I remember when I was young and dumb and buying my first brand new car. I pulled into the dealership with my beat up 1999 Pontiac Grand Am and told them I was looking to trade it in for a brand-new Toyota. Yes, I was a big hitter!
Again, because I was young and dumb, I told them that I was not going to be ripped off on the trade-in value of my car which was still in “great shape” and was “one of a kind” (sarcasm). After the salesperson pulled the old “let me talk to my manager,“ he came back with a killer price that they were going to give me credit for on my trade-in. I knew I had this salesperson right where I wanted him because he must have been clueless to give me that type of price for my beat-up Grand Am. Then we proceeded to discuss the price of the new Toyota. This is where I quickly learned the used car sales game. He would not drop the price of the Toyota one penny from sticker! I would’ve had to effectively pay full sticker price for that Toyota. This ticked me off since I knew the game they were playing so I walked out.
In the end, I realized that it was just a game of teeter-totter they were playing with me. They knew my “emotional trigger” was a good trade-in value on my car, so they offered that to me. However, the better the deal they gave me on my trade-in, the worse the deal they would’ve given me on the price of the new car. I was not a complete idiot and knew that the net price was what was important. P.S. The above demonstrates How car companies are able to occasionally do promotions where they “guarantee you” a big trade-in value even on junk cars.
What I just explained above is similar to how annuities with guaranteed lifetime withdrawal benefits work. GLWBs are one of my favorite financial products of all time but it’s important that you understand the difference between the emotional sizzle and true steak.
I speak with dozens of agents every day, and I am always surprised with how many agents are infatuated with some blast email they got from another company discussing a huge “benefit base bonus” and a huge “roll up rate” on XYZ’s guaranteed lifetime withdrawal benefit. Those large benefit bases are emotional triggers, for agents and clients alike. The agents often call to ask me if my IMO has access to that product. At that point in time, I will discuss if that product is “sizzle” or “steak.” After running them a comparison report showing the top paying GLWB annuities in the industry, they realize that the net payout is what matters most. And many times those massive GLWB benefit base bonuses and roll ups don’t really matter if the end payout factor is small. After all, here is the formula for the client’s income: Benefit Base X Payout Factor = GLWB Lifetime Income. All that matters is the GLWB lifetime income. So, the benefit base can have massive rollup rates in it, but it doesn’t matter if the end payout factor is small and vice versa.
For instance, with my $100,000, if I were to need income two years from now at age 65, and had a choice between two products, which one would I choose?
Product 1. Has a roll up rate of 25 percent simple each year and then, at age 65, has a payout factor of five percent.
or
Product 2. Has a roll up rate of 10 percent simple each year and a payout factor of 6.5 percent at age 65.
Let’s do the math for product one. If you put in $100,000 and get 25 percent simple interest two times that means at age 65 your benefit base is equal to $150,000. When you multiply that by the five percent payout factor, your end income is $7,500.
Now for product two. With a 10 percent simple rollup rate, your $100,000 will equal $120,000 at the end of year two. When you multiply that by a 6.5 percent payout rate you are looking at lifetime income of $7,800.
Number 2 wins in this scenario.
My point above on these hypothetical products is that, although you, the agent, will get a massive amount of blast emails singing the virtues of product number one and how it has a massive 25 percent benefit base rollup, that benefit base should be viewed as “funny money.” Afterall, it is not like the “benefit base” can be cashed out by the client. To the contrary, all that the benefit base is, is a basis for calculating the end GLWB payout.
Again, when there are massive benefit base bonuses and massive rollup rates, just beware that the actuarial teeter-totter can be at play whereas the bigger the benefit base rollup is, the smaller the payout factor.
In the end, what is most important is that you do not let the marketing sizzle influence you and you have your independent marketing organization do the analysis on what product has the best net payout. A good IMO will have these tools at their disposal. Furthermore, a good IMO will also provide you with additional context beyond just the numbers. There is so much more to these products than just the numbers.
