(upbeat music)
- Hi Doug Andrew here.
I'm here with my son,
also a financial strategist, Aaron Andrew
and we're gonna have a conversation
with you right now
because maybe you've heard me state on this channel,
three dimensional wealth
that I didn't think I would ever own an annuity.
Well, I may be rethinking that
because some things have been happening happening recently
that I was really surprised with
and so finally there are a few indexed annuities
that have higher caps than some indexed universal life.
I never thought I would see the day.
- Me too.
- So we're gonna talk about the differences
between an annuity and an IUL
cause an IUL is still my favorite vehicle
if you can qualify and if you can fund it
and put it in there and create tax free income.
So we're gonna talk about some of the pros and cons.
I'm going to simply summarize first of all
why I made the statement.
I've never owned one and I doubted I ever would
because an annuity, if you're not aware,
is like a savings account with an insurance company, right?
- Yeah.
- You're putting money into an insurance company
and the multi-trillion dollar insurance industry
is the backbone of America and the backbone of the world
and so annuities are usually deemed
some of the safest repositories for serious cash.
This is why sometimes school teacher pensions
and what have you or sort of designed
after an annuity type of a formula
where your money goes in either after tax
or maybe pre-tax, but it's tax deferred
but see, when you start accessing money out of an annuity,
it's now taxable.
Whether it's a qualified plan like an IRA, 401K, 403B
or whatever, or if it's any type of a qualified plan,
you're gonna have to pay tax on the back end.
- Yep.
- But if it's a non-qualified annuity,
you're putting in after tax dollars
and the growth is tax deferred
but when you start turning on income,
out of an annuity, is now taxable, right?
- The growth is taxable on a non-qualified
and the basis would be a returner principle.
But yes, the growth would be taxable.
- Yeah.
And it's, if you start turning on income, it's taxed life.
Oh, let me just simplify that.
That means last in, first out.
So in a real simple example,
if you put $500,000 into an annuity,
and let's say you were earning 10%,
just to keep it simple.
Theoretically, if you annuitized it immediately,
meaning you started to take income,
you ought be able to pull out 10% a year,
50,000 a year but that would be 100% taxable
because you're only taking out the interest
and the last, in the last amount you're earning, okay,
is the first money that's coming out.
Only if you start to dip into your basis or the principle,
would that not be tax because you've already paid tax on it
and so that's why, you know,
I go hm, golly,
index universal life, I can put money in
and I can take it out tax free even beyond my basis. Okay
- So, that's the IUL, not the annuity.
- Yeah, that's the IUL.
And so that's why I thought,
why would I ever want to own an annuity
when an IUL can actually gimme tax free income?
And historically IUL has actually had higher caps
than a lot of annuity.
So I thought why would I want that?
Even sometimes people go,
well an annuity doesn't have some of the fees
or charges that an IUL does in index universal life
cause you have the cost of insurance.
Well, for a long term investment,
I've usually been able to structure an IUL policy
even with the cost of insurance
to outperform an indexed annuity
with the same company until now, okay
and so this is why I wanted to record this conversation
with my son
so I'm going to ask you, Aaron,
what might be some considerations for somebody.
When is it appropriate
for somebody to maybe consider an annuity
versus maybe my favorite vehicle in an IUL?
- Yeah. Good question.
So basically, you know, a lot of factors go into it
but just some basic points is you might consider
a fixed index annuity or an index annuity
over an IUL if you're uninsurable, let's say,
or maybe your age.
Some clients that are at a certain age,
it makes more sense to do the annuity
cause of their amount of time they have
between now and their life expectancy
and some of them are uninsurable.
So we had, I had a client recently
that got declined on the life insurance,
the index universal life, our favorite
and so now we're going to our next favorite
which is the index annuity
and because of that, we can do it in now,
on them with out having to go through medical and so forth
and of course it's gonna be taxable.
But yeah, so looking at their age,
so sometimes people's age,
sometimes we can't put all the money into the insurance
nor do we want to, we wanna diversify into a few places.
Sometimes our money's tied up in IRAs and 401Ks
and it doesn't make sense with certain tax brackets
to take it all out
and so we're gonna leave it in that kind
of a vehicle under the umbrella of an IRA
but now you can put it into an annuity as an IRA.
So it's an IRA annuity, which you couldn't do it in the IUL.
So the IUL, you'd have to pay the taxes to get it in there.
So I would say the main things is age, you know,
not insurable or diversification
and now of course the rates which we'll talk about.
- Yeah, sometimes on this channel,
I've talked about when I ask people,
golly, would you like to accumulate a ton of wealth?
And some people say, you know,
I don't care about being rich necessarily,
I just want to be guaranteed that I'll never be poor
or that I'll never run out of income
and so I would say, okay, well,
there are some indexed annuities that actually,
if you put money into them
and you start taking an income,
if you outlive the projection and your actual cash value
or the money in there is depleted,
you still get income until you die
and so sometimes annuities for people
who want to be guaranteed they'll never run out of money,
might have been a good option.
Annuities generally don't increase in value when you die.
I think some annuities
might have some kind of death benefit
- Small death benefits
Or, but I mean the thing is,
what's kind of cool about 'em is there's,
there's so many types.
