It has often been debated by countless investors and financial planners as to the unique benefits that annuity insurance products have over dividend income seeking equity investors.
As you know, I dislike annuity insurance products for some very basic reasons. I would like to compare annuities to dividend equity investing in this article, so regular people can draw their own conclusions as to how they feel about each.
My Opinions Of Annuities
- Buying annuity insurance is not an investment, and you lose control of your money spent.
- Insurance companies sell annuities of which some are "promoted" by brokerages as well as financial advisors. The reason is quite simple. The insurance companies pay them to push the products.
- The monthly payments you receive from an insurance company is actually your own money back (the principal) with just a dash of "interest". (It is not truly interest because it is simply an annuitized rate that the insurance company pays you to use your money to re-invest.)
- The guaranteed monthly income is not guaranteed by anyone other than the insurance company itself. If they go belly up, so does your monthly income.
- The money you hand over to the insurance company is a purchase, not an investment. As with any insurance product, they pool all of the money they receive from purchases of these products, to pay monthly "allowances" to annuity insurance policy holders.
- Unless you pay for extras, once you die, the money you paid for the insurance policy is gone forever.
- The costs of buying an annuity policy can range from 3-7% based upon the company, the commissions they pay to their sales reps, and the "extras" you might want to add to the basic policy.
- The extras include: leaving payments for beneficiaries, joint or spousal benefits, inflation "protection", and cash back value once the insurance policy holders die. That does not mean that your $100k purchase will cost you $120k, so please do not misunderstand. It all has to do with how much you receive as an allowance on a monthly basis. If you start with a single life annuity insurance product with no frills for $100k, you might receive $500-700/bucks per month depending upon your age. For the extra frills, you might only receive $300-500/bucks per month.
- A typical $100k annuity insurance policy will give you an allowance of about $6,500/year for as long as you live.
The last bullet point is the insurance company's main selling feature; regular monthly/yearly payments for as long as you live. If you buy the policy at age 65 and live to 100 you have beaten the insurance company. Live until age 75, and not only have you lost the purchase price, but you have not even received the amount you paid.
Here is a simple chart for married couples who buy a joint annuity policy:
If one spouse dies the other will receive the same amount. The variable rates are actually tied to the action of the markets, so that number might fluctuate, but trust me on this, the insurance company has it all figured out as to their own profit structure, not yours. It is still NOT an investment. Unless of course you consider that the insurance company itself is using YOUR money to invest in the very equities that a dividend investor might! Of course they use a hedging approach as well, to minimize risks to them, but their big key is the actuarial table on how long a buyer of these insurance products will actually live.
Here is another chart that is also quite simple to evaluate:
I just love the words "income generated," don't you? This chart simply shows what this couple would receive annually in annuities in different forms; a fixed payment, a GLWB (guaranteed lifetime withdrawal benefit), an Mgd payout (4% based on a "managed" guaranteed benefit) and the wonderful inflation adjusted annuity payment of 40% less than the fixed payment. The figures in both charts are annual numbers by the way.
At an inflation rate of 3% (and the insurance companies use the government skewed numbers by the way) it would take approximately 13 years just to catch up to the fixed payment rate. If both policy holders die before that number is reached, the insurance company's profits are extraordinary.
What a deal! For the insurance companies, that is.
My Opinions On Dividend Equity Investing
- The money you have saved for your entire life is still yours to do whatever you want with. Even if you invest fully in dividend income stocks, they are liquid and the money can be at your disposal.
- The only fees associated with dividend equity investing are the costs of the trades.
- The value of the portfolio can increase over time as opposed to remaining stagnant forever. (Yes they can go down over time also, but look at the chart below)
- You are in control of your own financial destiny, not the insurance company.
- You can actually set up your own "annuity" of sorts by simply paying yourself monthly from your own funds.
- While there is no guarantees of any sort, when a portfolio is prudently managed, it can pay more than an annuity and last for a lifetime. The downside is that if you are reckless, you might fall short. This is the fear tactic used by insurance companies to sell their products.
- You can buy and sell equities to take advantage of better opportunities, to receive even more income.
- Companies that are dividend winners will increase their dividends regularly, which has an even better effect than an inflation adjusted annuity product. It costs the shareholders nothing, and they can get increases in their "income" without paying extra.
- Dividend equity portfolios have the flexibility of taking more out on an annual basis by the mere fact that the long-term bias of the stock market is up. It is not unusual for dividend investors to withdraw the dividends, plus another 3% which could mean an annual withdrawal rate of 7-8% right off the bat.
- You can write covered calls against your holdings to actually tweak your income even further. With an annuity, the insurance company will do that for themselves, with your money.
To illustrate what these advantages offer, take a look at the Team Alpha Portfolio:
Our Team Alpha portfolio now consists of Apple (AAPL), McDonald's (MCD), Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), KKR Financial (KFN), Procter & Gamble (PG), CSX Corp. (CSX), Realty Income (O), Coca-Cola (KO), Annaly Capital (NLY), Cisco (CSCO), Bristol-Myers Squibb (BMY), Healthcare Select Sector SPDR (XLV), General Dynamics (GD), and iShares S&P U.S. Preferred Stock Index Fund (PFF).
The following is a look at how much an investor would have coming in annually if they had followed this portfolio from the beginning, began it today with an equal allocation, or used the Team Alpha allocations:
|Team Alpha Income From Port.|
|Current%||Eq. Alloc.||TA Alloc.|
As dividends are increased these numbers will rise. As the market rises the portfolio value increases as well as the income, and if the market decreases, the dividends will usually continue coming in and usually continue to rise.
Do not forget, all of the money is still yours, not the insurance companies.
Let's look at a few charts:
Over the long haul, equity investing can create wealth, along with the dividends, for income. An annuity cannot.
Even during precarious times, the market has moved higher. The same cannot be said for an annuity insurance product. The point is, investing in a sound dividend income producing portfolio, and even growth stocks, will give you a far better return, even in down markets.
As far as I am concerned, the only reason to buy an annuity insurance product is if you have absolutely no inclination to be involved in the equity markets, and you are afraid that you might outlive your money.
Actions To Take
First, decide on what your goals and objectives are. If you are the type of individual that realizes that investing simply is not for you, then annuities are one way to have some sort of regular payments coming in so as not to outlive your money.
On the other hand, by taking a prudent approach to dividend investing, now is as good a time as any to allocate funds towards an achievable financial goal of a more secure retirement, by investing in those dividend producing stocks that will simply pay you to own the shares.
Proper allocations and diversification will reduce many of the risks inherent with equity investing.
Here is the Team Alpha current allocation schedule for you to use as a guide:
|Stocks Held||Allocation %|
Here is the current diversification chart of the business sectors that Team Alpha is invested in:
The Bottom Line
Some folks require an annuity policy for reasons that they understand and I suppose there is a large enough market for them because they are important insurance products.
A decent investor can do much better by investing in a dividend income portfolio such as Team Alpha, or any other of the thousands upon thousands that are similar or better. Each individual must decide for themselves.
I will leave you with this final compelling chart, as to the power of dividend investing, compare this to any annuity you can find:
If you can find an annuity policy with this kind of continuous performance, please let everyone of us know!