SUNDAY, FEBRUARY 25, 2018
JIM: Welcome to today’s show. We have back with us Tim Keesling who speaks around the country, the different advisor, teaching them all different types of topics on how to be a better advisor and today he’s joining us as kind of an expert witness to talk to us about annuities. In our last show we kind of talked about this. Are they good? Are they bad and when you read the articles in the press, people seem to love them or hate them. I’ve never seen a product that gets so much emotions involved. I just look at it as a tool in the tool box. If I’m a plumber, I need a plumbing wrench not a crescent wrench so depending on the job you’re going to do, annuities do have a place in an overall retirement planning strategy or saving strategy but they are not going to create world peace if everybody just buys enough of them so today we have back Tim and he’s going to talk about annuities as a distribution tool. If you missed the program where we talked about annuities as an accumulation tool, if you’re thinking about annuities, this is something you definitely want to talk about with your advisor because it is an important tool to have some significant tax benefits but it’s not one size fits all and everybody should have all their money in these but it certainly is an effective tool and I want to welcome you back, Tim. Thanks for joining us.
TIM KEESLING: I appreciate it Jim. It’s a privilege to be back. Certainly there’s been a lot of discussion about annuities and the distribution phase and all the different challenges that today’s retirees are facing so I’m happy to join you and share some information.
JIM: Now last program we talked about annuities as saving and accumulation money but now we’re going to talk about it as a distribution tool. Tell us where do you use annuities or how do you feel annuities are a distribution tool?
TIM KEESLING: Well, with the retirement landscape changing for clients as many of the prior generations retired, they had the same three-legged retirement stool. They had a pension from the company they worked for, they had social security, and then they had their personal savings. Well, as we’re all aware, that stool is pretty wobbly right now and especially that pension leg has been all but chopped out for most people that are getting ready to retire. We won’t go into the social security leg today nor the challenges faced on the personal savings leg, but certainly where I think the annuity fits, specifically the income annuity where you may hear terms like immediate income annuity, I think that fits to help replace that pension leg that many of us have lost. Many, many clients are saying I want some level of guaranteed income that comes on a consistent reliable basis that I know I can’t outlive. The big concern used to be my healthcare and maintaining my health during retirement and I think more and more folks are now saying I’m more worried about outliving my money and how can we help them to produce the income that gives them the satisfaction they want through retirement.
JIM: What’s interesting is a lot of people I know when I visit with them and they have a pension, I might be talking about annuities as a possible solution and maybe they’ve read a negative article about it and said don’t even talk to me about annuities and they have a pension and I say well you already have one of those and they’re like what do you mean? Now sometimes those pension were paid from the pension fund but a lot of the pensions that I’ve come across, the pension fund actually bought an immediate annuity from an insurance company to provide those benefits. You look at them where they all of a sudden have this ah-hah moment, oh yeah, an insurance company does send me that check so the thing is an immediate annuity is really something that is designed almost identical to how pensions are designed. It’s an income stream that you’re purchasing so let’s talk about some of those payout options.
TIM KEESLING: I think that’s where probably the biggest confusion comes in, Jim. There is different terminology _____, but what is a life payout or what is a period certain, what is a joint and survivor? If the title says that I’m getting a life payout, basically what that means is I need to be breathing in order to get that payment so a true life-only annuity says I’m going to get a payment for as long as I live and that might be three months, it might be 30 years, but as long as I’m living, the insurance company’s going to send me that payment on a regular basis. Typically we hear monthly but I can structure it however I need it so that’s a life-only payout. By the way, that’s the payout option that the press says everybody gets and we always hear the story of the widow who put all of her assets into a life-only annuity and then died three months later and all the money’s gone. Statistics actually show that a lot of people choose to not take that particular payout and even those folks that do choose that particular payout, because it does produce the highest payout for me, most folks that do that have a substantial portfolio of life insurance or other assets backing that up and there’s a very valid reason as to why they chose that payout option so it’s not as bad as the press will paint it.
JIM: And I’ll throw a one other option too. I have had a couple clients where the life option was what they needed to take because if we kept the money in savings, the amount of money they needed to withdraw was so great that it was just a matter of time of running out and if you have a life option which you just said, it makes payments as long as they live so the opposite end of that press story you’re talking about is the widow who puts all her money in and lives 30 years and keeps collecting checks. That could be the only way they can survive so one thing is to always be careful of and I see a lot of times in a pension situation where a husband or wife will pick the life-only option not understanding that leaving a surviving spouse with no checks because they automatically checked the box of the highest amount so as we talked about in the deferred annuity and accumulation annuity phase, is understanding these features are so critical, there’s no right way or wrong way. It’s the right way for you if it’s the right fit.
