Annuities and their role in our investing plan

[teejayevans]

Are annuities insured?? I lot can happen in 40 years, what happens
if you annuities writer (I assume its like mortgages, and they are
sold and transfered to other holding companies) goes belly up?
Tom

 

[brewer12345]

Are annuities insured?? I lot can happen in 40 years, what happens
if you annuities writer (I assume its like mortgages, and they are
sold and transfered to other holding companies) goes belly up?
Tom

Not insured. Insurers are required to hold excess capital as a cushion and are reasonably tightly regulated, but if they blow up, the only thing backing policyholders is the insurers' remaining assets and state-by-state guaranty funds, which are generally lightly funded and not backed by anyone.

 

[rs0460a]

Are annuities insured?? I lot can happen in 40 years, what happens
if you annuities writer (I assume its like mortgages, and they are
sold and transfered to other holding companies) goes belly up?
Tom

That's why you "spread it around" between different companies. Also, since I'm not comiting 100% of my retirement funds, I'm reducing the stated risk.

- Ron

 

[OkieTexan]

I see only 2 advantages in buying an annuity investment product.

1. Tax deferral - In recent years the insurance companies have made annuities more attractive by offering more options like mutual funds and the concept of a variable annuity. They can be used as a "less restrictive" IRA for those of us below the age of 59-1/2. They can also free you from the required distributions when you reach 70-1/2. I have 1 fixed annuity that I plan to roll over (1035) into a variable annuity (to avoid a taxable event). John Hancock has a VA that will guarantee 5% even if the bears take over the market. I still have a lot to learn about it, though.

2. Income security - You basically trade a piece of your nest egg for a guaranteed monthly payment. The insurance company is risking that you will live long enough to erase their profit from the annuity. So, if you live to be 100, it might be a good deal. If you die at 70, well...........maybe it won't be. Actuaries make their living assuring insurance companies they will achieve solvency.

As the years have passed, I have tried to reduce my involvement with insurance companies. They think a lot like car dealers. I heard a speaker at a financial planning seminar say it like this, " A car salesman wants you to focus on the monthly payment because he can get you to sign the deal without knowing the real price of the car. Annuity salesmen do the same thing with your life savings!"

Since I have to deal with insurance companies in order to own a home and to drive a car, a cloud of skepticism usually surrounds my relationship with them. My rule has been, "If I don't need them, stay away!"

 

[Empty Pockets]

When it is mentioned that annuities are not insured by anything else but the state guaranty fund, what about sub-accounts in a VUL that are held in mutual funds. Are you saying that those funds would go down with the insurer ?

 

[W2R]

Are annuities insured?? I lot can happen in 40 years, what happens
if you annuities writer (I assume its like mortgages, and they are
sold and transfered to other holding companies) goes belly up?
Tom

That's definitely something to consider! I hadn't thought of the possibility that they could sell it. Also, you're right - - a lot can happen in 40 years.

 

[FinanceDude]

Not insured. Insurers are required to hold excess capital as a cushion and are reasonably tightly regulated, but if they blow up, the only thing backing policyholders is the insurers' remaining assets and state-by-state guaranty funds, which are generally lightly funded and not backed by anyone.

Yes, there is risk involved with even the big insurers. The interesting thing in all of this is the perception that an annuity company like AIG or MetLife is somehow riskier than having your money in a Vanguard mutual fund. I think the REAL question is: Can the insurer live up to their "guarantees"............and I think we could ask the same thing of Social Security........are they going to live up to their "guarantees"...........in some ways I feel more comfortable with Pacific Life than the Treasury...........

 

[brewer12345]

When it is mentioned that annuities are not insured by anything else but the state guaranty fund, what about sub-accounts in a VUL that are held in mutual funds. Are you saying that those funds would go down with the insurer ?

Depends on what you are talking about. The actual variable account assets that are in mutual funds would be exempt from other claims on an insurer, at least AFAIK. So your invested assets whould be OK. But any other guarantees the insurer made would be jeopardy.

