Hybrid Annuities vs Pre-Issued Annuities

We have a controversy that we're always kind of in the middle of, and that is which annuity is best in what given situation. Two of our hottest topics are hybrid annuities and pre issued annuities. Eric: All right. Which one's better? Come on.

Tell us. Dick: Just give me a quick answer. Let's get this video over. Eric: That's right.

How do you take care of the answer of which one is best? Let's start with some of the positives on the pre-issued side. Dick: Okay. Eric: You're looking at higher than normal growth. Dick: You're going to get a much better yield.

Eric: Then you contrast that with, on the hybrid side . . . Dick: Hybrid and all fixed annuities.

If you really come down to fixed annuities, fixed indexed annuities, what we call the hybrid annuities, which are the fixed index with the income rider. When you're looking at actual APY, your annual percentage yield, it is not good in fixed annuities or fixed indexed annuities. We might be talking about somewhere between 2% to 4%. Eric: I.

Agree. If we're looking at it simplistically, growth potential, if we're lining up, we put the check under the pre-issued annuities. Dick: Yes. What kind of yield are we looking at there, Eric? Eric: We're looking at 5% to 8%, typically.

Dick: Yeah. I think being realistic without overstating it, you are right; it is 5% to 8%. Eric: He's going to down downplay it. 5% To 6% is where.

. . Dick: 5 to 5 is more standard. If we step into not life-contingent, but what am I trying to say? Eric: When you're using the life insurance backing of [inaudible: 01:48].

Dick: That is what I'm trying to say is life-contingent. I was thinking life settlement when I was questioning. Eric: Which is another video in and of itself. Dick: Another video.

Life-contingent, you can get up into the 8%. I have seen some period certains in the pre-issued that will get up into 7%, that type of thing. With the pre-issued, yes, you can expect a much, much better yield. Eric: The guaranteed yield.

Dick: Yes. Eric: You know what you're getting when you start into it. Dick: Yes. It's backed up.

Let's touch on that again, we did from the last couple of videos. On the pre-issued annuities, it's backed up by the same A-rated insurance company that we might do with a new issued annuities. Safety is there. Eric: Okay.

All right. We've got growth probably edges out on the pre- issued side. Now you take the next step here, and that's . .

. Dick: The hybrid. Eric: You look at the hybrid, and what's the positive in the gross side. You're not necessarily .

. . Dick: Right. Eric: .

. . Not necessarily in the cash account. Dick: If all we're thinking about is yield, we wouldn't maybe choose the hybrid.

Obviously, there has to be something good about the hybrid because there's a lot of people that this works for. Eric: The hybrid is really good for income, guaranteed income for life. Dick: A pension-style income. Eric: Exactly.

When you're taking an allocation into a hybrid, you're usually focused on lifetime income because there are guarantees on the rider that will give you that higher accumulation amount, but it's usually only for income, for future income. Dick: Right. If we need a pension-style income, and we can defer it for some length of time, typically with a hybrid annuity, we can get about an 8% rollup, which will . .

. 7%. Eric: 7%, yeah. Dick: See, I'm overstating now.

Eric: I was going to say. Dick: Things have changed in this rate environment, from what we used to be able to say, even in the recent past. About 7%. Eric: You got the income rollup.

In deferral, those are able to grow at a guaranteed rate, higher than what we say is on pre-issued. However, after the end of your contract period, you're walking-away money doesn't necessarily always grow at that rate. Dick: Correct. Overtime, as you take it out on a pension-style income, you will get it out and you will get the benefit.

However, if you want to take it all out at one time, you couldn't. Another thing I want to contrast between the pre-issued and the hybrid is the flexibility that you have when you're setting up a hybrid. You set it up the way you need it, the way you want it, the way it's going to work for you. When you want a pre-issued, no.

Eric: For me, that's the strongest point. When you're constructing a hybrid allocation, basically a hybrid [inaudible: 04:47] allocation, it's designed for you. You're building it based off of your needs. When you're getting a pre-issued annuity, you're getting something that was designed, basically, for somebody else's purpose.

Dick: Right. You have to be flexible. Eric: Repurposing is what I . .

. Dick: Yeah, repurposing. Eric: It may not always fit like a glove. Dick: Or may not fit, at all.

