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THE SNAP PRINCIPLE

By James Alden

Annuity Buyers Act on Emotional Convictions of Safety — 
Uninformed Buyers Think They are Buying an Investment
Truly. What I have been calling here as The SNAP Principle. It is the opposite of outright concerns on rate of return and all the emotional turmoil that comes with that choice.

Rather, it is about being convicted emotionally that you want your money to be there for you, guaranteed, to the best of our country's financial system's ability, when future times arise in life concerning: Safety, Income Needs & Asset Preservation.

An indexed annuity was designed to compete for the dollars that you had earmarked for the banking system, not your dollars that you had earmarked for investments. And this is despite the fact that indexed annuities have returned attractive yields (sometimes double digit, yes) over the past decade and a half (since the sub-prime crisis of 2007 ) because insurers have been savvy to capitalize on lucratively advancing equity markets.

However, If you enter into an indexed annuity contract with consistent double digit yield aspirations, you do run the risk of being disappointed at some point. It was not designed for that. It was designed for safety, and there is a price to be paid for that.

An insurance company is obligated (by State law as well) to invest your monies prudently, in a manner that the insurer can be satisfied will fulfill all of the legal obligations inherent within the terms of your written contract. Cash Reserves must be set aside to honor the written guarantees that have been promised to you. Actuarial reports must be filed annually and sometimes quarterly. 

Do stock portfolios have similar contractual obligations? Is there a lifetime contractual guarantee somewhere in the prospectus of your mutual fund?

It is fair to say that your stock and mutual funds have a "more liberated" opportunity to return greater yields when such aforementioned restrictions are not required.

Obviously, the Informed Annuity Buyer has a slightly different prerogative. This person is aware that their contract cannot return spectacular year to year yields without that same element of risk. And It is that specific element of risk that an informed annuity buyer prefers not to associate with! They have better things to occupy their minds with.

The informed annuity buyer prefers the comfort of a sure thing; The return of their money, in some years, perhaps more than the uncertain return on their money.

Not to say this will happen only. These days, insurers are scrambling to create strategies (algorithms) that will yield higher yields for your annuity contract.

But the fact remains that the first choice of the informed annuity buyer is to not have to worry about loss. The annuity is one of the best financial instruments to solve that concern for this type of individual.

Annuity buyers, by and large, are a content lot, despite some of the negative press surrounding annuities, that can often originate from:
  1. Brokers of other financial products like stocks, mutual funds etc.
  2. Self appointed consumer financial advocates who dwell on fees and commissions as if other financial instruments can offer the same level of safety for free. (Of course, this is a circular argument and a matter of opinion).
  3. And incorrectly "sold" annuity buyers who thought they were going to get rich in an annuity.
However, if expectations are set properly when purchasing an annuity, expectations are always met, based on the claims paying ability of the insurer.

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