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Old 11-14-2013, 08:15 PM   #21
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Never heard of asset allocation, eh....
Stock / bond asset allocation is the time tested method. The problem is that annuities are often sold as an alternative to stocks and bonds by non-fiduciaries who want the highest commissions. How many times do you hear advertisements saying "Are you tired of stock market ups and downs"? They talk about the 2008 - 2009 stock market crash when in fact annuities are LONG-term financial products -- Not short term (2008 - 2009). Over the long term a diversification of stocks and bond ETF's easily beats the annuity.
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Old 11-14-2013, 08:45 PM   #22
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...Again both the CD and the index annuity are like hiding from the market. Very conservative. Not investing.
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Never heard of asset allocation, eh....
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.....Over the long term a diversification of stocks and bond ETF's easily beats the annuity.
You speak with forked tongue - sort of like an annuity ETF salesman.

A long held FPDA is similar to a bond, but with no interest rate risk so to say that over the long term a diversified stock/bond portfolio easily beats the annuity is sort of like claiming that over the long term a diversified stock/bond portfolio easily beats bonds - it is a perceptive glimpse of the obvious.

In today's interest rate environment, I would much rather be in the OPs old FPDA with a 3% minimum guaranteed interest rate than a bond ETF. In fact, I would take all the 3% no surrender charge FPDA they would give me. The bond ETF had a boatload of interest rate risk whereas the FPDA has none. For the same interest rate risk concerns, some of today's CDs are attractive compared to bond ETFs (like PedFed's current 3-7 year 2.02% APR CDs).

CDs are investing - fixed income investing.
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Old 11-14-2013, 08:57 PM   #23
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You speak with forked tongue - sort of like an annuity ETF salesman.

A long held FPDA is similar to a bond, but with no interest rate risk so to say that over the long term a diversified stock/bond portfolio easily beats the annuity is sort of like claiming that over the long term a diversified stock/bond portfolio easily beats bonds - it is a perceptive glimpse of the obvious.
There is no such thing as an ETF salesman. There are no commissions associated with ETF's. Maybe you're an insurance agent?

Google William Reichenstein 85/15 portfolio which beat the index annuity by nearly 2% per year on average.

Dr. Craig McCann of UCLA and Dr. Dengpan Luo of Yale University, the discovered that investors would be better off in a simple portfolio of U.S. Treasury bonds and large cap stocks – a whopping 97% of the time.
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Old 11-14-2013, 09:05 PM   #24
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There is no such thing as an ETF salesman. There are no commissions associated with ETF's. Maybe you're an insurance agent?

Google William Reichenstein 85/15 portfolio which beat the index annuity by nearly 2% per year on average.

Dr. Craig McCann of UCLA and Dr. Dengpan Luo of Yale University, the discovered that investors would be better off in a simple portfolio of U.S. Treasury bonds and large cap stocks – a whopping 97% of the time.
Maybe you don't genuinely get it, but we are talking about OP who has a fixed annuity, not an index annuity. This is also something they already have, not something they are thinking about buying. I think you would have a hard time finding anyone here advocating the purchase of an index annuity.
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Old 11-14-2013, 09:14 PM   #25
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There is no such thing as an ETF salesman. There are no commissions associated with ETF's. Maybe you're an insurance agent? ....
Oh, darn, I forgot....ETFs are free!!!

Forbes seems to think you have to pay a commission to buy ETFs. Please go away and straighten them out.

Are Commission-Free ETFs Really Cheaper? - Forbes
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Old 11-14-2013, 09:22 PM   #26
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The company is North American Company the rate for the next year is 3%. I have most of our Monday in stock funds (60%) and bond funds (funds) but as I am retiring in 13 days I am trying to have a cash cushion of at least a year's expenses and preferably 2 years. My wife will still be working but at a salary that will just cover our expenses. So while we won't be withdrawing any money, our saving days are over. I am getting 0.8+% from our credit union for our cash now, but will reduce the cash by at least $30000 to be made up by the $30,000 I will leave in this annuity. If there is Abigail correction I may deploy this annuity into restock the equity portion (pun intended), but for this tax year I am definitely NOT cashing in- we are in the top tax bracket. Next year with me earning Zero we will drop down a few brackets. If we wait until my wife stops working we could be in an even lower bracket. Now in the vast scheme, $30,000 is a small percentage of our current portfolio (yay! Less than 1%), but I need to investigate the implications of adding more of our cash to this "safe" tax free(deferred) 3% earning vehicle.
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Old 11-14-2013, 09:40 PM   #27
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I would look carefully at the fine print of the annuity before adding money to make sure there are no gotchas. That said, assuming there are no such issues the main reason you might have some misgivings about adding money have to do with taxation. You would want to call the insurer and ask what the tax treatment of withdrawals would be if you added money. For example, if you add 100k and subsequently withdraw 30k, is the first 30k considered to be all the "old" money with lots of taxable interest, ow would the 30k be a pro rata slice of the total 130k with lots of more recently contributed principal (non taxable)?
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Old 11-14-2013, 11:13 PM   #28
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Oh, darn, I forgot....ETFs are free!!!

