The process of buying an annuity may seem overwhelming at times due to its almost unlimited amount of possibilities. In this episode of Money Script Monday, Sal Mendoza explains the pros and cons of both immediate and deferred annuities and offers insight into a hybrid annuity that could provide you with both immediate income and accumulation.

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Video transcription

My name is Sal Mendoza, and welcome to today's presentation on "Using a Hybrid Annuity for Both Immediate Income and Accumulation".

A few months ago, I had some friends in town and we went to Disneyland. We ended up at this restaurant called The Cheesecake Factory. We sat down after waiting for about 45 minutes, and the waitress came over and she dropped off a menu, one of the first things I noticed is how big the menu was.

As I started to open the menu and fanned through each page there were probably over 250 selections. You heard that right, 250 selections. I thought, whoa, this is going to take a while! It probably took me a good 10 minutes to go through the menu before I decided to order something, and sometimes financial planning can be that way. You have a lot of stuff out there and it may seem confusing at times.

Now, many of you have been to an In-N-Out Burger, and for those who haven't, when you go to In-N-Out Burger you're going to find three things on the menu. You're going to find a Hamburger, a Cheeseburger, and a Double Double. They don't offer 250 different things because they do not want to confuse you and have you leave. So today, we're going to do this presentation very much like an In-N-Out Burger menu. We've narrowed down the options for you so that you can make an informed decision about which annuity to go with.

Immediate annuity

Let's start with the Immediate Annuity, which we call the Hamburger.

• Immediate Guaranteed Income: You trigger this income and it's going to be there for the rest of your life. It doesn't matter if you're 85 or 105. That particular contract will continue to pay you for as long as you live.
• Payout Option: If you want to receive the payments annually or monthly, you can go ahead and just sign that off on the form, and they can send that payment to you either monthly or annually.

Cons of an Immediate Annuity

One of the things a lot of people don't understand is that some of the features are not so good when it comes to buying an immediate annuity.

• No Liquidity: Once you have a contract with the insurance company, that's it. You send them a check, they give you the contract, we start the income, but there is no liquidity. If there is ever an emergency, you cannot get that money from the insurance company. You're going to have to go somewhere else.
• Mortality Risk: If you pass away in year 5 or 10 and you've written the insurance company a $300,000 check, that's it. They keep the money. That money does not go to your beneficiaries. So there's no legacy transfer.
• Interest Rates: Right now, we're in a very low interest rate environment. Seven years down the road, once interest rates recover or go back up, you cannot participate.

Deferred annuity

Now let's move on into what we call the Cheeseburger, the deferred annuity.

• Safe Interest Rate: When we're looking at the risk and return, it's not volatile. There's not a lot of high risk, like a variable annuity. By the same token, it's not a low-risk either. In other words, the risk is very low if you're using a Multi-Year Guarantee Annuity (MYGA). With a Deferred Annuity it's going to fall right in the middle, what we call one of the most ideal retirement vehicles when you need money.
• Withdrawals Privileges: This allows you to access up to 10% of your accumulation. For example, if you had $500,000 and you needed to access that money today, you would call up the insurance company and they would send you $50,000 anywhere between three to five days.
• Living Benefits: This is very important, especially in a deferred annuity. I'm going to give you a little insight on two of them.

(1) Protected Income Value Interest Bonus: This is an increasing paycheck to keep ahead of inflation. So if there is ever an upside in the market, and let's say you're getting $1,000 a month and you're able to participate, so for instance you're getting $1,000. The next year you may be getting $1,050, and that is locked in for the entire duration of that contract.

(2) Terminal Illness or Confinement Waiver: If something happens and you get sick and all of a sudden you cannot perform two of the six daily activities, you're able to call the insurance company and they'll actually send you extra money.

Hybrid scenario

This is the third item of the menu - your Double Double.

Let me give you a quick scenario here.

• 65-year-old woman
• Writes a check for $500,000 to insurance company
• Insurance company issues a fixed-indexed annuity (FIA)

This FIA has actually two accounts, the accumulation account and an income account. What's nice about this is it has the best characteristics of both an immediate and a deferred annuity.

• Income Account: This is very much like the immediate annuity in that it will provide the income you need for the rest of your life. The other great feature is that, typically on a rollup rate, you're going to get anywhere between 6% and 8% every year, at least for the first few years, and if you decide to defer it a little bit longer, your withdrawal rate will also increase to 5%, 5.5%, and maybe even potentially 6% depending on the contract.
• Accumulation Account: This is very much like the deferred annuity in that it grows and continues to accumulate. It also will allow you to transfer that to your family as well if something should ever happen to you.

So as you can see, a fixed-indexed annuity (FIA), or hybrid annuity as we like to say, may be a good choice for you if you are looking for an opportunity to receive both immediate income while also having that ability of accumulation. No other product offers the tax deferral, indexed interest potential, and optional benefits to protect your retirement assets and income like a FIA.

Annuities are complex products that include many features and factors so I hope my comparison of providing you the In-N-Out Burger menu of annuities helped provide clarity into how annuities work.

I want to thank everyone for watching this Money Script Monday episode on "Using Hybrid Annuity for Both Immediate Income and Accumulation". Take care.