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What is an Annuity? - YouTube
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annuities
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should you invest in them should you
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avoid them like the plague let's dig
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into it
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hello everybody joe orbit coming at you
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and today we are going to talk about the
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basics of annuities we're not going to
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dig deep into different types of
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annuities i'll record another video
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where we'll break down each and every
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type of annuity we're going to talk
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about today today's a good overview so
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you can
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you know maybe stop being afraid of
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annuities i'm not saying that everybody
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should own an annuity i'm not saying
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that you individually should or should
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not invest in an annuity i just want you
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to have the information you need to make
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an informed decision now the most
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important thing to remember when you're
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speaking of annuities is everything i
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talk about in this video is going to be
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based on the claims paying ability of
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the insurance company that issues the
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annuity so you need to make sure that
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they have the ability to cover their
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debts cover their losses cover their
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payouts so what you want to do is you
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want to look at their ratings now
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there's independent rating agencies you
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have am best standard and poor's moody's
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fitches you want to make sure that the
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company you're dealing with has a good
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rating from one of these companies but
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that's no guarantee that the insurance
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company will be around forever so
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understand that when i say it's fixed or
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it's guaranteed or it's going to pay an
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income all of that goes back to the
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claims paying ability of that insurance
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company and then each and every state
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may have their own benefits or
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guarantees to help those insurance
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companies so just make sure you
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understand that this is not fdic in
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short this is not going to be backed by
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the government it's going to be backed
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by the insurance company that issues the
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annuity so let's start with the two
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basic different types of annuities we
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have immediate annuities and we have
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deferred annuities okay an immediate
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annuity is an annuity that pays out an
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income to you for life
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let's say you're lucky enough to have a
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pension and you've worked for a company
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your for your entire life and they've
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been putting money aside for you and
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when you retire they say hey great
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you've retired you work for us we're
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going to pay you an income for the rest
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of your life that is an immediate
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annuity basically what happens is
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there's a lump sum of cash that goes to
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the insurance company because annuities
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are issued by insurance companies so
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this lump sum of money goes to the
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insurance company and that insurance
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company guarantees you
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an income each and every single month
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for as long as you live
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now you may have a survivor benefit
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maybe you chose not to take
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just for your life maybe you chose to
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take for your spouse's life so once you
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pass then that income would go on to
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your spouse but you have to remember
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with an immediate annuity
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when you die or if it's a joint when
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both of you die there's no money left
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okay so for the most part on an
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immediate annuity depending upon the
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payouts and like i said we'll take a
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deeper dive into immediate annuities in
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a separate video
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but basically it's hey here's an income
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for life you can't outlive this income
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that's a pretty powerful statement to
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know you're going to have income for
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life so that's immediate annuities
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deferred annuities are basically
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deferring until you take an income
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stream now just because you purchase a
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deferred annuity it does not mean that
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you ever have to take an immediate
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annuity income stream off of it so you
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do not have to you're not forced all the
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time to turn your deferred annuity into
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an immediate annuity and what we call
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that when you take your deferred annuity
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and make it an immediate annuity we call
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that annuitization
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that means that the cash doesn't exist
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anymore there's no lump sum there's no
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money anymore all you have is a payment
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stream so immediate and deferred now on
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the deferred side you have two different
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ways your assets can grow
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while you're waiting to take an income
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stream they can grow either based on a
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fixed account or a variable account
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what i mean by that is on the fixed
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account that means you're not going to
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lose money it doesn't matter what the
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markets do it doesn't matter the
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performance of an individual stock or a
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mutual fund on a fixed annuity the value
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is never going to go down based on
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markets it's going to go up based on a
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fixed rate on the variable side that
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means you're going to invest in some
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sort of an investment and typically in a
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variable annuity you don't have mutual
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funds what you have are sub accounts
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they're like mutual funds but they're
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held inside of a variable annuity so
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they're considered sub accounts now on
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the variable annuity there's things you
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have to consider there's costs typically
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they have mortality expense charges they
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have admin fees they have death benefit
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fees they may offer riders like a
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guaranteed income rider again we'll
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break that down more when we talk more