Eric: You're finding benefit in usually another area. Typically in this time, it's growth, you're getting better growth than you're going to get someplace else. Dick: If you can be patient with a pre-issued annuity and your goal is really yield, you can get that yield to many times be structured the way you want it to come in, rather than lump sums in 5 years, 10 years, or rather it's a monthly income stream. You can still get yield and a monthly income stream, this type of thing, but it isn't typically a lifetime income.

Eric: One of the questions I've been fielding, especially after the last couple videos, is, "Talk to me about these pre-issued annuities. Am I. Going to get a lump sum at the end? Am I. Going to get an income stream? Am I going to get .

. . How does that configure?" The answer was, "Yes." Dick: Yeah. Eric: They come in all those different varieties.

The same set of pieces that are constructed when you're doing a first-issue annuity are out there on the secondary market. The problem is it's not been designed for you. If someone took a 20-year period certain, there may be 16 years left on the piece you're able to purchase. Dick: Right.

If that works for your scenario, then it's an ideal situation to get a great yield, get safety. In this market, where can you get yield like that? Eric: That's the key. Dick: Safety. Eric: I really like the pre-issued market for somebody who's had CDs that are maturing, that just needs a bigger yield.

They say, "Where can I get 5%? I wish I could get 5% again." This is one of those places. Dick: Exactly, CDs. I. Like it also for those folks that come out of the stock market, and they're like, "Look.

I just don't want the volatility. I. Don't want the craziness anymore." Eric: This is predictability, but without flexibility. You have to know it's not money you're going to go back in and dip into.

Dick: Right. Eric: It doesn't always fit for somebody that needs to get a stream of income. It can sometimes, but you don't want to put all of your money in this bucket. Dick: Right.

As we've said, the hybrid annuity has its advantages, because you can tailor it to what you need, what your income needs are, to a husband and wife sharing a joint income; many different areas that you can tailor it to your specific needs. Eric: Yeah. Like you said, pension-style income is the best way. That's the perfect fit for today's 401K world, where you got a lump sum, you're walking, and you want income for life.

You want to guarantee that portion. The hybrid annuity fits like a glove for that. That's where it realizes its strong point. Dick: I think we've done a pretty good job here of being fair to both.

They're both great products, great financial vehicles if they're used properly. Is there any way to say that a hybrid annuity is better than a pre-issued annuity, or a pre-issued annuity is better than a hybrid annuity? Eric: Sure, but I. Wouldn't advise it. Dick: You could say it, but it wouldn't always be true.

Eric: It wouldn't always be true. Like we classically end almost every segment here, it depends on your situation. Dick: It does. You want to work with an adviser that really understands the merits of each and can be fair and unbiased about it.

Eric: Exactly. Like we say, make sure you work with somebody that's going to basically set it in your terms so it fits your situation. Dick: Right. Maybe you need one of each, or a couple of each.

A. Little diversification, imagine that. Eric: Wow. Allocation diversification.

Dick: What an idea. Eric: Thanks for coming in today. Dick: Thank you..

How Safe Are Annuities

One of the things that continues to be upfront on our client's minds and different ones that we talk to about annuities is, "Just how safe are annuities, really?" Eric: It is a big question and there are some misconceptions. Let's start first with FDIC insurance, but it is not FDIC... Dick: Annuities are not FDIC insured. There's another form of insurance out there that we're not allowed to talk about, if we're trying to sell an annuity.

Eric: That's right. State law here in Illinois, precludes us... Dick: And most other states. Eric: ...

From, let's just disclose. The state guaranty, Insurance Guaranty Association, basically is a piece that's out there and it's often confused with FDIC. Dick: Right, and it's not FDIC. Eric: Because guaranty associations have caps or maximums like...

Dick: Right. Like the FDIC. Frequently, I've had clients bring that question up to me. "What about the state guaranty association?" I've actually called our state guaranty association Eric, and I've said, "What should I do in a situation like this when I'm presenting an annuity and someone's asking me questions about the guaranty association?" One thing that they suggested was, well have them call us, so call your state guaranty association.

One thing that you might want to be aware of is that these caps vary from state to state and that's the difference between the FDIC. The FDIC is federal and federal is absolutely going to guarantee the same for everyone up to $250,000 per account. Eric: Insurance companies are regulated on the state level. Each different state has a Department of Insurance that oversees these.

