How Do Insurance Companies Make Money On Fixed Index Annuities? - YouTube

Hi, Stan the annuity man. Today's topic is a wingdinger. It's how annuity companies

make money on fixed indexed annuities. Boy, there's a lot of misinformation out

there. And I'm going to try to make it very simple for you to understand why

annuities come except the big buildings, right? I mean they're smart but

some of the misconceptions and some of the ideas that people have about indexed

annuities, we need to cover. So, at the end of this, you're going to understand how they

make money on their next annuities. And if it's a good deal for you. Maybe even

need one. In addition to that, make sure you watch my other video on

disadvantages of fixed indexed annuities where I cover even deeper on that

product.

Boy, do we have a lot to cover on this topic. And I love this topic which is how

do annuity companies make money on fixed indexed annuities. So, we're going to

cover a lot of things. We're going to cover what is a fixed indexed

annuity, you know what is it solve for, how does it work. Then we're going to

talk about how annuity companies make money on annuities in general. Why do

they have the big buildings? Why do they have those with big logos on those Jets,

right? They're smart. Do they know things, right? Life insurance

companies know when you're going to die. That's the reason they have the big

buildings. And property and casualty companies don't know when the hurricanes

are going to hit. For you all you Floridians out there. So, you understand

that. And then we're going to go over the details of how they make money or not

make money on fixed indexed annuities. At the end, we're going to talk about where

they fit, the limitations and benefits of the product. And also, hang in there

through the video because at the very end, I'm going to tell you how to get a

free book that I've written on fixed indexed annuities. So, what is a fixed

indexed annuities? Now, if you've been to the bad chicken dinner seminar where the

guys up there in a bad Leisure Suit telling you about this product sounds

too good to be true. it is. Never forget, if it sounds too good to be true, it is

every single time without exception with the annuities. And with fixed indexed

annuities, boy, the hype is crazy. I mean they are this is the best thing since

sliced bread. I mean, if you don't buy your brace, you and I both know there's

limitations and benefits to all products. So, what is a fixed index annuity? It's a

fixed annuity. That's the first word. Fixed annuity. You're never going to lose

any money. That's a good thing, right? Now, it was put on the planet in 1995 to

compete with CD returns. And guess what it's done historically. This compete with

CD returns. All of this type of market upside with no downside. Market

participation, Piscopo protection. You know, instead of 8-minute abs, it's

six-minute abs, right? I mean, if it sounds too good to be true,

it is. That doesn't mean it's a bad product. You just need to understand how

it works. And it works to provide enhanced CD type returns. That's what a

fixed indexed annuity is. Alright. So, let's talk about how fixed indexed

annuities work. Not typically what start this, I warn people is kind of like

showing paintings to blind people. No offense to blind people. It's tough. I try

to take it down to a 9-year-old level. No offense the 9-year olds. But I

always say, "If you don't understand it... If you can't explain it to a 9-year old,

you shouldn't buy it or sell it." Right? So, a lot of people out there that are

pushing these indexed annuities fixed index annuities is the one-size-fits-all

solution to your life, calm down Sparky. It doesn't work like

that. These are contracts. So, it's not too good to be true. So, let's talk about just

the nuts and bolts about fixed index annuities. Number 1, it's a fixed

annuity. It's protecting your principle, fixed. Now, the games part of it where the

height and all the people go crazy at the bad chicken dinner seminars and on

these TV commercials you see where it just says, "You turn to your wife and go..."

Hey, that sounds pretty good. Why wouldn't we get that? That's perfect.

Because it's not. The gains are based on a call option on an index. A call option

is like a one-year bet saying that I think the index is going to go up. And if

it does, you get to lock in that game with a limit. Now, see this is where all

of the sales pitch stuff comes in and you got to be real careful. Because

annuity companies aren't in the business of giving anything away.

There's no philanthropist at an annuity premises. "You know what? I want to give

things away." No. They're going to provide a good product but you've got

understanding for what that product is. So, the basics of how a fixed indexed

annuities work, there's a cap on the upside. There's a limitation on the

upside. And those rules are dictated by that carrier and can be changed at their

discretion. And also understand you can attach what's called a lifetime benefit

income rider to a fixed indexed annuity at the time of application if you want

income later guarantees. So, that's kind of how a fixed indexed annuity works. So,

what do fixed indexed annuities solve for? Once again, fixed principle

protection and it provides enhanced CD type returns historically. That's what it

provides for. It can also provide a lifetime income guarantee if you attach

that income rider at the time of application if that specific annuity

offers that. Okay, getting ready to get in the weeds. So, just bear with me.

I'm going to go slow because I want you to understand how annuity companies make

money on annuities. Let's talk about just from a broad standpoint. Regardless of

type, how do annuity companies make money?

Here's the basics, okay? When you give money to an annuity

company that's fit for a fixed annuity of any type, the regulator's say that the

annuity company has to have the money in bonds on day one. So, the annuity company has

your money in a bond portfolio, a huge one. And the interest that they get off

of that bond portfolio, they give you some and they keep some for their profit.

At the end of the day from a 30,000 foot view, that's how the new 'ti companies

make money on your money regardless of annuity type. Now, remember I told you

that annuity companies invest in bonds and they take some of that interest off.

