Annuity Pitfalls Pt2
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. 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, so, 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 hundred percent 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 at, not at any point, but they, they have points where they can change what those fees are.
And that completely, you know, 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 earned zero on this policy,
what is the benefit that I'm getting? What am I paying for in a worst case scenario? Your insurance agent is going to fight you tooth and nail on giving you that illustration. And it is the thing that I demand of everybody who ever pitches any type of product to me is I wanna see the worst case scenario.
And you need to make sure that the worst case scenario is something that you would still say, yes, this is something I wanna buy. And sometimes that is the case. Sometimes that is absolutely the case, that you look at it and you go, I really need protection X, and I'm willing to pay Y for it, and that price is reasonable for it and go for it, right?
Other times you look at it and you'll say, you know what? Uh, you know, maybe I'll self-insure on this one, right? Mm-hmm. Maybe it's not really worth giving up all that upside in order to get this protection. But you gotta really, you gotta really look at the numbers and, and, see what if the worst case scenario were to happen.
Is it worth it? If the worst case scenario is not an okay scenario for you, then you gotta start digging in and seeing, okay, you know what, maybe there's some room to play here, but generally speaking, it's usually not worth exploring.
Freddie: Interesting. We're talking about annuity pitfalls and what to look for.
You mentioned the questions, so are there other warning signs that retirees or people investing in this instrument should be aware of?
Leibel: Yeah. The questions that you gotta ask of any policy is, number one, what is the worst case scenario? Number two, what happens if I die?
Right? What happens if I die? Does my spouse get to take over the contract as if I were still alive? And that's a very important question because there obscene different mechanics for how that happens. Some contracts are, yes, no problem. Your spouse gets to take it over just as if you are alive most of the time.
That's not the case. And there's some caveat to it. Sometimes it'll be, oh, we pay out the death benefit, and then she can get a new contract, which is like, no, no, no. I got all this theoretical value tied up in here, which you can't surrender and you won't pay out as a death benefit. This theoretical living benefits, I want the living benefits.
That's what I'm investing in this thing for. Mm-hmm. And if she's not gonna get it, if I die, you know, a day before we're gonna turn on income, right. Or whatever. Or long-term care. Then what was the purpose? All of a sudden we just put money down the toilet and got nothing in return for it.
So you really gotta ask that question and you gotta shop around because it is, you know, the thing to keep in mind, 70% of insurance policies lapse without payment. And so something happens and then the insurance company makes out, right? And so you're playing against the house, right?
Is it possible to win? You go to Vegas, is it possible to win? Yes. Absolutely. 49% of the people win. You just need to make sure that you're the 49% that win and not the 51% that lose. The insurance company is not gonna care whether you're the 49% because they've got the 51%. And with insurance it's a lot more than 51% because they're not, you know, regulated by a gaming commission.
Freddie: So finally, what, strategies can I'm gonna say, can I do, what can retirees do if they're already locked into an annuity right now? Is there a strategy available to us?
Leibel: Yeah. So what if you've got a policy and you don't like what is happening, right? You don't like the outcome. You were promised the moon, and you're getting a little sticker on your window.
You're getting a fraction of what you were told. Then what you want to do is you want to start shopping around for replacements. Sometimes you need to move it into what's called, you know, low cost fee based annuities. And so these are where the annuity company, basically the life insurance company has stripped out all of the insurance component of it.
And all they're selling you is essentially a tax wrapper, right? They're giving you their tax letter, their tax shelter that they've worked really hard to get so that you don't have to pay income tax. When you take the money out of this annuity in an exchange, they're gonna give you the ability to basically invest in the market.
And I say basically because. Just like with everything with insurance companies, they're making money somehow, right? If they're not making on the mortality administration fees they're making on the investment component and the investment component, some of them take a small bite of the apple, some of them take a bigger bite of the apple.
There are a few companies that I work with, I help people kind of move out of these policies where they take a tiny bit bite of the apple and, okay, so you went from losing, you know, 2, 3%, maybe more to the annuity company. To losing a fraction of a percent, and now you're getting basically market returns.
So there's always things to shop around if you do want the living benefits. If you wanted income for life, if you wanted long-term care, right? If you wanted a death benefit for your surviving spouse or for your kids, then there are always policies to look around with. During times of market volatility, the annuity companies are constantly trying to induce people to switch.
So it's just a matter of figuring out surrender charge versus, you know, the guaranteed upside. The guaranteed, performance that you're gonna get contractually guaranteed. And is it worth doing that switch?
Freddie: What a great primer. Is there more information at yields4u.com Leibel?
Leibel: Yep. A ton of information at yields4u.com.
And then of course, right, we have our free retirement tax analysis. So if you want us to help take a look at your policies and give you our 2 cents on what we think you should do with it, with the caveat being that we don't sell life insurance. We'll help you get out of policies if you're unhappy with it.
But we don't sell these things, so we will give you kind of unbiased advice in terms of, you know, is it something worth keeping or not keeping.
Freddie: Leibel's website is yields the number four, the letter u.com. We gotta leave it right there. But I wanna remind you that in this episode we explore the hidden fees in annuities.
They include mortality and expense charges, surrender penalties, and rider costs, and how they affect long-term income. We also discussed how these fees vary by annuity type and what types of steps that we can take as retirees to evaluate, to adjust and make a good, solid move on the existing contracts that we might have.
Understanding these details, they're very important to making informed retirement decisions. I'm Freddie Bell for Leibel Sternbach on this edition of Leibel on Fire.