Dick: Right. In these states, I've seen anywhere from $100,000 up to $500,000, and here in Illinois about a year and a half ago or so it was changed to $250,000 on annuities. Eric: Just to make it more confusing, because that was the same amount that the FDIC was insuring. Dick: Right, so let's talk about what folks should be considering when they're buying an annuity, and we agree that the guaranty association is an added layer of protection, but that is not what you should be considering when you're buying an annuity.

Eric: First and foremost, are the claims paying ability of the insurance company. Dick: Yes, it is. Eric: It's being able to evaluate the insurance company, and its ability to fulfill its obligation to you as a contract holder, and then so the most common thing that people reference is third party agency reports. Now of course, the question we get is...

Dick: There are a lot of third party rating agencies. Eric: ... Which third party, so you've got AM Best, you've got Fitch's, S&P, Comdex. Dick: Weiss.

Eric: So which one do you pick and want? Dick: There's nothing wrong with looking at several of them, however, one thing that we fall back on a lot of times is AM Best, because they really tend to have been around for a good length of time, and that has been their specialty, not regulating but evaluating these insurance companies, and they're very, very thorough, so I like AM Best, but I'll also use some of the others. Eric: Now the question I get asked is, "All right, now I. Look at these reports. Are they going to be in English or are they going to be in...?" Dick: They truly are, you can actually go out to AM Best, and you can put in the company's name and you can read an evaluation on it.

Yes, they have some very in-depth reports that could bore you to death, and good reading to fall asleep to, but they also have summary reports which are much simpler and straight to the point. One thing that I would like to say, that I like about third party rating agencies is that in our experience Eric, when we watch these companies that are doing really well or the companies that are maybe getting into a little bit of trouble that it's a very slow process as a rule. As they, these rating agencies look at these companies and they may go from a positive outlook, to a stable outlook, to a negative outlook. This may take a period of years, just to go through those three stages, before they're actually downgraded.

And so you've typically got time, before a company would go from like say, an A-rated company down to a C-rated company. There's usually a period of years that would happen and it gives us time to evaluate and make decisions. Eric: And most of these rating agencies don't just, it's not your standard grading scale that you got in school, or you're A-B-C-D-F. It's literally, you've got the A++, and when you're looking at those ratings you have to really decipher.

The first thing you have to do is look at the code itself and figure out what is good, what is excellent, and where that kind of transition stands. So if you start to see a company that drops down year after year, more challenge. But you're going to see it move from an A to an A- to a B++, to a B+ to a B. Dick: Right, so you've got time.

These rating agencies are basing this on changes in assets and changes in business climate and so many different factors. I. Think that we need to touch on that, that because each of these companies is regulated by the state, they have a very strict type of accounting. It's called statutory type of accounting.

I look at it as kind of, like a show me the cash type of accounting, as compared to an accrual type of an accounting that might be used with the GAAP method, the generally accepted accounting practices, right. Eric: They're not able to hide the money as well, in a sense of moving it from one area to another. Dick: Hiding expenses or hiding; the state can come in and be very transparent with them and they can see that the investments, the underlying investments that protect the client's assets and funds; are what they should be, high-grade investment bonds or treasuries, this type of thing. Eric: The reserve ratio that insurance companies are required to have, in order to basically just be in compliance with their state regulation, dictates what they're able to kind of put in different buckets and how they're able to spend money.

But the key aspect there is they're going to be in compliance. The state comes in and they're looking at the books, if they're not in compliance, that's when the state starts to move in and take over. Dick: Right. Unlike maybe a larger corporation that would get into trouble and have to file bankruptcy, typically if an insurance company gets into a little bit of trouble the state is watching it way ahead of time.

We have access to third party ratings way ahead of time and what will typically happen, is all of those assets will be moved over to a more profitable company and that's called receivership when that company's put in receivership, and so the client's assets are protected and just moved to a company that's operating more profitably. Eric: The one thing you must understand is annuities are about confidence and confidence in insurance companies, and the insurance industry understands that, because if there was somebody that lost money in an annuity, the whole industry would have a down. Dick: It would hurt the entire industry. Eric: So what we have is an industry that really self-polices itself on a big level, because they want to make sure that, basically everybody's comfortable with these products, and they're confident in their ability to deliver on what they've been offering.