TIM KEESLING: Exactly right and each person’s going to have a different view as to how do they want to take that payout and there is certainly more than just a life-only payout as well. There’s a life with a period certain so you may hear of a life with 10 payout. Well what that means is as long as I’m alive, I’m getting that payment but let’s say I’m killed in a car accident five years into it. My wife would still get five years worth of payments. Now the thing there is it’s not the period certain or the 10-year period that I mention there doesn’t start at the time of my death, it starts at the time the income stream starts so with the life with 10, again I get that payment as long as I’m alive but if I live into the 11th year and pass away, there’s nothing for my beneficiary and there are different ways I can choose I period certain anywhere from 2 years to some companies will let me go as high as 30 years that I can put a period certain. Why would I do that? I’m just transferring risk over to the insurance company. Just keep in mind that every time I add a period certain or some type of guarantee like that, it’s going to reduce my monthly payout and I need to account for how I feel about that.
Now one of the other ways that’s out there that is not talked about much at all but I really like it as a payout option is called a life with refund so let’s say I write a check to an insurance company for $500,000. They agree to pay me an amount every month. Well, when I die, that insurance company will say did we send Tim $500,000 worth of payments? If I’d only received $300,000 worth of total payments before I die, my beneficiary will get the remaining $200,000. Some contracts will pay that out in a lump sum. Other contracts will continue to pay it on a monthly basis until in total myself and my beneficiary get back the $500,000 that’s been put in the contract and that’s called a life with refund. A lot of folks like that because they know at a minimum I’m going to get the money I gave to the insurance company, but as you alluded to earlier, Jim, if I’m one of those individuals that lives a long, long time, I could get back substantially more than the amount that I originally put into the insurance company.
One of the other ones you’re going to hear is joint and survivor. That is simply an income stream that’s paid out for any two individuals. Most commonly you’re going to see spouses but it can be any two individuals and as long as either one of those individuals are alive, those payment streams continue and there are variations on that that at the passing of the first individual, I might be able to decrease the payment in half because the thought is that my expenses have been decreased. There are actually some annuity contracts that let me increase the payout after the passing of the first. Again lots of different contracts and lots of different companies. Find the one that fits best for your individual situation and that’s the one we need to go with.
JIM: And now we have immediate income annuities, there’s deferred income annuities, all different types that are based or more focused on income, let’s talk a little bit about that. How do you define immediate income annuity versus a deferred income annuity?
TIM KEESLING: Great question. Every time the industry adds another product, there can be some additional confusion right? So an immediate income annuity is one that’s defined where the income stream starts within the next 12 months. As long as that income stream starts within that time period, I’m going to be purchasing an immediate income annuity. A deferred is simply anytime after that 12 months. That could be 13 months or in some cases it can be 30, 40 years down the road before that income stream can start but that’s the differential between the two and as you alluded to, that deferred income annuity is a relatively new product whereby I can take and deposit funds with an insurance company today and say I’m maybe 45 years old, I can do that today and tell them to hold off and start sending me income at some date in the future. Maybe it’s age 60 or 65, 70, or some point in the future, but I transferred the risk to watching those dollars grow or producing income off of those dollars, that goes over to the insurance company now and they guarantee me an income stream at that defined date.
JIM: What’s interesting I had an older couple and they were fed up with the market with the last downturn in the market. The husband with another advisor had purchased an immediate annuity with a 10-year period certain. Well he just passed away and there’s five years left of annuity payments and then that income is gone. Well, they had a death benefit from some life insurance that he had, they really wanted nothing to do with the market. She just wanted to be safe and we actually used one of these deferred income annuities where we put enough money in there to guarantee her the income that she wanted as well as having an inflation hedge but the payments didn’t begin until five years and then we coupled that with that refund that you talked about so if she dies within five years, she gets all the money back but now she’s got an inflation-adjusted income stream. Right now she’s 81 years old and we’re waiting five years before we start. Some might argue well, how much income is she going to need? Well I had a client die just short of their 108th birthday so you don’t know if it’s going to be 5 years, 10 years, 15 years, well now she’s got the peace of mind that that money’s going to grow, she’s going to have an inflation-adjusted income stream for as long as she lives and we put as little money as we could to get that benefit, then the rest of the money was put aside to save for her heirs with the hope that we’ll never need to touch it so that gave her the peace of mind to sleep at night. That deferred immediate annuity something like you said, we didn’t have years ago, was a perfect solution for the circumstance that that client had.