Give it to you and they keep the rest for profits. Now, with indexed annuities

fixed indexed annuities, instead of them giving you the interest like on a

multi-year guarantee annuities, CD type annuity, they take that interest, that portion and

they buy the call option; that index option on the indexed annuity. So, that's

what they're doing with that money. Let's go over some common misconceptions that

people have about indexed annuity carriers. And I get calls like this all

the time that are wrong. And I'm so happy to clear all of this up. Number one, the

annuity companies do not make money buying the index options. They make no

money buying them. That's the first thing you need to know. The second thing you

need to know, the carriers, they don't make any money on the index option.

They're not making money on the index option participation. They do not keep

the difference between the caps and the spreads. The limitations that are in

place, they don't keep that. That's a common one there was, "Well, I only got

4 and they kept the rest." Incorrect. That's not how it happens. What happens

is when they buy the index option, when they buy that option, they're typically

buying from one of these large investment banks. All of those blueblood

guys with like $3,000 suits. I mean, they don't have cool stuff like I

were. But they're wearing these Brooks Brothers stuff. Except they'll probably

won't this happen. But that's another story, okay? So, they give them the money to buy

the option and the investment bank is absorbing that risk of what happens with

the performance of that index option. So, once again the index annuity companies

buy the option from the investment bank. They don't make any money on that. And

they're transferring the risk to that investment bank, the JP Morgan's and all

those rich, smart Ivy League people to absorb that performance of the option.

Also understand, the reason there are caps and limitations on the upside for

index annuities is that's all the annuity company can buy. That's all the

upside they can buy while protecting your principle. Remember, fixed indexed

annuities. Fixed --protecting your principle. So, if the question is "Why is

my cap, why is my limitation 4% or 5% on the upside for that option?" It's because

that's all they could buy with that money. That interest money that they

allocated to buy the option. That's all they could buy to protect your principle.

Because at the end of the day, remember this, fixed indexed annuities are fixed,

right? They're principal protection products first. They're not market

products. They're CD type products. They're fixed products. Now, to just add

to the party. I know I'm throwing a lot at just like a fire hose a fixed indexed

annuity information. But you can always you know replay it and go slow, right? So,

let's go for one more thing. At the time of application with most fixed index

annuities, you have the option or the ability to attach what's called an

income benefit rider. Which is a future income guarantee. Now, if you do that, the

annuity company is going to hold on to your money longer. Why? Because when you

turn on that income benefit, that income benefit payment is based on your life

expectancy at the time you take the payment. So, in addition to them making

money off your money from just buying bonds, they're also going to have a

longer time to make money off your money buying bonds if you use the income rider

for future income because you're going to stay in the policy longer. So again,

you kind of see how they're making money. Just

baseball analogy, they're not hitting homeruns with your money. They're hitting

but singles for a long time. So, if you think of it like that,

they're not killing it. They're just incrementally making small amounts with

a bunch of money. 2 final key points which i think is very important for you

to know. Annuity companies are smarter than banks. Okay? They're more regulated

than banks. When you give money to a fixed annuity company for a fixed index

annuity, the regulators require... There's no option. They require the fixed index

annuity come you to buy bonds. Investment grant tight bonds. They can't go do risky

stuff with your money like a bank. Doesn't mean they're better than banks.

It just means they're handcuffed. They can't do crazy things with your money. So,

they're handcuffed from the standpoint that the new it carriers from what they

can invest. It's got to be investment grade bonds. So, understand that. And the

other thing I think is important to understand is when you buy a fixed

indexed annuity, the surrender charges are really, really, really high. Why is

that? Number one, there's a built-in Commission that goes to the agent. Number

2, because of their buying the options and all this stuff administrative costs,

for the first few years, the annuity company is in the hole. I'm serious about

that. I know you're crying tears for them but it's true. And that's the reason that

the shrinkage charges are so high because if you pit it and say, "I want to

learn about." Then they're going to have to make up for some of that money they've

been investing in the options, etc. So, it's a long-term play for them as well.

Let's go over quickly the benefits and limitations of fixed indexed annuities.

Obviously, the benefits are principal protection. You get CD type returns, you

never lose a penny. And any type of games do lock in permanently at that contract

anniversary date. That's a good thing, right? You can also attach an income

rider for future benefit for income. The negative really revolves around the

environment of the overhyping of the sales message. Market upside with no

downside. Market participation with full principal protection. Remember, they

were put on the planet, fixed index annuities;

1995 to compete with CD type returns, okay?

Are there some anomaly years where they do a little bit better? Yeah, sure.

But at the end of the day, blended returns just go into a fixed indexed

annuity if you buy one with the understand that you're going to get CD

or better type returns. If you do that, you'll like the product. But if you go

into it thinking you're going to kill it with... You know, you get 7, 9, 10

percent every single year, come on. You're smarter than that. You know better than

that. It's not designed like that and it doesn't work like that.

Remember the first part of the video, I said, "Hey, if you hang in there with me,

you're going to get some free books." Thanks for hanging in there with me. I

mean it's been a great topic but it's detailed. I'm hoping you've really learned

a lot. But I'm going to give you these books. All you got to do is go to the link

below and sign up. Index annuity owners manual, the income riders owners manual.

I've written both of them. I'll send em to you for free. We won't call you.

We won't bug you. You'll just get them in this really neat gold Willy Wonka

package. And then you can read about it. You can re-watch this video and you'll

understand how fixed index annuity and income riders work.

you