate people and tell them what to look for. If you see something that looks too good to be true, then put some pressure on the guy who proposed it. He or she needs to disclaim it appropriately and show you all the other possible outcomes. It’s the right way to do this, and there aren’t a lot of professionals who are interested in that. If you need me to look at it and help out, then give me a call.
Podcast about BS Annuity Illustrations
What You’ll Learn from This Episode:
[1:53] An annuity offers protection in exchange for yield, making it a safe asset.
[5:45] One-year options are less risky than two-year options.
[9:00] Understanding compound interest and how rates operate.
[9:17] The guaranteed minimum’s upside potential.
[12:12] The impact of rate changes.
[14:30] Bryan recommends these top companies for accumulation contracts.
[17:17] Deceptive annuity illustrations are prevalent.
Key Quotes:
[1:50] “An annuity is a safe asset you’ll get some protection in exchange for some yield.”
Resources:
Call Annuity Straight Talk at 800-438-5121 or schedule a call at AnnuityStraightTalk.com
Last Updated on January 7, 2025 by Bryan Anderson
