Annuities, safe investments?

[ziggy29]

While I don't usually think annuities are a terribly good deal (and the wrong kind of high-fee annuity is terrible), I can see annuities purchased from a low-cost provider like Vanguard to be attractive for at least two groups of people:

(1) High-income individuals for whom eating the fees is worth the tax deferral;

(2) High net-worth individuals who, in some states, are looking to increase asset protection from creditors and lawsuits. Here in Texas, for example, annuities are almost completely untouchable by creditors or to pay legal judgments against you. I can see this being attractive to high-risk occupations like doctors in states like Texas and Florida, where there are strong asset protection laws and many options for building wealth exempted from bankruptcy or lawsuits.

Having said that, an annuity is only as strong as one individual insurer, and that's one of the reasons why even low-cost annuities scare me a bit.

[explanade]

Originally Posted by rs0460a

Just so happens my SPIA is with Fidelity. After 28 years (my SPIA guaranteed payout), I'll get slightly better than 2x my original investment. The contract is 1 year old, so the interest calcuations would have been around this date, last year.

BTW, I/DW were age 59 at the time of the first payment.

- Ron

So you could look at it as 100% return in 28 years. That averages out to about 3.57% return.

What is your excluding rate like, somewhere between 45-50%? So only about half your payments are taxable?

[explanade]

Originally Posted by ziggy29

(2) High net-worth individuals who, in some states, are looking to increase asset protection from creditors and lawsuits. Here in Texas, for example, annuities are almost completely untouchable by creditors or to pay legal judgments against you. I can see this being attractive to high-risk occupations like doctors in states like Texas and Florida, where there are strong asset protection laws and many options for building wealth exempted from bankruptcy or lawsuits.

Didn't OJ have annuities which shielded his income from the judgement against him in the civil case by his in-laws?

Plus yeah, there are nuisance suits as well. I've known people who've gotten burned in the mold litigation of properties they've sold, with the new buyers alleging all kinds of coverups and so forth.

[explanade]

Originally Posted by brewer12345

Assuming we are not talking about a "participating" policy/annuity, insurers generally do not have discretion to reduce or stop making payments unless that is what is specified in the policy (read the fine print).

Insurance companies cannot file for bankruptcy. Instead, if they get into serious trouble, the regulator steps in and takes control. They ideally try to sell the company to another insurer. If they cannot do that, they liquidate the company and distribute the proceeds to policyholders first, with other creditors only getting paid after the policyholders are made whole. Usually long before a company gets seized and liquidated the regulators are on the scene beating management with a stock and pushing them to try to fix the problem.

OK, it's good to know it's spelled out. So annuity holders would also be in front of other creditors as well?

[ziggy29]

Originally Posted by explanade

Didn't OJ have annuities which shielded his income from the judgement against him in the civil case by his in-laws?

Plus yeah, there are nuisance suits as well. I've known people who've gotten burned in the mold litigation of properties they've sold, with the new buyers alleging all kinds of coverups and so forth.

I don't know the details of O.J.'s finances or the specifics of California asset protection law, but yes, much of his wealth was shielded from judgment. The Goldmans can't touch it. O.J. clearly did his homework here.

I know that Ken Lay purchased millions of dollars in annuities a year or two before Enron blew up. These assets are almost certainly protected from lawsuits under Texas law, unless "fraudulent conversion" of assets from non-exempt to exempt can be determined.

[brewer12345]

Originally Posted by explanade

OK, it's good to know it's spelled out. So annuity holders would also be in front of other creditors as well?

Annuity holders would be in line ahead of general creditors, but equal with other policholders. The wrinkle with a SPIA is that I don't know how they calculate what you are owed, whether they just continue a stream of payments or give you a lump sum and wish you good luck.

[donheff]

Originally Posted by ziggy29

I don't know the details of O.J.'s finances or the specifics of California asset protection law, but yes, much of his wealth was shielded from judgment. The Goldmans can't touch it. O.J. clearly did his homework here.

I know that Ken Lay purchased millions of dollars in annuities a year or two before Enron blew up. These assets are almost certainly protected from lawsuits under Texas law, unless "fraudulent conversion" of assets from non-exempt to exempt can be determined.

So, if we get really POd at someone and are considering some nasty deed, we should get an annuity and then wait a year to off him -- or whatever. Makes sense - revenge is a dish best served cold. Of course, getting the annuity might be used to demonstrate premeditation - darn

[cute fuzzy bunny]

Originally Posted by ziggy29

I know that Ken Lay purchased millions of dollars in annuities

Yeah, and look how THAT turned out for him.

Scandal, bankruptcy, criminal conviction, and sudden death.

Dont let this happen to YOU!

[Marquette]

Originally Posted by cute fuzzy bunny

Yeah, and look how THAT turned out for him.

Scandal, bankruptcy, criminal conviction, and sudden death.

Dont let this happen to YOU!

Come to think of it, if that was the case, then the carrier probably offed him. Huge influx in premium with absolutely no payout!

[Marquette]

Just a thought on gaming the system... sort of.

