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Annuities: Choosing a Fixed Index Annuity? - YouTube
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Dick: So we'll talk about some of these
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variations here, Eric.
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Eric: I think that's the probably the bad
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transition, but the best
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transition we could do here, simply
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talking about the fixed indexed
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annuity. Dick, if I might start here. The
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fixed indexed annuity is that
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keyword there being, index. When you here
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equity indexed you hear indexing,
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it comes with all sorts of acronyms that
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play out. But basically, what you
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have is and I hate to use the term
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variable, because that's when things get-
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you have an index, which has a varying
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rate of return at times, and that's
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where people get confused, where they
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think that they have a variable
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annuity, many times they actually have an
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indexed annuity. What you're
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doing is you're accepting a little bit
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more upside potential, by basically
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working with an indexed annuity. Most of
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the time over a standard fixed
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annuity.
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Dick: You have more potential for upside.
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Eric: Right, so now you got your fixed
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annuity chassis, which that means no
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downside. You've got downside protection.
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Dick: You've got your safety.
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Eric: So usually there's no risk of loss
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of principal, is how we would
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state that. Now your index is going to
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allow a bump up, based off the
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performance of an index, typically the S&P
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50, or the NASDAQ, or something
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of that variety.
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So if the market gains 5.0% depending on
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where your caps are and I realize
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I'm throwing terms out there a little
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ahead of... But you're getting that
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potential gain that goes with the index,
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so it may be a portion and this is
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where we start talking about participation
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rate and caps and those things
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of that ilk
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Dick: One of the things, Eric that I'd
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like to just point out here. You
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started out, by saying equity indexed
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annuity and folks you're going to
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hear that a lot. You're going hear equity
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indexed annuity, fixed indexed
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annuity. Let me make this really crystal
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clear. It is not invested in
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equities. A fixed indexed annuity does not
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have an investment in equities.
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Eric: You are not in the market.
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Dick: You are not in the market. You're
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using the index, only as a gage to
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be paid interest and that interest is
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decided, based on various items such
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as caps. Like a cap says you can only make
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so much, no matter how much the
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market goes up. You can only make a
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certain amount. That cap could be 5.0%.
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It could be 7.0%. It could be 3.0-4.0%,
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and in the interest rate
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environment we've seen recently we've seen
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a lot of caps down in that 4.0%.
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So 3.0%+, I mean we've seen some that get
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up there in the 6.0%, and then
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some unusual strategies with
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participation's and different blends,
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where
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they've got a little more potential. But
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let's be realistic, what should
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someone expect over a 10-year period with
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an indexed annuity?
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Eric: Before we get that far, the one
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thing we have to clarify is to take
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a cap, you're giving up some of the
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upside, and why you're giving up some
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of that upside, is because you're giving
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up the downside.
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Dick: You're getting safety.
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Eric: Safety, right. And I think when we
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compare, usually a fixed indexed
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annuity with a variable annuity the one
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thing that we have to point out the
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difference in with a variable, a true
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variable annuity, you can lose the
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principal. With a fixed indexed annuity
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you've got that floor guaranteed,
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so you're not going to go below where that
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indexing point is.
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Dick: As much as we don't want to have a
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non-earning year in any
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investment vehicle, we look at a fixed
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indexed annuity, and a lot of times
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we use the term zero is the hero and the
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reason we say that, is because
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it's much better to have a year where you
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don't earn, than a year where you
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lose 25-30-40% and so that's where the
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index annuity becomes very strong.
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You know we look at what we call the loss
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decade, where these indexes did
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not perform, Eric.
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Eric: We look at 2000-2010 and I'm just
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going to talk about 2008. I mean
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if you look at it, we're bumping kind of
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constant moves up in the indexes
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and the overall stock market, but in 2008,
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September of 2008; I can tell
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you exactly where were you in 2008; but
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you saw the market take a huge,
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huge drop. And right there, the amount of
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time that we've had to have
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people recover wherein that market goes
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down, the S&P loses half of its
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value in a period of months, so at that
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point in time people who are close
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to retirement, we're having to reassess.
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Well, if you're in an equity
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indexed annuity in that point in time, you
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have no fears.
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Dick: You're even. You've lost nothing.
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Eric: You have not gone backwards. Now you
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would much rather take a zero,
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than a (50) or (60, negative anything.
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Dick: 25-30-40%, so yeah, that is the
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advantage to the indexed annuity
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that if you look at several studies. One
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study I'd like to just mention,
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that you can Google or we can send it to
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you is the Wharton study. The
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Wharton study took several popular indexed
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annuities and kind of compared
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it to the indexes and how it would have
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fared compared to the indexes, and
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then the nice thing about an index is an
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indexed annuity or a fixed indexed
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annuity, is that it will reset every year.
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So in those years when the market was
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really low, it reset and every time
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there's an increase in the following year,
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that annuity will be credited
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interest, based on whatever the cap was
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and whatever the rise in the market
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was. So typically, if we go back during
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the lost decade, we saw index
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annuities actually outperform the indexes
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they were measured against,
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because they never had to take any losses.
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Now an indexed annuity was never actually
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designed with that in mind, to
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beat the stock market. So in a good stock
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market, the index annuity will
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fall short of those gains. However, in a
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very volatile time, up and down or
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flat, many times a fixed annuity can
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actually outperform the index that
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it's being calibrated to.
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So that's where you really once you
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understand how a fixed annuity works,
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it can be very safe, and it can actually
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give a pretty good return, even
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sometimes it can exceed the market.
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Eric: You're getting security and
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guarantee of protection of principal, in
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exchange for that you're giving up some of
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the market upside potential.
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Dick: In that report Eric, I'm just going
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to generalize, but during that
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lost decade where some of the indexes had
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a little bit negative or they
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were basically flat, there were several of
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the indexed annuities that
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produced in the 4.0-5.0% range, which was
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very respectable for that time
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period.
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