“Guaranteed for Life”… By WHOM?
Remember Gloria’s excitement over getting into “THEIR pocket”? [#029]
Whose pocket is that?
Gloria has a Fixed Index Annuity with an Income Rider…
Last week [#029] we went over the complex parts of these contracts, learned to read the statements, and started to look at the reasons to, and not to, own one.
Obviously, promised lifetime income is the big attraction.
But we must understand what we really own.
One statement, Two Values:
- The Green Circle is the “real” money (Account Value)
- The Blue Circle is the “fake money” (Benefit Base used to calculate income)
Two values. The roll-up grows the benefit base, not your money. The payout percentage turns the Income base into a paycheck. If you missed it, go back and read [#029] first.
One more thing about that statement at the top. Look at it again…the income rider is terrific! The accumulation is almost nothing.
Why? Because a contract built to deliver big, guaranteed income gives up accumulation to do it. If someone tells you a contract is best for both, ask to see both sets of numbers!
Gloria bought it for income…and turned on her income 6 years ago.
Since her income is subtracted from her “real” (Account Value) money, almost half of her “real” money is gone! Gloria is only 67, could she use up ALL the money?
Absolutely! And she’s looking forward to it! You see, she doesn’t have any children, and her husband, who’s 13 years older, is covered by a separate contract.
She’s totally excited about the insurance company paying her out of THEIR pocket! (While she continues to invest her other money!)
Sounds like a plan! However…
“Guaranteed for Life” is a promise. Every promise has a price and somebody making it.
Which brings us to today’s questions:
Today: What is the price, and who is the promisor?
PART ONE: What does that promise cost?
The number I didn’t give you last week.
The rider cost is deducted directly from the Account Value (Real Money). But how is it calculated?
We know that the Account Value doesn’t grow with a roll-up like the Benefit Base, so normally it’s quite a bit smaller. Which number would you like them to calculate the charges on? The smaller one?
Too bad, it’s not usually the smaller number! It’s normally calculated on the “Income Base” (Fake money), but taken out of the “real money” (Account Value).
Plain English: You pay the fee on the number you can’t cash in, and it comes out of the number you can!
The Math: 1% a year on a Benefit Base climbing from $100,000 to $190,000 adds up to about $14,500 over ten years. At an average 4% credit, $100,000 would have reached about $148,000. After fees, though, it lands at about $130,000.
(This is hypothetical, for illustration only.)
The rules of the insurance contract determine the cost of the rider, how much income you can expect in the future…and how much “real money” you’ll have.
What questions should you ask about the rider charges when choosing a “Guaranteed Income for Life” FIA rider?
[Download This PDF to Take With You!]
The four questions I promised you last week are on that sheet too.
Your first concern is to understand what you’re buying…
Pro Tip: Ask for the rider pages of the contract, not just an illustration. After 30+ years of reading these things, I’ve learned: “The big print giveth, the small print taketh away”!
What you get for it…
The Honest Trade (From Gloria’s Statement at the Top):
- Deposit: $155,981 (Age 51)
- $15,559 a year income for life after 10 years (Age 61)
- Her own money covers about 13 years (Ignoring any future interest credits, which would stretch it a little)
Live to 95: The insurance company pays about $326,742 out of THEIR pocket.
Die at 75: Heirs get nothing ($217,828 income paid, not much more than her deposit)
The Line: Same contract, same numbers, different outcomes. It’s insurance against living a long time, and you “win” by living a long time!
What your kids/heirs get…
Usually the Account Value, not the Income Benefit Base. The $311,183 is not an inheritance. Like Airline Miles, your kids/heirs can’t cash those either.
What if the roof goes?
Usually, “Excess withdrawals”, taking more than the rider allows, can:
- Shrink the benefit base, sometimes by more than the dollars you took
- Cut your income for life permanently
Pro Tip: Keep an emergency fund OUTSIDE of the annuity. Remember Marion in [#028]? We refused to provide another annuity because it would lock up the money she really should keep for an emergency fund!
Will $1,000 still buy $1,000 of groceries at 85?
The “Income for Life” rider produces a level income for life, unless the rider has an increase feature, and those cost something extra.
Be careful, many tell you it could go up if you get market credits…but the Account Value has to exceed the value of the Income Benefit Base, which is already much larger than your account value…not likely to happen!
Let’s look at the example above to understand the shrinking income value…
- Income started at 61
- 24 years until age 85.
- 2.5% Average historical inflation
- $1,809 required at age 85 to equal the purchasing power of $1,000 at age 61!
How do we plan for that? This is where true “retirement planning” comes in. We shouldn’t just plan for today. We need to plan for 30 years, just in case we live that long!
