Final Expense IMO's for a Beginner

[Newby]

Man, this place has changed.


Going to wager your FE book is not real heavy with welfare homes.

I had a mix. I've got doctors, lawyers, and business owners as clients and also the poorest of the poor. But I always felt my strength was in the middle class on up rather than the dysfunctionally poor. I've always sold in a way that uses common sense and logic. I like people that can follow logic.

Financially dysfunctional people don't respond as well to logic. They make impulsive decisions based on strange emotions and actually respond well to a strong salespersons personality pushing them which has never been my style. I admire guys who can naturally sell those people in that way IF they are selling products that are good for the client. Because left to their own devices they always make crazy stupid decisions. And I've sold plenty of those cases myself. But those are the ones that the real top performer FE only guys are going to be more effective than me.

 

[LostDollar]

There are plenty of people that would be in the lowest income group due to the fact they are retired and SS is their primary or even sole source of income that have several thousand in savings. They were not in the lowest income folks during their working days.

I tried the other day to read some information about annuities and I couldn't really follow it very well. One of the things I am unclear about is whether, for the holder of an annuity, it represents a way to save with a higher return than the local Savings and Loan, or whether it represents a way to convert a limited sum of money which could "disappear in an instant" into an income stream, of some amount, which they can then count on for the remainder of their lives.

Is the income stream idea something that makes an annuity attractive to these people?

(I don't know if they even have Building and Loans or Savings and Loans any more, but that's where I started and the term that is really ingrained in my mind.)

 

[KRobby]

I tried the other day to read some information about annuities and I couldn't really follow it very well. One of the things I am unclear about is whether, for the holder of an annuity, it represents a way to save with a higher return than the local Savings and Loan, or whether it represents a way to convert a limited sum of money which could "disappear in an instant" into an income stream, of some amount, which they can then count on for the remainder of their lives.

Is the income stream idea something that makes an annuity attractive to these people?

(I don't know if they even have Building and Loans or Savings and Loans any more, but that's where I started and the term that is really ingrained in my mind.)

There's Immediate annuities and there's deferred (fixed, fixed indexed, & variable)..
Most here are probably selling a deferred fixed indexed or possibly a deferred fixed.

 

[Newby]

I tried the other day to read some information about annuities and I couldn't really follow it very well. One of the things I am unclear about is whether, for the holder of an annuity, it represents a way to save with a higher return than the local Savings and Loan, or whether it represents a way to convert a limited sum of money which could "disappear in an instant" into an income stream, of some amount, which they can then count on for the remainder of their lives.

Is the income stream idea something that makes an annuity attractive to these people?

(I don't know if they even have Building and Loans or Savings and Loans any more, but that's where I started and the term that is really ingrained in my mind.)

Start out this way:

Think of an annuity the same as a CD. That's the most basic kind. Fixed rate for a set term. So buy a 5-year annuity and get 2.5% interest annually. Same as a CD except through an insurance company rather than a bank.

Now we move it to indexed annuities. Same thing except instead of a flat fixed rate it will pay interest based on an index. The most popular index is the S&P 500. So your annuity is never invested into the S&P 500. But the interest they pay you will be based on what the S&P 500 does this year.
1. The S&P might go down this year. But your annuity can't go down. You can never lose your principle or the interest you already got last year. It's like a ratchet. It only clicks in one direction or stays the same. So if the S&P goes down...you got zero interest. And you are happy about it because all your friends are complaining that they lost money.

2. If the S&P goes up, you gain interest. But not as much as if you were actually invested IN the S&P (they can't give you the whole pie since you have protection from losses.) There are several ways they can portion your piece of the pie. One popular one is a cap. So if your cap is 5% you get all the gain for the year up to 5%. So if the S&P gains 3% you get all 3%. If it gains 8% you get 5% (you hit your cap.) If the S&P tanks and loses 12% you lost nothing. Also gained nothing.

3. Another common way to divide the pie is with participation rate (or % that you get.) So if you have a 45% participation rate with no cap and the S&P gained 10% for the year, you got 4.5% (45% of 10). If the S&P goes up 20% you get 9%. So this way of dividing the pie is great for you in years that there are large swings but not as good in years with small swings. I actually received 18% on one of my annuities like this a year ago. I never would have believed that was possible but it was. (I would never tell an annuity buyer to expect more than around 4 to 6% on the high end years and of course zero in some years. )

There are many variations on how to divide up that pie. And that is where the complications come in.