TIM KEESLING: And now that client knows that that income stream isn’t going to stop five years from now and that’s exactly like you said, the peace of mind that they want. A flipside of that that we’ve seen, Jim, is a number of clients have had a nice little run in the market lately. Some of them have said I want to take my chips off the table so to speak and I’ve had a nice little run, I’m going to take this gain that I’ve got, why not buy a deferred income annuity for when I retire five years from now and I’ve locked in my gain now and so that’s another avenue that many clients have said I’ve had enough with the market volatility. Maybe they believe the market’s about ready to take a downturn, I’m going to lock in my gains by taking those gains and moving them over to one of these products.
JIM: Well, let’s take a short break. When we come back, let’s just discuss a couple other strategies that clients may consider a deferred income annuity and some of the other benefits that might be available with it so please stay tuned.
JIM: Welcome back as we continue the interview with Tim Keesling who’s a speaker consultant and NAIFA member. He’s been speaking around the country helping advisors understand different strategies specifically when it comes to annuities, that dirty word in the press. Again, it’s something that is a tool. It’s not necessarily right or wrong. It just is what it is and it’s a matter of dissecting it and figuring out if a piece of your investment portfolio, whether or not you should be considering the benefits that an annuity might provide you and today we’re really speaking about immediate annuities. Let’s talk a little bit about nonqualified immediate annuities because this is a tool that I don’t think you can get anywhere else and that is where taxes can be spread out by using the exclusion factor. Can you talk a little bit about that?
TIM KEESLING: Sure. There’s a way that you can control the taxation on your income stream and the fancy term for it is called the exclusion ratio. Basically what that means is a portion of each payment that I receive is a return of my principal and a portion of that is earnings that is taxed but I have the ability to take that earnings and the tax liability that goes with that and spread that out over my lifetime so for an example, I might write a check out to an insurance company, they start producing income for me at age 65, they will anticipate the earnings on that contract and a portion of each one of those payments is going to be earnings, a portion of it is going to be a return of my initial principal and I only pay ordinary income tax on that portion of the earnings. It’s the ability to spread that taxation out over the rest of my life but in that nonqualified contract, it’s a very nice way to handle that tax liability especially as I enter retirement and I want to keep an eye on what my taxable income is because it may upset the amount of my social security benefit for example that’s taxed.
JIM: I know we deal with a lot of clients and looking at their taxes, it seems like a lot of them they’re in that sweet spot for Uncle Sam where they take a dollar out and $0.85 of their social security becomes taxable for every dollar they take out so it’s almost like a double tax. One of the challenges that people have if they use these deferred annuities and then just make withdrawals, the deferred income is what comes out first so let’s say for the sake of discussion that you put $100,000 in a deferred annuity many, many, many years ago and it’s accumulated to $200,000 or $300,000. Well if I take a dollar out, that dollar’s taxable. If I take $50,000 out, that $50,000 is all taxable but if I had let’s say $100,000 and just kind of make it simple interest, if I had $100,000 of interest and $100,000 of principal and I take an annuitization, an immediate annuity payout stream, roughly half of it will be taxable versus all of it taxable down to the basis of that contract so I know it sounds maybe a little bit confusing on the air like this but it really is an effective tool minimizing taxes and your taxable income and a way to get the kind of income you need especially in that nonqualified arena.
TIM KEESLING: Just another way that we can maintain some control over the taxation and help mitigate that so it doesn’t affect things like you did with the social security.
JIM: Another strategy that I’ve heard people use and I’ve used myself, a lot of times client depending what part of the country you’re in, I’m in the Midwest and I know you are too where we tend to be a lot more conservative. People don’t spend money here. I know it’s that way in other parts of the country too but I run across a lot of clients I’m amazed at how much money they’ve saved with the little bit of income that they’ve had through the years. One thing that seems to be a common denominator, nobody wants to pay taxes so we see a lot of people that have these deferred annuities. It’s a way of kicking the can down the road but that time to pay taxes, they never get to their comfort zone and a lot of them say well, we’ll just let the kids pay it and the kids are in a much higher bracket. A lot of times what we’ve seen if people are insurable, they take and they pay out their annuities over time and keep their brackets lower and use that money if they’re not going to use it for themselves, to purchase life insurance. One big advantage we have with life insurance and transferring wealth, is that the death benefit still goes to the heirs income tax free. It’s a great way to transfer wealth and not get dinged with huge taxes by having it all distributed to kids in a lump sum or over a short period of time. Have you see that much?