After we’ve addressed all the “tools” in our Retirement Tool Box, we’ll reveal how that can be accomplished…stay with us every week!
PART TWO: Who is actually writing the checks?
In issue [#025] we talked about our retired United Airlines pilot friends, Cliff & Kay. He had 30-plus years as a pilot and retired at age 60 with a $125,000/yr pension. Then United declared bankruptcy in 2002.
A federal agency, the PBGC, picked up the plan. What came out the other end was roughly $28,000 a year at the time, on the maximum for age 60, with a survivor benefit for Kay, and no COLA! That’s quite an income cut!
When retirees are looking for “guaranteed” money, whether it’s your principal in the bank, your income from a pension, or an annuity, who stands behind that “guarantee”?
The FDIC and PBGC are federal agencies. As you saw, the PBGC may or may not pay a pensioner dollar for dollar. You may also be unaware of the backing for banks by the FDIC:
Note that the “Deposit Insurance Fund reserve ratio is tracking toward the statutory minimum of 1.35% earlier than the required deadline”. What does that mean?
It means that their goal is to have $1.35 in reserves for every $100 of insured deposits. Not every dollar in every bank, just the insured ones.
Is that a problem? Probably not. If one or two banks fail, that’s a small call on the fund. The FDIC can also borrow from the Treasury and charge the banks special assessments, and it says no depositor has ever lost a penny of insured money.
My point isn’t that your bank is in trouble. My point is that EVERY one of these guarantees has a structure behind it, and most people have never looked at any of them!
What about the company issuing your annuity? The National Association of Insurance Commissioners (who regulates insurance companies in each state) published this in June:
Each state must vet the insurance companies it allows to operate in the state. When the state takes over a company, your policy may continue. It may not!
I’ll give you two examples:
Both of these clients took a known risk, with their eyes open, after we told them what we thought. One of them got a good ending, the other didn’t. Nobody could have told you in advance which was which.
The GOOD Outcome:
We had a client, Otto, who would not qualify for a Long-Term Care policy with the popular carriers. At 77, he was very concerned about using their savings and leaving his wife, Margaret, destitute should he need care. At that time, Penn Treaty was accepting many clients that other companies would not.
Although we warned him of the risks, their ratings were low, and the company had already been in financial trouble, Otto wanted to take a chance on getting a policy. The policy was issued in 2007. After eight years of legal battles, the State Guaranty Association took over his policy in 2017. It remained in force, and claims would be honored up to the state maximum (which covered his policy).
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Be careful: not every state backed these policies the way Virginia did.
The DISTURBING Outcome:
Judy loved to chase rates. Although Judy had some money invested, she liked to keep some in what she considered “safe” places. She asked for the MYGA (Multi-Year Guaranteed Annuity) with the highest rates we could find. Several had decent rates, but one stood out: Colorado Bankers Life, with a higher rate and a full 7-year term.
Remember how these work. The longer the term, the better the rate. Judy wanted the rate, so she bought the term…7 years.
Then the court froze it, and seven years stopped meaning anything.
Colorado Bankers Life was founded in 1974, not a “new company”. It had maintained a solid B++ rating. Although that is a “good” rating, we were not fully comfortable with it, but Judy was. The trade-off was that we wouldn’t put any money into this contract that would be necessary for her future financial security.
Behind the scenes, a billionaire who, regulators later alleged and courts have since found, used regulatory loopholes to move large percentages of insurer assets into his own non-insurance companies through circular transactions. The regulators didn’t know either!
Colorado Bankers Life entered regulatory rehabilitation in 2019 and stopped paying interest. A liquidation order was issued in 2022 and officially took effect in November 2024.
Here’s the part that still bothers me.
Judy’s contract was small. About $27,000 going in, and $29,498.38 by the time the rehabilitation letter showed up in 2022. Virginia’s guaranty association covers annuities up to $250,000 in present value. She wasn’t anywhere close to the limit.
On paper, she was covered, but she still didn’t get it all back!
Her money sat frozen while the courts worked. No growth. No access. No way to know when it would end (that bothered her the most!). And here’s the part almost nobody thinks about…
It was an IRA.
She wasn’t allowed to transfer it. Couldn’t roll it anywhere. So when the money finally came, it came out as a taxable distribution. Not a rollover.
Think about what that means. She didn’t just lose the interest and six years of her life. She lost the tax shelter. Money that was supposed to stay inside her IRA landed on her tax return instead, in whatever year they got around to sending it.
Judy is grateful for the guardrails we insisted on. I’m grateful there was only $27,000 there.