Forbes seems to think you have to pay a commission to buy ETFs. Please go away and straighten them out.

Are Commission-Free ETFs Really Cheaper? - Forbes
I don't know about you but I pay $9.99 per trade via my deep discount brokerage account (which happens to be E Trade, but Scottrade and Ameritrade charge about the same). If someone has been charging you more then demand a refund!

I'm still waiting for someone to tell me what an "ETF pusher" is and how they would profit off of a $9.99 trade.
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Old 11-15-2013, 12:18 AM   #29
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So my wife recently showed me that she has an annuity she bought 23 years ago -before we met- and definitely when neither of us knew anything. She did not know hat she was getting and we are still trying to sort out what have we got. I spoke to the company about it and want the wisdom of members here as well. This is a Flexible Premium Deferred Annuity non qualified-worth about $30000 right now with no Surrender penalty at this point. it earned 3% last year and is on a fixed interest rate. I forgot to ask if that 3% will continue. I was thinking of leaving it be as a part of our rainy day "cash" which is earning a decent interest for cash and at tax deferred. When my wife finally stops working then maybe we could cash it out at the lower tax rate we will be in then. Certainly no matter what we will wait uat least ntil next year when we drop our tax rate with me retiring in 2 weeks!!!
My questions are- does this make sense or am I missing some way the annuity people are continuing to take us for a ride? Also since it is a flexible premium, should I move more cash into it now?
Wow! These annuities are really great!
You seem to have 3% tax deferred cash. Pretty good deal. Once your wife stops working, and your tax bracket drops, you'll be able to withdraw with minimal tax hit. Congrats to your wife (and her annuity salesperson) for making such an astute investment.
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Old 11-15-2013, 05:58 AM   #30
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I'd keep the annuity and consider it part of fixed income and understand the withdrawal rules on the account. I have an old TIAA Traditional deferred annuity that is currently paying 4.38% (that's after fees). It's been compounding for 25 years. It has a lot of withdrawal options, two being either to turn it into an annuity or just pay it all out in equal amounts over 10 years
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Old 11-17-2013, 09:17 PM   #31
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This is based on the assumption that stocks will go down from where they are at now. We've had a bull run alright but from 1990 - 1997 the S&P went 1,767 trading days without a 10% correction.
Sure, but OP has other fixed income products, likely, that he can reallocate to the market.

He may also be able to buy on margin at a lower rate than 3%.

My point is that this annuity is one of the later things OP should be liquidating to put more funds in the market, and for most people, it's OK to have a fixed income component to a portfolio, especially if it's paying 3% and you can cash it out at any time without penalty if rates go up. A fixed income product like that today is NOT something you want to cash in unless you have to.

Finally, this is a $30K product, not a $500K product. If OP is in his fifties and can save $2500/month, he can get to a reasonable (albeit conservative) portfolio allocation in a year by sticking all of his savings into the stock market.

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I'd rather be FDIC insured than insured by a company and that fund that could get depleted in a worst case scenario. That's why an annuity is riskier than a CD. Again both the CD and the index annuity are like hiding from the market. Very conservative. Not investing.
A state reinsurance plan has never gone bankrupt, and the state is ultimately on the hook to bail out smaller annuity and life insurance balances such as this one. OK, if the policy was bought in Illinois, maybe there's some risk. OP needs to figure out which state is reinsuring his policy, and what the limits are on that. Most states offer an FDIC for bankrupt insurance companies-the only difference is that they are not the federal government and they do not have a printing press.
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Old 11-17-2013, 09:54 PM   #32
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the state is ultimately on the hook to bail out smaller annuity and life insurance balances such as this one.
Bzzt! WRONG! Thank you for playing, Wanda do we have a lovely pating gift for our contestant?

State insurance guaranty funds are funded solely by assessments on healthy insurers doing business in that state. The state's balance sheet is never on the hook.
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Old 11-17-2013, 09:56 PM   #33
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Bzzt! WRONG! Thank you for playing, Wanda do we have a lovely pating gift for our contestant?

State insurance guaranty funds are funded solely by assessments on healthy insurers doing business in that state. The state's balance sheet is never on the hook.
But a state insurance guaranty fund has never gone bankrupt. It's also created by state statute.

There would also be a great deal of political pressure to bail it out.

I'd treat this like an MBS issued by Fannie or Freddie pre-08. Technically there is a default risk... but if you stay below the limit, not really.

There really should be an FDIC for these annuities and whole life policies. Honestly I think the next time we have a systemic insurance crisis, we'll probably get one (obviously with reasonable account limits).
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Old 11-17-2013, 10:03 PM   #34
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But a state insurance guaranty fund has never gone bankrupt. It's also created by state statute.

There would also be a great deal of political pressure to bail it out.

