Product Review: Safety, Growth and Income
A few of the most popular annuities are presented by many agents as the solution to every single issue in retirement. For anyone who doesn’t know, the five keys to retirement are income, market volatility, inflation, control of your money and legacy. It takes a strategy to solve for all five and no single product or asset can do it alone. Still, too many agents and advisors pitch some of these products as the solution to everything.
Allianz takes the cake with the majority of sales and Athene also has one that comes with a big bonus and promises everything a retiree could dream of. It is not that there’s anything wrong with these annuities, rather that the true purpose is very specific and not nearly as general as many would have you believe. Annual sales figures for these prove that use of either product is far more widespread than appropriate. A lot of people buy these contracts for the wrong reasons and without fully understanding the restrictions.
Both companies offer an enormous bonus that many in the past have been told is just free money. That’s not true and at no point do you get to put the bonus in your pocket. Allianz has the 222 that requires a ten year deferral to receive benefit from the bonus and Athene has the Agility series with a seven or ten year deferral option. The catch is that the bonus only enhances lifetime income after the deferral period so it does translate to better cash flow but you can’t just cancel the contract and walk away with the extra cash.
Another way to use the bonus is by way of a death benefit. The cash value plus bonus will pay to your heirs if taken over a five year period. I’ve known plenty of people who just buy this and let it sit with a plan to pass it to the next generation one day. That’s a perfectly acceptable use for the deal and anyone who does this has to be okay with setting a chunk of money aside and never touching it again. I don’t focus on selling this benefit because I expect the long-term rate of return, including the bonus, should be in the neighborhood of 4% and maybe as high as 5%. You can likely do better elsewhere with something simpler but go ahead and do it if that phantom bonus makes you feel warm and fuzzy.
This brings me back to the title of this newsletter: Safety, Growth and Income. You can do that with these contracts because one major benefit is that there is no fee on the contract. What you need to remember is that if you want all the benefits wrapped into a single product then you have to accept the fact that it’s kinda good at several things but not really good at any one thing. The jack of all trades is the master of none.
Safety is covered by any annuity from a good company. Growth is typically better when fees haven’t been deducted and income is a free addition to the contract. But neither growth nor income is as high as it would be if you went with a contract that focuses on one of those benefits individually. Maximum guaranteed income can be found in one contract and maximum growth potential in a completely different one. Blended benefits lead to reductions all the way around. One person sitting in a rowboat is going to ride higher in the water than three people in the same size boat.
Index and variable annuities with guaranteed lifetime income riders have always been sold as the product with guaranteed income and a residual value that can be left to heirs. It’s mostly true but fees reduce growth potential and make a residual very unlikely after about 18-20 years. Variable annuities are the worst for that given the very high fees and market volatility. When fees are deducted annually you are not even guaranteed to get all your money back. That depends on how long you collect income and what the underlying account performance is. It might happen but it is not guaranteed.
For all I’ve said about the Allianz and Athene contracts, the main redeeming quality of either is that you are essentially guaranteed to at least get your money back. Assuming you don’t live long enough to collect income equal to your initial investment, it only takes a minimal yield to return the balance of payments plus some yield to your beneficiaries. No fees make all the difference in this one. But the ten year deferral requirement is what held me back. I never sold Allianz and have only used Athene a few times. The Athene contract illustrates much better for anyone who is curious.
Allianz solved this problem a few years ago when they introduced the Allianz Benefit Control (ABC). It essentially works like the 222 but has a smaller bonus and allows a person to take income from the additional credits in any year so the deferral requirement doesn’t get in the way. Even still, lots of agents continued to sell this contract like the 222, free money on the bonus and additional credits. It wasn’t true and lots of consumers were misled.
I wasn’t swayed by the new product from Allianz because I already had one that could do the same thing. And it works a fair bit better in all areas. Safety from a really good company, growth potential that beats Allianz or Athene, guaranteed income in any year and no fees to deplete the account value. It’s called the IncomeVantage Pro from Midland National Life and it’s been around for a long time. Those who sell the others claiming there is nothing else like it have not done their homework. We are all required by law to give you options but unfortunately there are plenty of agents who don’t.
If you want safety, growth and income with one product, you have to accept less income. None of the products mentioned have the highest guaranteed payouts. It’s a smaller guarantee which leaves a larger remaining balance for your heirs. Pulling less out leaves a larger remainder. No contract fees mean you get it all back. Each of them has potential to significantly increase the payouts based on performance and total years of deferral. Midland has the highest growth potential which is roughly 30% better than the other two. Take your pick but look at all options before you commit to a lifetime deal.
The way I sell any of these is to tell people to plan on the guaranteed minimum income amount. If that works for you then any performance that increases the income payout will be gravy. A lot of people who buy haven’t been shown anything but the hypothetical income page in the illustration. That’s why plenty of them have been disappointed when learning the truth years later.
I’ll explain more about the Midland contract in the podcast. It’s a good option for safety growth and income all in one product. If any of you would like to see it or go deep into a comparison then make an appointment and we can dig into it.
Enjoy your weekend!