Annuities 101 < Everything You Need To Know, (PART 2)

Ready to uncover the mystery behind variable annuities? You've hit the jackpot. 

I'm Kimsey Hollifield, from Hollifield Financial Group, and I'm taking you on a journey through the world of variable annuities. We'll dismantles all the nuances of this financial instrument, often shrouded in confusing jargon and hidden fees. I'll also tell you why I'm not a fan of variable annuities, echoing the sentiment of financial gurus like Tony Robbins and Suze Orman. 

In this episode, I'll lay out the inherent risks and the plethora of fees that come hitched with variable annuities. You'll be privy to a real-life story of my clients who ended up paying over twenty thousand dollars ($20,000 USD)  in fees due to the variable annuity they were in. 

If you're eager to make sense of your investments and steer clear from the snares of high-fee investment options, this episode is your treasure trove. Get ready to arm yourself with insights that could end up saving you thousands of dollars and a whole lot of financial stress. 

Interested in learning more? Visit us at https://www.hollifieldfinancial.com/ or give us a call at (843) 400-3022.

Transcript

Speaker 1: 0:09

Hey, this is Kim Z Hallifield with Hallifield Financial Group. If you hate annuities, the reason is probably because someone has spoken to you or you've looked into a variable annuity. And listen, I hate some annuities as well. I don't like variable annuities, and I'm going to talk today about why I don't like variable annuities. And it's not just me. Tony Robbins has been very outspoken hates variable annuities. Suzy Orman hates variable annuities. All of these people that you would consider financial gurus talk negatively about variable annuities. Why is it that so many people have variable annuities? All right, two reasons why I dislike variable annuities. First of all, there's a lot of risk, and then there's a lot of fees in these things. So let's talk for a second about what is a variable annuity. A variable annuity is a contract between you and the insurance company that you're going to put money into this program and it's going to perform a certain way. Now, this can be an IRA. This could be your 401K rollover. This could just be regular money you had in the bank, but you're going to give it to the insurance company and they are going to invest it in a specific way. They're actually going to invest it in mutual funds. Now, this is actually part two of our Truth About Annuities series. So part one I'll link up here. If you are brand new and you didn't know what an annuity was before you turned this video on, maybe start there. But if you are somewhat familiar or you've already watched the first part, go ahead. Let's continue on Mutual annuities, like I said, they are invested in a separate account in mutual funds, and mutual funds have risk.

Speaker 1: 2:00

Mutual funds go up and they go down, and a mutual fund is basically a fund or a basket of different stocks and bonds that are invested in the market and they are supposed to do something. So if you have a technology mutual fund, it's going to be invested in technology stocks. If you have a dividend mutual fund, it's going to be invested in dividend stocks and you can really see, based on what the mutual fund says, what you're invested in. And that's what this insurance company does. When you give them money in a variable annuity, they're going to put it into the mutual fund, which means that you have the risk of the mutual fund and you have the fees associated with the mutual funds.

Speaker 1: 2:43

The second reason, and really the biggest reason why I dislike variable annuities is because they have tremendously high fees. I think that they have the highest fees of any investment that you can choose. Now you know why so many people have them because there are such high fees on these accounts. There's actually six fees in a variable annuity, so let's go through them. Let's count them out. One is an admin fee. The admin fee is not very high. So if you call and you ask the company what are your fees, they always start with that. The admin fee is not very high. Number two is something called an M and E fee. That stands for mortality and expense and that can range from not very much to fairly significant. So the first two fees are admin and mortality and expense.

Speaker 1: 3:40

The third fee that I like to go over is the sub account fee. The sub-account is the mutual funds that we just talked about. The manager of the mutual fund is going to get paid to manage your money and not the insurance company, but the manager of the mutual fund that the insurance company invested you in. So normally that is maybe 1% plus or minus per year. So that goes to the mutual fund company and it's listed as a sub-account fee. The last three fees are interesting.

Speaker 1: 4:19

The next one is an income rider fee and the way I like to describe an income rider fee is have you ever been to the ATM and you go up and you need some cash for something and you put your card in and then you hit your. You know you want $20 and you're waiting to hear the sound of your money, ch-ch-ch-ch, you know. And instead it pops up hey, there's a $3.50 fee to take the money out of your account. That is sort of like what an income rider fee does. It's a fee that says, hey, if you have $100,000 in your account and we invested in mutual funds and you lose half, now you have $50,000 left. If you want to take that out over time, then you can still spend the $100,000 over time. It becomes like a very, very expensive personal pension.