 

[Martha]

Okay. Most of you are full of sh#t. CFB ended two of the options with the qualifier, "if it made sense." (choices #2 and #3) Yet very few of you selected #3. So . . . what you are saying is that you would not do something that made sense.

That makes no sense. Now, you may believe that #3 will never make sense, but that wasn't the option.

Well I voted for two, not three. Both options say "if the numbers make sense." There is more to a choice than numbers. I would never put all my money into an annuity product even if the numbers looked good because of the risk that something goes bad with the insurance company or something else bad happening that would make it a poor investment. A diversification issue. So the numbers can make sense but the investment still not make sense.

 

[Cut-Throat]

2. Income security - You basically trade a piece of your nest egg for a guaranteed monthly payment. The insurance company is risking that you will live long enough to erase their profit from the annuity. So, if you live to be 100, it might be a good deal. If you die at 70, well...........maybe it won't be.

Well, if you are not interested in leaving an estate when you die, consider this:

If you were getting a monthly payment from an annuity that was greater than the SWR you were taking at age 70, and you died at age 75: Which withdrawal method gave you the most money to spend from ages 70 to 75?

 

[donheff]

Yes, there is risk involved with even the big insurers. The interesting thing in all of this is the perception that an annuity company like AIG or MetLife is somehow riskier than having your money in a Vanguard mutual fund. I think the REAL question is: Can the insurer live up to their "guarantees"............and I think we could ask the same thing of Social Security........are they going to live up to their "guarantees"...........in some ways I feel more comfortable with Pacific Life than the Treasury...........

I posted a question about the security of companies like Vanguard and Fidelity some time ago. The asnwers I got were somewhat reassuring but I don't remember the details. It is probably worth revisiting now and then.

How secure are these big mutual fund companies. How much value is there in distributing your funds in several rather than keeping them all in one? I am thinking about moving a fair amount of money to a target retirement fund at Vanguard -- how secure is that concentration?

 

[brewer12345]

I posted a question about the security of companies like Vanguard and Fidelity some time ago. The asnwers I got were somewhat reassuring but I don't remember the details. It is probably worth revisiting now and then.

How secure are these big mutual fund companies. How much value is there in distributing your funds in several rather than keeping them all in one? I am thinking about moving a fair amount of money to a target retirement fund at Vanguard -- how secure is that concentration?

Oy, here we go again. Get ready for an outbreak of the tinfoil hat-wearing piglet sodomizers...

As I understand things (do your own due diligence, YMMV, offer not valid in Mexico, yadda yadda...), the assets you have in a mutual fund are effectively in a trust and cannot be attached by creditors of the fund management company. So the fund assets are presumably safe. The exposure would be to any cash in transit or any other obligations of the fund management company to you, which I would imagine are very small and generally transitory. All-in-all, looks like de minimus exposure to me.

 

[FinanceDude]

Oy, here we go again. Get ready for an outbreak of the tinfoil hat-wearing piglet sodomizers...

As I understand things (do your own due diligence, YMMV, offer not valid in Mexico, yadda yadda...), the assets you have in a mutual fund are effectively in a trust and cannot be attached by creditors of the fund management company. So the fund assets are presumably safe. The exposure would be to any cash in transit or any other obligations of the fund management company to you, which I would imagine are very small and generally transitory. All-in-all, looks like de minimus exposure to me.

Agree the risk is MARKET RISK (mutual fund), not SOLVENCY RISK (insurance comany)...........perhaps the main difference between a mutual and an insurance company.........different risks.............

 

[ats5g]

Simply put, the funds Vanguard offers are separate companies from The Vanguard Group, Inc. Each fund is owned by the investors that own shares of the fund [i.e. you and me]. The Vanguard Group, Inc is owned collectively by all of the vanguard funds [wellington, wellesley, 500 index, etc.]. Hence, Vanguard is owned by all of us, not Bogle, Brennan or anyone else.

