7 Things You May Not Know About Life Insurance and Annuities

7 Things You May Not Know About Life Insurance & Annuities

1. The death benefit in a life insurance policy pays out free of income taxes in most cases. (consult your tax advisor to make sure this is true for you)

2. The cash value in a whole life or universal life policy builds tax-deferred.

3. If set up and managed properly, an indexed universal life insurance policy (an IUL) can provide a retirement income free of income taxes using tax-free withdrawals and zero-cost, or low-cost, policy loans.

4. The cash value in a whole life or an indexed universal life policy (IUL) never goes down because of a bad stock market.

5. The hottest thing in the life insurance business in 2014 is “Living Benefits“; ways to use the death benefit in a life insurance policy WHILE YOU ARE STILL ALIVE!

6. Annuities offer a guaranteed income that you can never outlive.

7. The hottest thing in the annuity business in 2014 is still the Lifetime Income Benefit Riders, which offer higher incomes, protection from loss, and an income for life.

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Why Retirees Still NEED Life Insurance

Why Most Retirees Still NEED Life Insurance

It seems like a million years, but it was only about 40 years ago that most workers could still look forward to a pension when they retired. The income came from money contributed by the employer, not the employee, and offered a guaranteed income as long as the employee lived. When the employee retired, it was likely that he or she would have paid off the house, been debt-free, and the kids would have left a long time ago. There also were no taxes on the employees earnings from Social Security.  So, with low expenses, a life expectancy of less than 20 years, income from the pension and Social Security, and home equity in case of emergency, the popular feeling was that there was no need for life insurance.

But things have changed.  In 2013, there is a very good chance that at least one spouse will live to reach the high 80’s or 90’s.  Most retirees still have house payments, car payments, and may have other debts.  Not only is the house not paid off, it may be upside down!  They may be supporting children or grand-children.  There’s a good chance that part, if not most, of their Social Security income is taxable but they probably already know that they did not save enough money to last until their 90’s.  They are staring directly at a financial disaster.

It’s not a stretch to think that MOST people who just retired, or soon will retire, do not have enough money to get through their retirement years.  If they need long term care at some point, they will not be able to pay for it and won’t get help from the government unless they are already broke (see Medicare and Medicaid pay down rules).  If one of the spouses dies, the surviving spouse is going to lose a big chunk of income.

For many of these people, their best hope is going to be a life insurance policy or annuity.  Some life insurance policies and annuities offer GUARANTEED LIVING BENEFITS such as an income for life (just like the old pensions), market-based rates of return on cash values, money for long term care or major illness costs not covered by Medicare without pay downs, zero-or lost cost policy loans, plus death benefits with large cash payouts that are free of income taxes.

This is why I call life insurance the most misunderstood financial tool.  But you MUST be working with an agent that really knows what he’s doing.


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Annuities Guide from Money and CNN

Review of “Ultimate Guide to Retirement: Annuities” on

I was reading through this guide and thought there was a lot of good, simple information in it. But I also found some gigantic misstatements and exaggerations.  I’ve compiled a list of the errors I found –

