Annuity Pitfalls Pt1 script
Freddie: In this episode of Leibel On Fire, we'll examine the hidden fees commonly found in annuity contracts, including mortality and expense charges, surrender penalties, and other costs. We'll explain how these fees work, how they vary across different types of annuities, and the impact they can have on your retirement income.
The discussion will also cover what to look for before purchasing an annuity and the options that exist if you already own one, hello again and welcome to Leibel On Fire! I'm Freddie Bell with you today, and Leibel Sternbach is here. Of course you know he's Amazon's bestselling author of Living with Financial Anxiety and also the book entitled Authenticity.
Hello Leibel. Welcome back to the show.
Leibel: Hey, Freddie. How you doing today?
Freddie: Unbelievable. I'm excited to talk to you because when you talk about money, I just perk up. I don't know why.
Leibel: Money's a fun topic to talk about.
Freddie: We wanna talk this week about annuity pitfalls, the, uh, hidden fees that the annuity companies don't want you to know about.
Why don't they want you to know about these hidden fees Leibel sternbach?
Leibel: I've got a love hate relationship with them for the right purpose and with the right product. They're amazing tools because they give you something that you can't get anywhere else, which is a
contractual guarantee of a defined outcome, or at least that is what the promise is. There's also all kinds of tax benefits it's a yin and yang, there's a give and take, there's things that can only be done in an insurance contract. However, the insurance companies need to make money, right?
Right. Nobody's in this, uh, for a free lunch, right? Nobody's offering out handouts. When you look at organizations that support themselves by giving out handouts, communism comes to mind. It doesn't end well. Always gotta ask yourself where is it that they're making money?
How are they making money? What is their financial incentive to do all of this? Right? Because nothing comes for free in life when it comes to annuities, something that seems like too good of a deal probably is too good of a deal. So it's important to understand what you're buying when you walk into it.
Freddie: That makes sense. We're talking with Leibel Sternbach today on Leibel on Fire! I'm just curious what hidden fees are commonly buried in annuity contracts Leibel, how do these fees vary across different types of annuities, like fixed, variable and indexed annuities?
I know that's like eight or nine questions right there. Can you help us?
Leibel: Lots of questions. Let's back it up and start with the basics. So one, you know, hidden fees is kind of a misnomer, right? Like they have to disclose the fees, but just like your mortgage company, right? It used to be mortgage contracts where, you know, two, three pages and now they're like 300 pages, right?
And you buy a house and you're sitting there signing papers for two hours. No different with an annuity contract. I've yet to see a contract that is less than 80 pages. Right? And when you think about it, right, it should be pretty simple and straightforward. I'm giving you money and in exchange you're gonna give me a, income stream for life, right?
That's a very simple contract where you're gonna give me investments and you're gonna protect my downside and I'm gonna get some of the upside, right? It's very simple pitch, right? I what? 30 seconds right? I said what it was. Yet somehow it takes 80 pages for us to talk about it.
What that really fundamentally comes down to is that the insurance company needs to ensure that they make money on every deal, right? They need to ensure that they make money and the way that they ensure that they make money in all market environments is by having lots of different levers in that contract that ensure that they get paid, ensure that they don't lose money, or if that they lose money, that it isn't a insurmountable amount.
Fundamentally if they lose too much money, then they are gonna get shut down by the Department of insurance, right? The insurance commissioner for their state. And that's, something that's untenable. They bake into their contract a whole lot of fees and a whole lot of little different ways for them to ensure that they're always financially solvent and that they always come out ahead in those contracts.
Right? And there are scenarios where you will make out more than the insurance company, but you need to know what those scenarios are going into it and whether it's worth the risk reward that comes with that. Just like with any investment.
Freddie: So can you break down the different types of fees between the fixed, variable, and the indexed?
Leibel: Yeah, so let's start with the basics, right? Every insurance contract fundamentally is a life insurance contract. Mm-hmm. And so that means that there's a life insurance component, right? And fundamentally, right? 'cause then they're life insurance companies and they're getting approved by the state to provide life insurance, uh, contracts and life insurance means there's a death benefit, right? Somebody dies and somebody gets paid. That's how life insurance works. Now they start getting a little creative with, okay, you want to have living benefits. Maybe the amount that your beneficiaries get after you die is not gonna be more than what you put into the accountant.