Speaker 1: 5:11

The next fee is called a death benefit rider fee and that is a fee that says if your account grows to, let's say, $200,000 and then the stock market drops and you lose down to $125,000 and you freak out and you die, your children, your beneficiaries, your family will still receive the $200,000. But the problem with that is a lot of times that fee by itself is maybe 1%, maybe higher, and so it ends up to be like a very, very expensive life insurance that you may never need. Now the last fee is called a surrender charge fee, a surrender charge schedule. When you get into a variable annuity it's normally for five years or seven years or 10 years, and so if you want to get out early, they're going to charge you a back end surrender penalty for taking your money out early. So those are the six total fees Admin, m&e or mortality and expense sub-account, income rider, death benefit rider and a surrender charge fee. Now all of these fees put together. There was just a survey that came out that they surveyed all of these products and the average fee is three and a half percent.

Speaker 1: 6:32

Now I have personally in my financial planning practice. I see these accounts a lot. I have seen them as high as 4.7 percent. And let's forget the 4.7 for a minute and let's just talk about the average of three and a half percent and why it becomes so difficult to make money in a variable annuity. It becomes so difficult to make money in a variable annuity because if one year, if you have a hundred thousand dollars and you make thirty five hundred dollars, that is all going to be deducted in fees. Well, the next year, if the market goes down and you lose thirty five hundred dollars. You're probably going to be down about seven thousand dollars because your fees come out whether the market is up or down. So it becomes very, very difficult to make money in an account that has risk and has these tremendous fees on them. You have two things that now you're trying to overcome.

Speaker 1: 7:28

Let me tell you a story real quick. I had some clients wonderful, wonderful people come into my office a few months back. They had actually attended a financial seminar, a financial event we did, and they set an appointment. When they came into my office they said you know, we've had this account for five years and it hasn't moved. You know, yeah, it's gone up and down, but pretty much we have the same amount of money that we started with and the husband had twenty five thousand or so and the wife had seventy five thousand. So let's say, you know they had right at a hundred thousand dollars, but that's what they started with for five years.

Speaker 1: 8:04

When I looked at their statements I knew right off the bat that they had a variable annuity. So I called the company and what we do is in my office, we put the company on speakerphone and we just go through and ask very, very simple questions what kind of fees are in this account? What about the M&E fee? What about the sub account fee? Is there this charge? Is there that charge? What did they start out with? What do they have now, you know, what kind of protection do they have? Just very simple questions. And we have a program in our office that I have pulled up and, as I'm asking the company these questions, it's populating the data and we can see at the end of the phone call what their entire fees, that they've paid for, the entire amount of time they've had at five years which, by the way, was over twenty thousand dollars, because he had four point three, two percent per year in fees and she had four point six. So they had paid over twenty thousand dollars in fees to the company. We can see if they've made money. We can see if they've made money, how much goes to them, how much goes to the company in fees, and all of this put together, at the end of the day we figured out they had made over twenty thousand dollars but all of it had gone to the company that was holding their money.

Speaker 1: 9:25

And what we're able to do, you know a lot of times when you have one of these variable annuities, you're you're stuck in it. You can't really get out. But now you know the market is up and a lot of times people are able to get out of these accounts now. So this couple here I was able to help them get out of the account and into something else. Now, a lot of times you still have a surrender charge that you're trying to make up right. So you have to choose accounts that have some upfront bonuses going in. So a lot of sponsoring companies will allow you to get out of these. You pick a new company, we choose a new company, the money rolls into the new company and we always make sure, if there is a back in charge, that that is made up by an upfront bonus by the new company. So this couple they were able to actually go into a brand new product. That was fantastic, much better for them, much safer, much lower fees and the upfront bonus more than made up for any charge that company was holding them onto.

Speaker 1: 10:34

So listen, if you have a variable annuity or maybe you just have questions on it, click the link below and we can schedule a 15 minute phone call or zoom, and I would be more than happy to walk you through the product that you have, the good, the bad, and at the end I'll be able to, at the end of 15 minutes, I'll be able to tell you can you get out of this or are you stuck for a little bit? Are there any things that you can adjust in this account to make it a little better for you? If you are stuck, then I'd be very, very happy to help you do that. We do this all the time for variable annuities. So thank you for listening, thank you for watching. If you're not subscribed, go ahead and subscribe. Hit the little bell icon so you can know when we post more videos. Once again, this was Kimsey Hollifield, hollifield Financial Group, and I will see you on the next video. You, you, you, you you.