  1. The “Guide” contains no mention of Fixed/Indexed Annuities, which are commonly abbreviated as FIA.  The FIA offers a mix of fixed growth and/or growth tied to the growth of a stock index like the S&P 500.  The mix you choose can be reviewed and changed annually.  The main benefit of the FIA is that there is no possibility of loss due to market forces, but when the stock index goes up, your account value goes up.  Imagine a blackjack table in Las Vegas where you get to keep most of your winnings when your bet wins, but you also get to keep all of your bet when it loses.  Over time, your bankroll would only go up, right?  How long would you sit at that table?
  1. Repeatedly through the “Guide”, it talks about “notoriously high expenses”, “agent’s commissions”, and other “hidden fees” and this is badly outdated information, at best.  Some of this information does apply to VARIABLE annuities, which are NOT normally sold by life insurance salesmen because they require a securities license due to the risk of loss of principal.  I don’t have a securities license, don’t offer variable products, and don’t offer any annuities that charge fees to the buyer except for specific riders.  And I don’t offer ANY annuities where the buyer is charged a commission.  I’m not saying insurance companies don’t pay commissions; I’m saying the buyer doesn’t pay them.  Finally, there are NO hidden fees in the FIA annuities that I sell.  EVERYTHING is fully disclosed in the application and the FIA that I sell either have no fee, or have low fees (.5% per year or so).  FIA typically have LOWER fees than mutual funds and perform better, as well.  Bad information about the fees charged by insurance companies for annuities may be the most common mistake made by financial writers, who rarely have personal experience on which to rely because they usually DON’T HAVE ANY MONEY!
  1. The “Guide” talks about surrender fees and is correct in saying that annuities typically have surrender fees.  So do cd’s and many other financial tools used to save money for a period of time.  If you want to save money but think you may need to access more than 10% of the money in any year, then you should not put it in an annuity.  An annuity is a tool for saving money over a period of years, then converting it to an income stream, unless you are buying an immediate annuity, which converts a lump sum into an income stream immediately.  In the annuity business, we are constantly confronted with one major issue – SUITABILITY.  Insurance is a highly-regulated field and insurance agents are closely scrutinized to make sure we are offering and selling products that are appropriate for our customers.  Surrender charges are disclosed in any application for an annuity, so make sure you are aware of them.  Over time, they get smaller until they are gone.  But you CAN access up to 10% of the money annually without surrender charges in every FIA that I offer.  I can also offer annuities with no surrender charges, but the upside potential is lower.
  1. The “Guide” mentions that you can buy annuities with no fees or surrender charges with “direct sold annuities.”  The same thing can be done with most life insurance agents.  Just tell them what you want, ask questions, and read the application!  Any GOOD life insurance agent is going to ask a lot of questions about WHY you need an annuity, or even a life insurance policy, because this is the ONLY way they can make sure you get the right product for your needs.
  1. The payout options for annuities in the “Guide” is missing the most important option – a lifetime income benefit rider (LIBR).  For a small fee (as low as .5% per year), the insurance company will track two separate cash values for your annuity.  One value is the actual cash value plus interest or credits.  The second value is the rider value, which increases at a fixed rate that is normally higher than the growth of the actual cash value.  The rider value typically increases at 6-6.5% per year (depending on the company and specific product).  When the time comes to convert your account value to a stream of income, the rider value will typically be higher (often much higher) than the actual cash value.  The insurance company will calculate your income stream (annual or monthly) on the rider value, resulting in a higher income than if it had been based on the actual cash value.  Each year, the actual cash value will be lowered by the amount paid out as income, EVEN IF THE INCOME PAID EXCEEDS THE CASH VALUE SAVED!  This will be done as long as the buyer/owner of the annuity lives, and if the buyer/owner dies, any amount remaining in the actual cash value will be paid to his or her heirs.  Try that with your qualified retirement plan (401(k) or IRA)! Using an FIA with an LIBR results in faster growth with low fees, a higher income that cannot be outlived, plus the safety of an insurance company (no life insurance companies have failed to pay a legitimate claim in the history of the U.S., including AIG, whose exotic investment division failed and caused the company to require a bailout a few years ago, NOT the life insurance division).
  1. In several places in the “Guide”, they compare annuities to mutual funds.  As I mentioned above, FIA typically have lower fees than mutual funds and HIGHER growth rates, with MUCH higher levels of safety.  I’m not saying that every annuity will beat the performance of every mutual fund every year, but if you’re looking to put away money that consistently grows and safely builds a retirement income that cannot be outlived, there’s a good chance that an annuity is the best option.  But this can ONLY be determined by a careful consultation with a good life insurance agent that asks a lot of questions.
  1. One whopper of a misstatement in the “Guide” is that you can count on tax rates not going up in the future.  If you look at any chart showing the history of income tax rates in the U.S., you’ll see that tax rates are currently at the low end of the scale, despite massive budget deficits.  I believe there is a good chance that income tax rates will go up in the future and I also believe that it’s criminal to tell people to count on lower tax rates in the future.  Some of us will have paid off our homes and our kids will have moved out by the time we retire.  This means we will also have lost our greatest tax deductions.  Even if our income has gone down and rates don’t rise, losing tax deductions means we may not be paying less in taxes.
  1. The “Guide’ says annuities may not be good in your IRA and that’s a mistake.  It’s true that the growth in the cash value is tax deferred already, which is a large part of the appeal of an IRA; but the growth rate is often superior to the growth rate in many of the alternatives and it CANNOT GO DOWN.  I bet you know somebody that lost a large portion of the value in their 401(k) or IRA during the last 6 years, don’t you?  If the money had been in an FIA it would not have gone down at all during the bad years, but would be growing during the good years.  When is that a bad thing?
  1. There is one BIG final omission from this guide.  Many insurance companies are offering bonuses for buyers of fixed/indexed annuities right now.  These bonuses can range up to 12% of your deposit.  Please tell me where you can invest your IRA money and get an immediate 10% bonus, applied to the cash value of your account as soon as you open it, with no expenses?

If you are 50-65 years old and are not ready to take large distributions from your investments or your qualified retirement account, then let’s talk about how an annuity MIGHT be a good financial tool for you.

Michael Goodman  (714)585-2371

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