So you're gonna, the real value is gonna be something that happens while you're still alive. Right now we're getting into some fancy areas, but regardless of the contract that you have, there's going to be a component that's called a mortality and administration fee. And they lump it together.
But it's really, it's two separate things. Mortality is, you know, what is the risk of you dying, right? What is the probability of you dying in the next year or really of you dying before they make their money back? And then the other cost is what is the cost to administer it? Right? Being an insurance company means they gotta file things with the Department of insurance, but they have to, file forms, they've gotta oversee all kinds of admin stuff, right?
To run any kind of business, right? And so those admin fees are baked into it. Now, some insurance companies, they don't charge a lot on the admin fee, right? They try to run it slim. Sometimes they'll even run it at a negative, right? A loss leader. Think about the grocery store that sells bread and milk or eggs at below cost to get people in the door.
Sometimes insurance companies have policies where they run, at cost or below cost on certain products because they're gonna make their money elsewhere, right? The mortality and the administration fee, that's the first thing that you wanna look at. The second thing you wanna look at is riders, right?
So as soon as you go beyond death benefit. You are now entering into the realm of you have something additional built into this contract. That can be an investment rider. That can be a loan rider. That can be a guaranteed income rider. Mm-hmm. Right. It could be a living benefits rider, like long-term care.
All of these riders are very custom. They change from month to month and they all have fees associated with them. What those fees are, they have to disclose that upfront to you. And if it's a range of fees, they have to give you what that range is, but those fees will be disclosed. I have seen fees as little as $25 and I'm seeing fees as high as 1.5 - 2%.
So you gotta really make sure that you know what those fees are for the benefit that you're getting. You then have in addition to that, you have the investment component of all these vehicles, right? Because very rarely are you just getting term insurance and you're just getting the death benefit.
Usually there's some other thing that you wanna get, some living benefit that you're willing to pay for, and because of that, there was a time when the insurance companies took all your money and they held onto it. They said, okay, we're gonna give you this benefit. But then the department of insurance came along and they were like, you know, that's not really right.
People are giving you their life savings and in exchange you're just walking away with the money to potentially maybe one day give them something. So the government required that insurance companies give some kind of upfront value in exchange for all this money they're taking that.
Term is called cash value, right? That's generally what that is referred to.
Freddie: Mm-hmm.
Leibel: Sometimes it's referred to as living benefits, but something that you get to use while you're still alive. The growth on that money, because it's required legally, it's required to grow. The growth on that money is subject to a whole lot of rules, and they get to change those rules on you from year to year.
So usually they'll give you some kind of really rosy picture on say like, oh, we're gonna give you, you can invest in the market. We're gonna give you 80% of what the market does, but if the market goes down, we're gonna protect you a hundred percent on the losses. Sounds awesome. I mean, that's an incredible deal.
Yeah. The problem is, is that people rarely get that in year two. So year one you get this amazing deal, but then they tell you it's subject to change and there's a renewal and then your renewal period comes up and you look at the rates and you go, um, this isn't an investment. This is barely a savings account.
Why am I getting this? I don't want this. I want the new rates. And they say, sorry that's for new subscribers only. Kind of like a cable bill. Right? Wow.
Freddie: Wow. So what can retirees do Leibel to protect themselves against these high costs or hidden costs before purchasing an annuity in the first place?
Even though some of these riders, as you've just mentioned, can have a benefit for the retiree.
Leibel: Yeah, so the first thing that you gotta understand, right, is that you're never gonna fully understand all the fees. There's no way to know a 100% what the fees are, because the way the contracts are written is that they're subject to change.
They can change those values on you not at any point, but they have points where they can change what those fees are, and that completely, changes the game in their favor. So, having said the fact that. There's no way to know beforehand what your maximum possible fee is. What you need to do right is ask the insurance company or your insurance agent, you ask 'em for guaranteed values.
I wanna know if the worst case were to happen and I earn zero on this policy. What is the benefit that I'm getting? What am I paying for in a worst case scenario?
Freddie: Leibel's website is Yields4U.com. We gotta leave it right there. I'm Freddie Bell for Leibel Sternbach on this edition of Leibel on Fire!