Dick: If you go out and you Google losses in annuities, losses in hybrid annuities, losses in indexed annuities, losses in fixed annuities, now variable annuities it's different, because you actually have an investment and you can lose money in that annuity. But to lose money in a fixed annuity, an immediate annuity you will find that if you Google that type of information, that it's almost unheard of, that anyone has lost any substantial money in annuities because it is one of the safest places, that you can put your money in a retirement style portfolio. Eric: To wrap it up, I think that's probably the best statement we could make, is that historically annuities are one of the safest places to put your money. Dick: Right.

Eric: Thanks for checking us out. Dick: Thank you..

Finding Financial Security After Tragedy with a Structured SettlementPrudential

>> If anything can
go well it will and that's the way
we live our life. If anything can go
well, it will. The automobile accident
was in November of '02. I was the second vehicle
into the intersection and making a left hand turn, he
T-boned me at 55 miles an hour.

The injuries from
the accident were so severe I had Bell's palsy
and they gave me some medication to try to get it to settle
the nerve and it ended up that I had a reaction
to the medication and it caused acute
angle closure glaucoma. I've always been a
really active person. I love building things
and sewing and anything that's
hands on and crafty. I love that kind of stuff.

Losing my site was
a huge change. I had to learn to do
things all over again. I guess the thing that I miss
most being blind is not being able to see my children
and how they've changed. I wanted to make sure that I was
able to have the funds necessary to take care of my
medical expenses and bills and things like that.

When the attorney spoke
to me he had mentioned a structured settlement. He wanted to know, you know,
what did my future look like? Was I planning on going
back to work or was I going to be a stay at home mom? Did I want to be able
to have money set aside for college for the kids? What were the specific things
that I was looking for? He took the time to get
to know me which was, and my family's needs
which was huge. That settlement makes sure that
we have a roof over our head and food in our stomach. 30 Days after I went blind
my husband lost his job.

The settlement has given
me more than piece of mind. Had I not had the structured
settlement in place, I can't even begin to fathom the
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I was told my sight's
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Financial Rant Annuities in Retirement Plans Suck! (GoodFinancialCents.com)

What's going on everybody? Jeff Rose, goodfinancialcents.Com
coming back at you. Today I'm doing something a little bit different. Not so much a financial
tip, today's is actually more of a financial rant. There are a lot of things in our industry
that I get really worked up on and the following is a prime example.

I had a client that had left her job. She
had taken a new position and she had a simple IRA. Simple IRA is kind of like a baby 401K
for small business owners. My rant or the thing that just got me so worked up was that
the owners of the company had taken out this simple IRA with an insurance company.

Instead
of having traditional mutual funds, they had an annuity product. A lot of people have their
own feelings on annuities. I don't really want to go down that path, but here is one
instance where I absolutely despise annuities, especially in retirement accounts. She had
left her job.

She had been gone for almost three months, and she wanted to roll over
her simple IRA to her own IRA. We called the insurance company and wanted to find out if
there were any surrender charges because I. Just had this feeling of there being a surrender
charge. Sure enough, lo and behold there was.

She had to pay a 6% surrender to roll her
money out of her old retirement account into her own IRA. It's her money. It's the money
that she put aside, but to get access to it to roll it over she had to pay a surrender
because it was in this annuity product. To make it worse she had six years before she
could roll all her money penalty free.

That burns me to no end. That is why -I'm going to use it, the hate
word- I hate annuities inside retirement plans. I think it's just ridiculous that somebody
has to pay a surrender to get access to their own money. Now it's something that she couldn't
avoid because that was her retirement account and she was doing the right thing by saving
for retirement.

Unfortunately, she found a better position and left. Now to get access
to that money she has to pay a very sizeable, lump sum, surrender charge to get that money. The insurance company did come back with her
being able to do a 10% free withdrawal for that money, so we still have to do 10% each
year. We can do it, and we still haven't decided what were going to do, but nonetheless that
just burns me.

Just be conscious of that. I'm not saying
don't utilize it because it is still a retirement savings tool for you. If you have no other
options out there, I guess it's better than saving for nothing. But still it's my rant.
I do not like annuity products inside retirement plans, especially those that require a surrender
to get access to your funds.

This is Jeff Rose, Good Financial Cents with
a good financial rant. Be sure to check us at the blog, and if you've not checked us
out on Facebook yet, please check out our Facebook fan page. Give us the big thumbs
up. We'll see you around.

Take care. The opinions voiced in this material are for
general information only and are not intended to provide specific advice or recommendations
for any individual. To determine which investment(s) may be appropriate for you, consult your financial
advisor prior to investing..