TIM KEESLING: I couldn’t agree more, Jim, and it goes back to your earlier comment of annuities are just a tool and life insurance is just a tool. I think part of the challenge is to identify what my goal is as a client and then take and say what’s the most efficient product to help meet that goal. If my goal is to take care of long-term care risk, long-term care insurance is the best way to do that. If my goal is to produce an income stream I can’t outlive, the income annuity is the best way to do that and as you just alluded to, if my goal was to pass dollars on or assets on to the next generation and leave a legacy, by far the most efficient way to do that is life insurance and so if I can take some of that income stream that maybe I don’t need to support the lifestyle I want during retirement and use the pennies of a life insurance premium to pass on massive dollars in regards to a benefit to the next generation that goes income tax free, I think that’s a very wise use of those dollars.
JIM: Now I have an outline here that you gave me that talks about the Rockefeller strategy and I just watched a program that he was the richest man that ever walked the face of the earth when adjusted for inflation so I got to hear what the Rockefeller strategy is.
TIM KEESLING: The Rockefeller strategy is a way as you just mentioned to maybe leave some assets to the next generation but I have found that many grandparents want to help their grandchildren. The old joke goes that the grandparents and the grandkids get along so well because they have common enemy. Many grandparents aren’t still entirely sold that their kids are going to turn out great, but they’re definitely confident that the grandkids are. Some folks don’t feel comfortable buying a permanent life insurance policy for example on little Johnny because the only way that I’m going to see any benefit of that as grandpa is unfortunately if little Johnny passes away before I do and that’s not what I want to see so what the Rockefeller strategy is is simply a way that I might be able to make an impact for instance to my grandkids today and I still get to see the benefit of it and it’s through the use of a joint and survivor annuity. Well how we set that up is grandpa or grandma buys the annuity, sets it up where the joint annuitant is one of their grandchildren and the insurance company sends one payment a year on the grandchild’s birthday so let me give an example. Maybe grandpa sets it up with little Johnny and one time a year on little Johnny’s birthday, the insurance company cuts a check to grandpa and let’s just say it’s for $1000. Now as long as grandpa’s alive, that check goes to grandpa, he puts it inside the birthday card, mails it to little Johnny, and maybe we put it in little Johnny’s 529 account or something else but once grandpa dies because it’s a joint and survivor annuity, every year on his birthday for the rest of his life, little Johnny gets a birthday present from grandpa and that will go on for the rest of his life and because the mortality is spread out over grandpa and little Johnny’s life, you’d be surprised as to how inexpensive it is to fund that type of gifting to the grandchildren. Now I do have to say because grandpa owns the contract, it’s not removed from the estate so it’s not a way to avoid estate taxes or anything like that, I just think it’s a really neat way for maybe grandparents to fund a legacy gift to their grandchildren.
JIM: Definitely something to sit down with your advisor and talk about some of these tools. Again if you’re cutting down a tree, a wood saw might do the trick. If you’re cutting a steak with it, it might not be the best vehicle. You may need a steak knife for it. Both cutting tools but they work differently for different circumstances. It’s the same thing with annuities. It’s a piece, it’s a solution that can help solve some problems of longevity, market volatility, can help smooth out the ride. Is it the right thing for all of your money? Absolutely not. You want to look at all the different things that are available to you, all the different tools, and come up with a strategy and that’s what your financial professional is all about. It’s someone that you can go to to understand your situation and make recommendations in how these might fit for you. Tim, I want to thank you again. This has been great. I hope that we made a difference for a lot of people, helped educate them on how to ask the right questions of their advisors and figure out what some of these products are and how they might fit into their own planning strategies. Thank you.
TIM KEESLING: You’re welcome, Jim. Thank you.
JIM: Thanks for joining us this week and tune in again next week as we explore another phase of the Real Wealth process and remember if anything you heard in today’s show you’d like to get more information about, contact your Prism Insurance Agency Advisor. Also if you feel that any of this information would be helpful to a friend or family member, just click the forward to a friend button.
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