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about variable annuities but that's a
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variable annuity the investments are
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going to grow during the deferral period
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on a variable basis meaning sometimes
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the account is going to be up and
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sometimes the account's going to be down
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now on the fixed side
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there's two different options there you
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have cd type and you have indexed
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cd type the reason i call it a cd type
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is basically what the insurance company
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says is we are going to guarantee an
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interest rate for a certain number of
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years let's say you get a three-year
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fixed annuity that's paying three
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percent what this means is you put the
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hundred thousand dollars in at the end
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of the first year you have a hundred and
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three thousand dollars there's no fees
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there's no expenses nothing is taken out
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of your account okay you put a hundred
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thousand dollars in the end of the first
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year it's worth a hundred and three
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thousand dollars at the end of the
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second year you now have a hundred and
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six thousand and ninety dollars it's
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compounded it's grown and at the end of
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the third year you have a hundred and
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nine thousand two hundred and seventy
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two dollars because again it's
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compounding interest it's growing
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traditional fixed cd type annuities have
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no costs they have no fees they state a
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return you get that return now they will
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limit your access to the account almost
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all annuities do not have full liquidity
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meaning when you put the money in you
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can't grab it all back out again so some
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companies offer you a ten percent
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liquidity feature or five percent
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liquidity feature or they allow you to
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pull out the interest but during that
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time period that you own that annuity
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you're going to be limited at the amount
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of money that you can pull out without a
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surrender charge so that three-year
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annuity it grew for three years it
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accumulated up to a hundred and nine
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thousand dollars in change and at the
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end of those three years you have
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complete access to the money you can
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pull it out and move it now i'm not
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going to get into how this money is
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taxed again we'll share that with a
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later video but know that at the end of
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the contract the money is yours it's not
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forced to be annuitized you don't have
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to turn it into an income stream you can
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simply take that money and walk away
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that's a cd type annuity on the other
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side we have indexed annuities so that
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is a fixed annuity but instead of
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growing at a stated interest rate it is
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going to grow based on an indices now
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each and every insurance company is
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going to offer different indices they
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may offer the s p 500 the dow jones you
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may be able to get a fidelity index or a
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volatility index i mean the indices
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there's a ton of them out there to
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choose from but know that it's fixed and
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because it's fixed it will not lose
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value based on market losses so if you
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put a hundred thousand dollars over here
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and the markets fall apart at the end of
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the first year you will still have a
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hundred thousand dollars unless
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you have fees and it's very important
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you understand that the variable
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annuities typically have fees the fixed
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index annuities may or may not have fees
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your traditional cd type fixed annuities
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typically do not have fees and every
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single insurance company is going to
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offer a different type of annuity with a
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different structure i just want you to
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understand the basics so you're not
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afraid of annuities annuities can be an
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integral part of your financial planning
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i never want you to put all of your
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money into annuities it's a bad idea
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just like i don't want people to put all
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of their money into the stock market
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necessarily you should diversify your
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assets talk to a qualified advisor talk
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to a cfp a certified financial planner
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and allow them to show you how
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fixed-indexed or cd-type fixed or
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variable annuities may play an integral
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role in your financial planning i'm not
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going to recommend this to anybody
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because i don't know your situation but
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don't be scared of these just because
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your friends or your stock broker told
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you annuities are bad that's like saying
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the gremlin which was a bad car back in
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the 70s because it blew up if you
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rear-ended it the gremlin was bad that
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doesn't mean you should never buy a car
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that means you probably didn't want to
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buy that car
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understand there's different types of
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annuities so as i said at the beginning
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immediate deferred on the deferred side
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we have fixed and variable
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and on the fixed side we have cd type
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and we have indexed annuities now as i
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said i'm going to create videos on each
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of those we're going to do one on
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immediate annuities one on variable
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annuities another one on cd type and one
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on indexed annuities we'll go more in
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depth so you have a better understanding
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of what annuities are but you need to
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understand this because there was a tax
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law that was just passed and annuities
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will now be allowed inside your 401ks so
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i want you to understand what you're
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getting into and is it the right
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investment for you
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as always i hope you enjoyed this video
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if you liked it please hit like if you'd
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like more videos make sure you subscribe
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and i will talk to you next time
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