051 Why You Shouldn’t Buy…Annuities?

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In the 51st episode of the Financial Procast:

Infinite Banking Gets Slammed

In a recent article over at ProducersWeb, Roccy DeFrancesco owner of the Wealth Preservation Institute took on the patriarch of all thinks related to infinite banking concept, becoming your banker, bank on yourself et. al.

It seems that Roccy has a bone to pick with Mr. Nash and he highlights several reasons why.  Now, we’re certainly no great fan of Nelson Nash or his minions for that matter—not that everything he says is bad or even incorrect.  But he (Nash) does sensationalize the concept of using cash value life insurance as an asset, something we just don’t feel is necessary.

nash slammed

There are really two points specifically that Mr. DeFrancesco brings to light that we spend some time discussin in this Financial Procast episode:

  1.  Bad Math
  2. Whole Life is the way, the truth and the only option for employing the use of life insurance a wealth building tool.

We’ve dealt with both of these very same issues in some posts that we’ve written in the past .  Most recently, Brandon wrote a piece that unravels all the mystery behind the IBC, BYOB, BOY school of thought and tackles head on their liberal understanding of paid up additions.  Here’s the link to that post:

Bank on Yourself®, Infinite Banking, et. al. Unraveled

We think that using a cash value policy to finance future purchases makes perfect sense, however, it should be done correctly and there’s no need to exaggerate its virtue.  The case can be made that it’s a prudent financing strategy.

On to Mr. DeFrancesco’s second point  regarding his objection that Nash & Company would have you believe that the strategy can only be properly executed via whole life insurance.  We agree wholeheartedly with this objection.

As we’ve stated before many times, we like whole life insurance and we have many clients who use it optimally to accumulate wealth.  But we also really like indexed universal life insurance.

Why? Because it works really well in some situations.  It’s hard to say when it’s best to use whole life insurance and when it’s best to look to IUL.  Both work incredibly well in different circumstances.

Many times we see IUL work particularly well for our clients who have a higher level of funding…somewhere north of $25,000 a year.  Additionally, we see it work quite well in the circumstance where a younger person has a much longer time to fund the policy.

In our experience, whole life insurance will often times work more advantageously for older people who may be looking to 7 pay or 10 pay a policy.  There are some mechanics as to why this happens but I want belabor that point today.

If you want to hear more about what we have to say, listen in to the episode, it occupies the entire first 30 minutes of the show.

annuity

Annuities May Not Be the Answer?

Wow, what a statement…right?

How could anyone say such a thing about annuities?  And I thought you guys (Brandon and Brantley) like annuities for guaranteed income?  Did you guys change your mind?

Nope. Not even close.

We haven’t changed our opinion on annuities at all.  In fact, we recommend them on a fairly regular basis as a great way for people to generate a guaranteed income stream for themselves when they choose to retire.

This part of the episode is in reaction to a news story we uncovered over at Forbes.  According to Janet Novak, “For decades, the conventional wisdom among economists has been that almost all households, unless they want to leave wealth to heirs, should annuitize their investments, since doing so will allow them to spend more each year without running the risk of outliving their money.”

Which Economists Was That?

Now, we’re not sure which economists we’re referring to but we don’t recall reading about any economists who suggest that retirees should annuitize their investments.

Annuities have always been presented as a viable strategy to generate a portion of a retiree’s income—most notably the portion that would guarantee a person had money to meet their normal monthly expenses.

Aside from the annuity(s) a person should also have adequate liquidity to deal with the unexpected expenses like medical bills that aren’t covered by insurance/medicare, car repairs, and other things that just to happen as we’re living our lives.

But evidently there’s been a new study that reveals perhaps only 27% of all households should actually own and use some form of annuitization in retirement.

We have a real appreciation of the academic endeavor that’s gone into this research and it’s certainly worthy of some recognition as a wonder of mathematical enlightenment.  However, there’s a big problem with the study from a practical standpoint.

All mathematical research deals in probabilities.  That’s great…except that we don’t know whether you’ll need the income or not.  And by the time you know with certainty if you will or you won’t, you can’t do anything to change the outcome.

I hope you call follow me on that.

In other words, it’s always to better to plan for needing the income an annuity will generate and not need it in the end.  The alternative is to need it and not have it.  Unfortunately, we’re not in the probability business, we’re in the certainty business and for certainty there’s nothing better than using an income annuity as part of your overall strategy.

We had a lot to say about this topic, please listen to the second half of the episode to hear more of our thoughts.

 

 

 


2 Responses to “051 Why You Shouldn’t Buy…Annuities?”

  1. dail stancill says:

    ….I love the podcasts
    ..no magic with whole life…but I once heard a talking say for every $1 of PUA….u get $6 in death benefit….no other asset creates such a thing??..death benefit face value is most unique and is what mutuals figured out 200 years ago!

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