So again, we're not talking about variable annuities
that get the term of having a lot of fees
are those that are usually variable.
So the ones we're talking about, again,
indexed annuities or fixed index annuities,
they have a fixed account and they have indexing
just like the IUL where you link to an index,
you have a floor in a cap or you have others
that are the volatility control index accounts
that have high participation rates and no cap.
You got different options
and that's what's kind of neat is this,
it's like we can put the money into this
and the ones like you were mentioning
that have the guaranteed income,
there's some that have a 1% cost
that are gonna give you a rider
that have a a guaranteed income for life
that if the annuity even runs outta money
down the road and if you live a long time,
the annuity is gonna keep paying out till the day you die.
So they have guaranteed income, kinda like a pension
but a guaranteed annuity
is gonna have like a lifetime income benefit rider
that'll give you guaranteed income for life.
But some others that don't want that,
they just want a place to put it
for 5, 7 or 10 years is, you know,
they wanna put their money
into one of these annuities
and have a good return but not lose.
So that's what's so cool
is some of these out there right now have no fees.
They have indexing caps
of like 7.5% to 9% right now.
So what's happened recently in the market
is with the 10 year treasury, as you know,
with interest rates,
right now at the time of this recording,
interest have been going up recently quite a bit,
especially on the 10 year treasury and so forth.
So what's happened is the insurance companies
with new money rates, it's called with annuities,
they can react quicker with caps and participation rates.
So a lot of these annuities,
these fixed index annuities right now,
have gone up quite a bit in their caps.
So like right now with the S and P 500,
some of them have as high as 7 to 9% on their cap.
So guarantee of 0 and 7% to 9%
on the cap where IULs are right there in that same range.
Some companies are 7.5, 8
some are up to, you know, 9%
and so some of these annuities
have been down for years,
down in the 3% to 4% range on the cap
because interest rates have been so low
but with interest rates rising,
these annuities have reacted quicker
cause as these, they as insurance companies
take that annuity money
and it comes in immediately to new money rates.
They're offering way higher returns in these annuities.
So they have some good historicals,
I mean zeros the hero,
you can't lose and there's no fees, which is pretty cool.
So you have no cost.
So if the money, if the market goes down, zeros the hero,
your balance stays the exact same dollar amount.
Now the only thing to also consider with annuities
is they are tied up a little bit more.
You got a surrender charge period, you got, you know,
access to 10% of the account
up to the, you know, 5, 7 or 10 years.
So there are some things that tied up a little bit
so are things to consider when you look at it
but yeah, they can be used for guaranteed income,
they can be used for great returns right now without risk.
So there's just some really good features right now
with some of these that have really just happened,
literally in the last few months that is,
these rates are way higher
than they've been in years and years.
So it's pretty exciting.
- Yeah, that's probably what blew me away
because what's changed in the industry,
because of interest rates,
annuities because maybe they're more nimble or whatever,
they can respond with new money quicker
to interest rates as they start to go up.
Where insurance companies with IUL portfolios,
it takes a little while for them to catch up
with the interest rates going up.
- So they're using, okay, yeah,
they're using a portfolio rate,
insurance companies, so they have money
and old rates and new rates,
so they're gonna, they're gonna lag a little bit
but they're gonna raise their caps as well
but it's gonna take a little bit of time.
- So IUL as interest rates go up,
the caps will go up in the future.
I mean that, it's just a function of that
but right now is an opportunity
that I didn't think I would see this soon
where fixed indexed annuities with caps at 8.5, 9%.
If you can't qualify for an IUL policy
because of these reasons we've been talking about,
you may wanna consider and see an illustration
of an fixed indexed annuity
to show you the growth with that kind of caps
at 8.5% and 9% because it's an incredible strategy.
Indexing is one of my favorite strategies
and even if you can't get it totally tax free,
the next best alternative would be an annuity,
where you have zero as your hero and the market goes down
but you can experience gains clear up to a cap.
So I think it's an incredible opportunity.
We wanted to do a video on this as a conversation
because you probably heard me poo poo annuities.
Well the time has come where they may be a good choice
for some of you watching this episode
or maybe your folks or somebody that you know.
- Yeah and also
that some of these that have a cap of like 8% or 9%,
there's other strategies
where they have these volatility control index accounts
that might have no cap
and have like 140% or 200% participation rate
with certain index accounts right now
in those products as well.
- And annuities, they can score fairly well
on our scoring system.
In our book that we co-author together,
it's called the laser fund.
A laser fund is a max funded index universal life
but we do talk about annuities in there.
We actually show scores on liquidity, safety,
ready to return and the tax benefits of an annuity.
But you may want to claim a, your free copy of that book
and when you're in there, you go to laserfund.com
laserfund.com or you can click on the link below,
you contribute a nominal amount
towards the shipping and handling
and I'll fire out a copy of that 300 page book
but while you're in there, you can take advantage
of setting up a time to talk to a professional
like Aaron that can help you see the difference
between IUL and see if you can qualify, if you can't,
they'll be happy to show you
an illustration of a a fixed indexed annuity
and how it may be the answer you're looking for.