Before you treat that as a safety net…
Here’s something most people have never been told: In most states, an agent is not allowed to use the guaranty association as a selling point. It’s against the rules to sit across from you and say, “Don’t worry, the state has you covered.”
Why?
Because it isn’t a promise you can plan around. It’s a cleanup crew!
Otto’s worked. Judy was covered on paper, nowhere near the limit, and still waited years for a smaller check that landed on her tax return. They both live in the same state, same backstop.
Two completely different endings, and neither one could have been predicted on the day they signed.
How to Check the PROMISOR:
Third Party Credit Ratings:
Ratings from the major insurance rating companies are available to everyone. Check any company proposed through:
AM Best: The oldest and most widely cited insurer rating company
Insurers are also rated by S&P Global, Moody’s, and Fitch. Each has its own scale, and a rating is an opinion, not a guarantee.
How long has the company been in business and paying claims?
As shown on the NAIC site: What is their Risk-Based Capital Ratio?
We’ve recently become aware that several of the insurance companies rated “A” by the major rating firms have moved their “reinsurance” from here to offshore/captive reinsurers. This is cause for concern, but not a reason to act in haste if you own such a policy.
We check these facts now before working with a company!
Pro Tip: Before IRA money goes into ANY insurance contract, ask one more question: What happens if this company ends up in receivership? Can I move it? If the answer is no, your rollover becomes somebody else’s taxable distribution, on their calendar instead of yours.
Now… The Good, The Bad and The Ugly
THE GOOD:
- A paycheck for life under the contract, even after your own money is gone.
- You don’t hand over your principal. You keep an Account Value you can see.
- Whatever is left usually goes to your heirs.
- Waiting raises both the benefit base and, usually, the payout percentage.
- Joint options are a real tool for survivorship.
- Some riders add long-term care features, depending on the contract.
THE BAD:
- It costs you money every year, usually figured on the big number and taken out of the real one.
- The Income Benefit Base can never be cashed in.
- Your early checks are your own money coming back to you.
- Level income buys less every year you live.
- One excess withdrawal can cut your income for life.
- Surrender periods limit your access.
- Complexity. Two values and one very long contract.
THE UGLY:
A useful tool, sold badly:
- “Guaranteed 10% growth!” On which value?
- “Your money doubles in ten years.” Which money?
- “It’s guaranteed, just like the bank.” No. Different promisor, different rules, as you now know.
- Selling a rider to someone who is never going to turn the income on.
- Paying for a rider with money that already has another job to do.
The person saying these things may believe every word. Don’t blame them, just ask the next question.
So, is an income rider a good tool or a bad one?
Wrong question.
It has one job…
Its job is to fill the portion of your retirement paycheck that must last as long as you do.
If Social Security and a pension already cover your basic and operating expenses, and neither you nor your spouse would need extra income if one of you were left alone, you may not need one at all. If there is a gap, this is one option among several, funded with only the amount necessary [#026].
And whoever writes that check (a bank, a pension, or an insurance company) somebody is standing behind it. Find out who…then find out what the fine print says about them.
That’s why we stay AGNOSTIC TO THE TOOL. We don’t fall in love with products. We fall in love with solving problems.
(Nothing here is advice; it’s education.)
Last week I gave you “Which Value? 9 Questions to Ask About an Income Rider.”
It’s grown, turn it over and you’ll find four more questions, the ones about what that rider is charging you every single year.
Same link, same page…Print it and take it with you!
Next Week:
Medicare Advantage or Medigap? Part D Plan? Decide Before December 7th!
Open enrollment runs October 15 through December 7, and this is the one deadline in retirement that doesn’t care whether you were ready.
Remember Edith in Issue [#005]? Almost 80, living in assisted living, switched off Original Medicare by a phone call she didn’t understand. We found out because of a mammogram bill.
Before you touch that plan, there are questions you need answered.
Next week you’ll have them!
Retirement News:
Mark your calendar. Medicare Open Enrollment is your window to change plans, switch drug coverage, or move between Original Medicare and Medicare Advantage.
My advice for this week? Don’t change anything yet… just put the dates on the calendar and read next week’s issue first! What you don’t know CAN hurt you…
Retire Plugged In Community Update
In our community, Retire Plugged In, all of this lives in one place: short videos on income planning, taxes, Social Security and avoiding scams, right at your fingertips. When the rules change, I can send you an Alert.
Here’s the link to join the list of people who’ll be notified when we open our founding beta group:
Okay, I’ll leave you with that for now. Have a great rest of your day, and I look forward to seeing you next week.
I think that’s enough REAL for today…
Take care, Nora