I used to work at a large electronics retailer (rhymes with Jest Guy). Our discount was 5% over cost. Typically you have to wait 60 days before the discount kicks in but during the Christmas rush, everyone got the discount right away).

I now work at a large insurance company (and I'm told we're the #1 seller of FIAs but we sell SPIAs, FAs, VAs, life and LTC). One of our perks here is that, if you buy a product through the internal sales team, you get the commission paid into your policy. And, of course, there are certain promotional events throughout the year where agents and/or customers get bigger incentives to buy. So, if you bought whichever product happened to be featured, you could stand to get a bonus 15% into your
contract.

I'm sure many other companies offer similar perks when you work for them.

So, my point is, go get a temp job when you're ready to buy an annuity and go work for a day during Christmas when you're ready to buy that new LCD TV.

Oh, and I've decided that there's no issue with solvency at my employer because we have a time capsule buried beneath the entrance that says 'open in 2051'.

[FinanceDude]

Originally Posted by Marquette

Come to think of it, if that was the case, then the carrier probably offed him. Huge influx in premium with absolutely no payout!

I'm sure his wife was the beneficiary, or a trust.........

[FinanceDude]

Originally Posted by ziggy29

(2) High net-worth individuals who, in some states, are looking to increase asset protection from creditors and lawsuits. Here in Texas, for example, annuities are almost completely untouchable by creditors or to pay legal judgments against you. I can see this being attractive to high-risk occupations like doctors in states like Texas and Florida, where there are strong asset protection laws and many options for building wealth exempted from bankruptcy or lawsuits.

Having said that, an annuity is only as strong as one individual insurer, and that's one of the reasons why even low-cost annuities scare me a bit.

One advisor I knew did that in Florida with a number of neuro and cardio surgeons..........

[REWahoo]

Originally Posted by Marquette

Oh, and I've decided that there's no issue with solvency at my employer because we have a time capsule buried beneath the entrance that says 'open in 2051'.

What are the odds it contains the remains of Jimmy Hoffa?

[Marquette]

Originally Posted by REWahoo

What are the odds it contains the remains of Jimmy Hoffa?

Probably pretty low... we built this office in 2001. Then again, if he bought a large enough annuity from us and didn't name any beneficiaries...

[rs0460a]

Originally Posted by explanade

So you could look at it as 100% return in 28 years. That averages out to about 3.57% return.

What is your excluding rate like, somewhere between 45-50%? So only about half your payments are taxable?

Actually, I/DW still have more than 90% of our retirement portfolio available (60/40) beyond the SPIA.

Like I said before, an SPIA is not for all people, but for a limited few (no estate to pass on, ER'd before 60, and other sources of income in retirement) it may make sense.

I really don't worry about other folks. All I know is in our case, it works. Our goal is to have enough money to continue to live in the manner in which we have become accustomed. An SPIA (as part of our "total program") makes sense.

You may not like it - so what? As the old saying says "what you think of me is none of my business ...."

- Ron

[ziggy29]

Originally Posted by FinanceDude

One advisor I knew did that in Florida with a number of neuro and cardio surgeons..........

I can believe it. This is exactly the type of individual for whom these things truly make sense -- high-income, high net worth, at high risk of lawsuit, and residing in states where these things are fully protected as exempt assets. For these people, the tax deferral and asset protection features likely justify the fees and expenses of a low cost annuity.

But they are a small minority of the overall population. People with low net worth who haven't even maxed out contributions to other tax-deferred, judgment-proof investments are often sold these things and for them it almost certainly makes no sense.

[donheff]

Speaking of judgment proof -- to what extent, if any, are IRAs and 401Ks exempt from civil suits?

[FinanceDude]

Originally Posted by donheff

Speaking of judgment proof -- to what extent, if any, are IRAs and 401Ks exempt from civil suits?

It depends on the state, I want to say it is $1,000,000 on 401K's..........

[Marquette]

Originally Posted by donheff

Speaking of judgment proof -- to what extent, if any, are IRAs and 401Ks exempt from civil suits?

CCH Financial Planning Toolkit | ERISA and Retirement Asset Protection

afaik, ianal, etc, etc, etc...

Old stuff I thought I knew:

An ERISA plan is exempt from judgment. This includes a 401(k), I think an IRA funded by rollover (but not an IRA otherwise), and I would assume a 403(b). It does not cover SEPs, stock bonuses, IRAs, etc.

State law could cover non-ERISA plans.


New stuff that may be different from that?:

FPA Journal - Creditor Protection for Retirement Accounts: ERISA, the Supreme Court, and the Bankruptcy Act of 2005

[ziggy29]

Originally Posted by FinanceDude

It depends on the state, I want to say it is $1,000,000 on 401K's..........

I believe it's the other way around at the federal level: unlimited for 401Ks and up to $1 million for traditional/Roth IRAs.

Some states differ from the federal default. In particular, a few states provide an unlimited exemption for these retirement accounts from civil suits and bankruptcy. And of those, a small number -- Florida, Texas and Oklahoma -- also provide for a virtually unlimited exemption for a homesteaded personal residence.