Annuities, Protection for Your Money & Even Adding Value!
Frankly, if you own a cellphone and drive, then you know the dangers of texting while driving! Besides the distractions and risking your life, it can cause devastating outcomes to you, your passengers and even personal property if you got in an accident! As a matter of fact, a friend recently got distracted by his cellphone while driving, and did get in an accident! Fortunately, he was lucky because no one was hurt. However, his car was totaled, and the other driver’s car suffered over $6700 in damages. Like many of us, he had car insurance, which proved to be a very good thing with this incident totaling over $30,000 in damages.
According to the National Safety Council, people average a car accident about once every 18 years. Yet, Bankrate.com estimates that the average car insurance premiums is roughly $1555 a year for something that may not happen but once in every 18 years! This means that assuming no changes in the average car insurance premiums, we may be paying over $29,000 for car insurance protection over the next 18 years, why? “It was the peace of mind knowing it was there!” or as my friend put it, “I don’t like paying for insurance, but I’m so happy that I had it with this accident!” Frankly, those sentiments are probably felt by most people when it comes to paying for insurance, because it’s not the expense, but protecting against something that could create a loss or cost money.
So what does all this mean?
- We are paying thousands of dollars each year in different insurance premiums for the peace of mind that having insurance can provide
- It also seems that we may be “pre-paying” for most insurance for something well advance of it actually happening, like an accident or claim; maybe even for something that never happens!
Over the years, I have spoken to thousands of people that own many types of insurance, such as health, car, business, disability, life insurance, long term care and so on. Many of these people, have investments as well. They have dreams of travelling, maybe getting a vacation home, spend time with their kids and grandkids, or many other desires. Unfortunately, they also realize that the future can be very uncertain, because life has unexpected twists and turns.
So why would paying for money protection with the stock market be different?
Ironically, the stock market has unforeseen consequences, which can cause risks and volatility as well. We only have to remember events like the tech bubble crash in the early 2000’s, the Great Depression of 2008, or the 34% drop in March last year with Covid, to see those firsthand. Therefore, it would seem reasonable that having some “insurance type protection” against stock market losses could provide significant peace of mind.
When it comes to protecting your money, a widely used strategy is annuity planning. I know that there are many good advisors that are providing value in many ways, but I also fear that they aren’t being totally fair when it comes to annuities. This is further puzzling when so many people are putting a premium on maintaining a “true fiduciary” perspective, but is their judgment clouded? “Misinformation” muddles the truth, and sometimes I hear:
“Annuities are too expensive or the commissions,”
“they are complex”
“they’re too restrictive”
Frankly, when I try to delve further in to these possible objections, I’m rarely given any answer where people truly elaborate, or their comments are truly based in fact. Yes, annuities have commissions and fees, but so does the managed money platforms that many advisors are recommending. If you took time to actually run some comparisons over 10 years, you would find that annuities fair very favorably. Ironically, the complexity argument holds little water too because I have seen time and time again where clients don’t actually know what they are doing with many of their assets, especially when it comes to risk! The “complexity” issue is really easy to overcome with proper education and full disclosure. Finally, too restrictive is ambiguous because when annuities are used properly, this shouldn’t be an issue.
According to the National Association for Fixed Annuities (NAFA), annuities provide clients with market-linked growth, along with SAFETY of PRINCIPAL! The problem is that once again Fixed Indexed Annuities (FIA) are often compared to a direct investment in the stock market, which is inaccurate. It’s funny when many studies have suggested because annuities are used to meet a specific need in the portfolio and can provide so many other bells and whistles, such as downside protection from a market correction, upside participation, long term care mitigation and lifetime income that is guaranteed. Like any investment, there’s a place in the portfolio when an annuity can truly add tremendous value!
I conclude that when the markets go up, Fixed Index Annuities will go up as well. However, as a bond alternative, a hedging strategy to reduce risk or even a lower yielding Certificates of Deposits alternative, an annuity solution can provide a lot of value!
It’s seems easy to make money when the market seems to be going straight up, but what happens when it goes down? Maybe the next time there’s isn’t a bounce back, or we experience another 20%+ drop.
My greatest fear is that this bull market has lulled investors into thinking that the stock market always go up! It’s created a false sense of security and we don’t need to do anything!
In our seminars, we discussed what it means to investors if the market drops 20% because it’s not simply going back up by 20% to get even, it’s 25%! A 40% drop means having to recover by 66% to get back to even! We show examples of the lost decade and what that meant to overall returns! Imagine having just retired with $1 million dollars in 2007, and using a typical 5% withdrawal strategy for retirement income, and your portfolio has dropped to just $660,000+ in just 18 months! How would that feel?
The stock market isn’t a ZERO Sum game, where everything is a winner and goes straight up! It might make sense to have some of your money protected? Why when we protect so many of other assets, but consider protecting some of our money? The choice is really about what’s best for you, fits your needs and accomplishes what you want to achieve! However, I do feel that those choices should be made with all the facts, giving investors the BEST solutions that will make sense for them. Annuities are around for a reason because they do provide value!!
Pat Moran has over 35 years of financial services experience and is a managing partner at Healthier Money. He is independent and specializes in financial education, reducing risks and tax favored strategies. He can be reached at (602) 571-1035 or www. Healthiermoney.com