Now we get to the lifetime income part. A whole lot of people never even use this feature. They just let the money in the annuity accumulate and take some out when needed. They can take 10% out most years and after their initial term is up they can take out as much as they want with no penalties.

But the lifetime income is called annuitizing. That's where you basically turn your annuity into a pension. You give the insurance company your entire lump sum of money and they guarantee you a monthly income for life. Just like a pension. Some people like to think of it as the exact opposite of buying a life insurance policy. To get the most money you take it based on your (one) life and when you die the insurance company keeps all the rest. So if you die younger than expected the insurance company wins big. If you live up into your 90's or 100 and you have depleted all the money in the annuity long ago, you win big. Because your annuity never quits paying the same monthly income until you die.

On that option you can take a little less monthly income and have it pay until the second of you or your spouse dies. (If you married a young trophy wife, this option will kill you.) The closer you are in age the better this option works out. You can also take less and get a period certain. So if that period is 15 years and you dies after 7 years, your spouse or kids will still get the income for 8 more years.

A lot of modern annuities have a newer feature where you can take a lifetime income stream WITHOUT annuitizing. So you still have control of your actual money in the annuty (in case you change your mind and want to walk away with it or take more out one year) but you start a guaranteed lifetime income stream without annuitizing. Many people like this better even though their monthly income would be less this way.

A huge thing that I love about indexed annuities is that they reset every year. Or some every two years. But because of this feature when the market has a down year I hope it tanks HARD. Once it's down I want it to keep going lower and lower. Because what ever it is at on my anniversery date resets ground zero for me for next year. ANd I know when there is a huge downswing, there will later very likely be a huge upswing.

So say you had $100,000 actually in the S&P 500 and the market tanks 20% the first year. And the 2nd year it gains 5%. You are still down 15%!! It might take two or three years of gains for you to be back to ground zero.

But with me in indexed annuity and that same $100,000 and the same 20% loss of the S&P I lost nothing. BUT the advantage I have is that where the S&P starts for the next year is my reset point. So if it only gains 5% the second year, I get the whole 5% (if I have a 5% cap) or my portion of the 5% (if I'm on participation rates.) I don't have to worry about recovering that 20% loss before I start making money again like I would if I were really in the market. That is HUGE for people like me that are not risk takers.

In the long term the market will always outperform annuities. BUT the world is FULL of people (I am one of them) that much prefers the security of annuities over the market. And the closer everyone gets to their retirement age they should have some of their money free from market risk.

There are a whole lot more variations and riders and options that make annuities confusing at first. But that is how I explain the basics. And if you explain them to the right people, they love them. I have sold millions of dollars of annuities and I have never sold one to anyone that doesn't love it.

 

[rousemark]

In the long term the market will always outperform annuities.

But you don't access your money "in the long term"... The only thing that counts is how much is there the day you need it.. .. If you have market "correction" the day before you are going to access your money, you are going to come up short. It doesn't matter that up until the day before the market out performed your annuity and it does you little good that it will eventually recover..

 

[Cornelius]

Check out some Tom Hegna videos on you tube or buy his books on annuities.

 

[HoosierLife]

So to keep what Newby said simple for the consumer: "You can participate in market highs and not be penalized in market lows."

 

[Thedude]

So to keep what Newby said simple for the consumer: "You can participate in market highs and not be penalized in market lows."

"Participate" ....aka lose out on the highs.

Max out all other retirement plans THEN think about an annuity (generally)

 

[LostDollar]

Check out some Tom Hegna videos on you tube or buy his books on annuities.

I appreciate having another name to relate to the type of financial product, however.....

There is a limited amount of material which I am going to be intellectually capable of absorbing right now. When I did a little scanning of Hegna material, one of the things I saw very quickly was paychecks and playchecks. He lost me right there. That strikes me as a form of financial eliteism which totally ignores the financial realities of life for the people being discussed in this thread.

I am totally flabbergasted by the amount of time and effort which newby took to make his post, but I think it is likely to be far superior in terms of giving me the very basics of annuities than anything Hegna would have to say.

 

[PA Bill]

I appreciate having another name to relate to the type of financial product, however.....

There is a limited amount of material which I am going to be intellectually capable of absorbing right now. When I did a little scanning of Hegna material, one of the things I saw very quickly was paychecks and playchecks. He lost me right there. That strikes me as a form of financial eliteism which totally ignores the financial realities of life for the people being discussed in this thread.

I am totally flabbergasted by the amount of time and effort which newby took to make his post, but I think it is likely to be far superior in terms of giving me the very basics of annuities than anything Hegna would have to say.

The man absolutely knows his shit. Amazing.