The Vanguard Group, Inc provides services to the funds [at cost] pursuant to a Service Agreement. If the fund, or whoever votes in voting matters [probably the funds' trustees with Vanguard funds], decides that Vanguard is not longer the best administrator of that fund, that fund can find someone else to administer the fund. Of course, IIRC John Brennan is the Chairman of each of Vanguard's funds, so the likelihood of this happening is nil. The funds' trustees can also hire and fire the investment managers for each fund [i.e. Wellington Management, Vanguard Quantitative Equity Group, Barro & Hanley, etc.].

Also, each fund has a custodian [like JP Morgan Chase for Wellington] that is responsible for maintaining the Fund’s assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign sub-custodians or foreign securities depositories. So, The Vanguard Group, Inc. does not hold any of the assets, and IIRC each funds' assets are separate from the assets of The Vanguard Group, Inc.

I would no problem holding all of my investments with Vanguard. Except for the TSP, we have all of our investments with Vanguard.

- Alec

 

[haha]

Yup, you're exactly correct! But the poll was not searching for the truth. It was just trying to 'stroke a hairball'.

I hope that CFB can in the future stroke his hair balls in private.

Ha

 

[Rich_by_the_Bay]

I would never put all my money into an annuity product even if the numbers looked good because of the risk that something goes bad with the insurance company or something else bad happening that would make it a poor investment. A diversification issue. So the numbers can make sense but the investment still not make sense.

I voted the same way for basically the same reasons.

I didn't interpret the insurer default risk or future tax code changes or any other "unforeseeable circumstance" risk inherent in an annuity to be encompassed or intended by the phrase "if the numbers make sense."

 

[Nords]

I hope that CFB can in the future stroke his hair balls in private. Ha

I'm never going to think of the term "non sequitur" in the same way again...

 

[peggy]

Okay. Most of you are full of sh#t. CFB ended two of the options with the qualifier, "if it made sense." (choices #2 and #3) Yet very few of you selected #3. So . . . what you are saying is that you would not do something that made sense.

That makes no sense. Now, you may believe that #3 will never make sense, but that wasn't the option.

I have some pension benefits and SS coming. I feel comfortable with moderate risk. So an annuity (even a small one) doesn't make sense for me right now at age 52. But I have no idea what will make sense for me in the future. Is something does make sense, I hope I have the sense to do it.

I read #3 as a limited subset of #2 -- meaning first I have to consider it before I can decide how much to put into it. And if the answer to #2 is the numbers don't make sense, how can I honestly choose #3?

 

[sgeeeee]

nm

 

[Martha]

Typical attorney response -- trying to redefine and parse the truth to bend it to your purpose. The statement didn't say, "If it makes numbers sense," Martha. It said, "If it makes sense." The fact that no one wants to read the statement as it is written but instead read their own bias into it is probably a good indication that CFB's hairball theory is indeed at work. You know how much it hurts me to admit that CFB is correct about anything? That's my hairball.

The poll says "if the numbers make sense."

 

[Nords]

Typical attorney response -- trying to redefine and parse the truth to bend it to your purpose. The statement didn't say, "If it makes numbers sense," Martha. It said, "If it makes sense." The fact that no one wants to read the statement as it is written but instead read their own bias into it is probably a good indication that CFB's hairball theory is indeed at work. You know how much it hurts me to admit that CFB is correct about anything? That's my hairball.

I think you've persuaded the Academy that it's time to pass retire@40's Noodge Award to you.

 

[Rich_by_the_Bay]

SGEEE says, referring to why most of those around him are full of s^%#:

The statement didn't say, "If it makes numbers sense," Martha. It said, "If it makes sense." The fact that no one wants to read the statement as it is written but instead read their own bias into it ...

Martha corrects him:

The poll says "if the numbers make sense."

What do you call it when someone tries to make a questionable point in a rude manner, then screws it up in the same way he is accusing others of doing, thereby rendering his whole original point meaningless, as he tries to tap dance his way out of it, misquoting the very material he used to make his point?

I nominate this for best of the boards .

 

[sgeeeee]

nm

 

[sgeeeee]

nm

 

[FinanceDude]

Where's an English teacher when I need one?? Hey MOM?? MOM!!!

Maybe I'll e-mail her this..........with a Master's in English and 30 years teaching, I think she can help...........