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How Does An Index Annuity Work? - YouTube
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everyone the Lessman here for money
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evolution calm in today's video blog I'm
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going to be talking about how does an
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indexed annuity work so first of all
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let's talk about what is an indexed
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annuity well an indexed annuity is
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really just a type of a fixed annuity
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where instead of getting an interest
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rate from the insurance company the
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interest rate that you receive is going
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to be based off of your participation in
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an underlying index like maybe the S&P
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500 I know there's a lot of people out
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there that refer to these as hybrid
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annuities hybrid annuity is really not
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an official term but I know a lot of
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people out there refer to them as that
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so if you see the terminology hybrid
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this is usually what they're referring
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to now there's going to be two important
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components to an indexed annuity that
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we're going to talk about here the first
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one is going to be the interest
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crediting method and let's talk about
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that or here just a second and again
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let's use the example of the Standard &
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Poor's 500 so let's say that that is the
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index that you choose and depending on
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the annuity you might have a number of
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different indexes that you can pick and
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choose from that can range from
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portfolios or indexes it might be 100
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percent stock based to portfolios that
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might have a mixture of stocks and bonds
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there's a couple of things that are
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going to be important to look at though
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is one is what is that crediting method
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and how is your interest going to be
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accumulated every year and that's
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usually going to be done with either
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what's referred to as a cap or a spread
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and again so let's say we're using the
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S&P 500 here and so a cap would be an
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upper limit to how much you're able to
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make within that that annuity so if we
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have a cap rate of 5% what that means is
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that if the S&P 500
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goes up whether it's 2% or it goes up 5%
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you can make up to 5% with that but if
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the index goes up 7% or 17% the most
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that you can make would be a 5% return
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on that because that's the cap or they
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think of it like the upper ceiling the
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second way they do that and that's going
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to be we'll call that cap and the second
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thing is going to be what's referred to
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as a spread and a spread is it
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it would would get deducted from that
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indexes return before your interest is
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credited so if we kept the example the
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same we said that it's the S&P 500 and
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it had a spread of 2% and just to
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clarify here I don't know of any
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annuities in this marketplace that have
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a spread of 2% on the SP usually we're
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seeing things come in around 5% for a
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cap but anyway let's just go with every
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little will keep this example rolling
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here so we had a spread of 2% and the
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index returned at 10% rate of return for
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the year we would subtract that 2% in
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the interest that you would get credited
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would be 8% for the year so some indexes
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index annuities have a cap some have a
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spread some might even have a cap and a
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spread where it might subtract something
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from the annuity but you can still only
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make up to a certain amount now how this
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works is let's say that you started off
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with $100,000 in your indexed annuity
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let's say we're using an S&P 500 with a
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cap of 5% if this year the return on the
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S&P 500 was 4% then the value of that
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account at the end of the year would be
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104 thousand dollars let's say the next
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year the market tanked and whether it
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goes down 10 percent 20 percent or even
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50 percent the worst that you can do in
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a year would be zero because from one
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point to another your principal is
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essentially protected within the annuity
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and that's one of the main benefits of
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this type of annuity is that your money
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is generally pretty safe with us
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the following year let's say the market
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does 12% well we can only make 5%
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because that's our cap and I'm running
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out of room here but you get the idea
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that you can make 5% and this can go on
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like this
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for quite a long period of time as long
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as you keep that money in the annuity
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you're going to continue getting that
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upside potential so a couple things on
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that so the crediting method whether you
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have a cap or spread what index you're
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choosing and then the other factor
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that's going to be in there is the term
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so most often we see S&P
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500 indexes with a one-year
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point-to-point which means that from the
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day that you start until basically that
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same day the following year they're
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going to take a snapshot what was the SP
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at the beginning of the period and what
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was it at the end and if it was positive
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they're going to calculate out that
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interest and in credit that to your
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account some indexes might be a little
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bit longer you might have a two-year or
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a three-year index which means it's
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going to be point to point over a two or
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three year time period so you want to
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keep that in mind the second thing that
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we want to look at is a feature here is
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we have the interest crediting method
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and I'm going to put this over here is
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there might be an income or a withdrawal
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feature to the annuity so again one of
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the reasons that a lot of people look at
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buying annuities is they want this for
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an income stream or withdrawal stream
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that they can take out for themselves
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most likely in retirement in depending
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on the annuity there's some fairly
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decent features to some of these it's
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going to be dependent on a couple of
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factors one is going to be your age
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generally the older you are when you
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start taking income that's going to give
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you potentially better withdrawal
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withdrawal right so for example it might
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be 4% if you take the income beginning
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at age 60 it might go up to four and a
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half if you waited till age 65 just as
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an example whether you do it
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joint or single life so if you want to
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have the income guaranteed for as long
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as either you or your spouse are alive
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there would be a joint benefit and
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obviously that's going to reduce that
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amount you might get again you might get
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four and a half percent if it's just
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based off of your lifetime but it might
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drop to four percent if you wanted to
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guaranteed over you and your spouse's
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lifetime and and then also to the final
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thing might be the number of years that
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you wait before you start taking that
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income so if you invested the money into
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the annuity at age sixty but you waited
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until age 65 to start taking those
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withdrawals or that income some
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annuities have a feature that will give
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you an automatic increase in what that
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future withdrawal or income benefit
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might be so that would be the the final
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the final feature with that
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so lots of different moving parts within
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this type of an annuity so be sure to do
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your homework and to really make sure
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you understand all of the intricacies of
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the annuity that you're looking at doing
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oh and one thing I was going to think
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about here is this income feature
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oftentimes has a writer cost and that
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cost could be you know may be anywhere
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from a little bit less than a percent it
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could be a little bit more than a
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percent so that would be something that
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would come off of the value so even in
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one of those years where maybe the
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market went sideways you still might see
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a little bit of a drop if that 1% were
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to come off of that so just to be clear
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on that I wanted to point that out as
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well that there could be a writer feat
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and therefore some of those some of them
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that don't have an income feature don't
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have a writer cost and really there's
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there's no cost at all other than what's
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built in to either those caps or those
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spreads so this is going to be part of a
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video series I've already got I think
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several videos up on our YouTube channel
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under an annuity playlist so if you
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haven't seen some of those other videos
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check those out and as more topics come
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up we'll continue probably to add to
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that playlist and you know check that
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out if you have questions they'll feel
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free to call us we can either review or
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walk you through an annuity that you may
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already own or we can answer questions
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about an annuity that you're thinking
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about buying or if you want to see how
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an annuity might fit into your
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retirement portfolio so anyway that's it
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I hope you enjoyed this video check out
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some of other stuff on money evolution
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comm and I will see you back in our next
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video thanks
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you
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