I'd treat this like an MBS issued by Fannie or Freddie pre-08. Technically there is a default risk... but if you stay below the limit, not really.
Insurance regulation has in general worked pretty well, at least in terms of ensuring insurer solvency. However, that also means that this whole system is largely untested. This is different than agency MBS and other federal bailouts. Fannie and Freddie always had a line of credit from the US treasury, which made it fairly clear that these were entities with contingent support from the feddle gubmint. The megabanks are backed by the FDIC and there is a real strong reason to prevent a domino effect from wiping them all out. Nobody promises explicitly or implicitly to stand behind the insurers. The only thing backing the insurers is the state guaranty fund system and that is funded largely by the good will of the industry. These companies are run by rational people. If a really huge insurer blows up and causes a capital call on the insurers that is sufficiently large, they will simply decline. What they lose is the ability to sell insurance in that state. Lets pretend a large insurer blows up in Iowa, a favored domicile for many reasons. You really think a large insurer will care that much that they cannot sell policies in Iowa? Not so much.

When you buy insurance, always be careful who you play with. Insist on good credit quality/ratings, and if possible pick a large mutual insurer.
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Old 11-18-2013, 05:59 AM   #35
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Bzzt! WRONG! Thank you for playing, Wanda do we have a lovely pating gift for our contestant?

State insurance guaranty funds are funded solely by assessments on healthy insurers doing business in that state. The state's balance sheet is never on the hook.
+1

I don't know how many people I've argued with about this same point.

If one insurance company goes bust, it isn't a big thing. The other companies will step in as they have repeatedly over the years. If we have a real meltdown and multiple companies go down, the remaining insurers will also be in difficult shape. They may not have the assets to go in on the bailout. In that situation, they may themselves be planning on exiting the market anyway so loss of the ability to market in the state won't have much value. Also, insurance companies can easily morph out new and exciting subsidiaries if needed. I don't know how tightly the market would be blocked against them.

With that sort of financial climate, the individual states will have many other things on their minds. State pensions and entitlements to large numbers of voters will certainly carry more weight than defaulting annuities that weren't the states' responsibility anyway.

As for credit quality, I had a level term life policy that I intentionally paid more for a company with a very high rating. Over the years the policy was sold three times. Each time the new company had a slightly lower rating.
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Old 11-18-2013, 06:27 AM   #36
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While I would be the first to agree that one shouldn't buy a new annuity, that is a very different decision from where someone has an old one and is deciding what to do with it. 3% minimum guarantees are no longer available and if that is what your contract have it is a valuable feature in this low interest rate environment.
TIAA-Traditional deferred annuity still has a 3% minimum and is currently paying me 4.38% interest after fees.
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Old 11-18-2013, 07:56 AM   #37
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Insurance regulation has in general worked pretty well, at least in terms of ensuring insurer solvency. However, that also means that this whole system is largely untested. ....
I would suggest that 2006-2009 was a pretty good real-life test. As banks were falling like dominos, insurers were stressed but weathered the storm quite well with a few close calls (Lincoln, Hartford, etc). (AIG doesn't count because the AIG insurance companies weathered the storm fine, it was the yahoos at AIG corporate that screwed the pooch.) I'm hard pressed to think of any major insolvency since RBC standards were put in place in the mid 1990s.

Let's put it this way - if we end up in a situation where insurers are going insolvent, it seems likely to me that the economy would be so bad that insurer insolvencies would be a relatively minor worry.

In terms of default risk, there are a lot of corporate bonds that I would worry about before worrying about an insurer solvency.
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Old 11-18-2013, 08:04 AM   #38
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I would suggest that 2006-2009 was a pretty good real-life test. As banks were falling like dominos, insurers were stressed but weathered the storm quite well with a few close calls (Lincoln, Hartford, etc). (AIG doesn't count because the AIG insurance companies weathered the storm fine, it was the yahoos at AIG corporate that screwed the pooch.) I'm hard pressed to think of any major insolvency since RBC standards were put in place in the mid 1990s.

Let's put it this way - if we end up in a situation where insurers are going insolvent, it seems likely to me that the economy would be so bad that insurer insolvencies would be a relatively minor worry.

In terms of default risk, there are a lot of corporate bonds that I would worry about before worrying about an insurer solvency.
I don't think we'll ever know what would have happened if all of the swaps held by AIG had been allowed to collapse along with AIG. They were only backed by AIG. The domino effect has not been played out. Next time, we might not have a US government as able and willing to absorb the financial cost of what was happening.

I think the risk of default is small. In the event of default, I believe that the likelihood of the insurance industry backing the "insured" policies is excellent. I just object to anyone assuming that the individual states or federal government would rush in to fill the void.
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Old 11-18-2013, 10:11 AM   #39
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I don't think we'll ever know what would have happened if all of the swaps held by AIG had been allowed to collapse along with AIG. They were only backed by AIG. The domino effect has not been played out. Next time, we might not have a US government as able and willing to absorb the financial cost of what was happening.

I think the risk of default is small. In the event of default, I believe that the likelihood of the insurance industry backing the "insured" policies is excellent. I just object to anyone assuming that the individual states or federal government would rush in to fill the void.
I think it is likely that the swaps would have defaulted and caused systemic problems in the banking system, which is why the feds intervened. My point is that the swaps were not written by any of AIG's regulated insurance companies - they were written by AIG Financial Products (owned by AIG but not a regulated insurer) and the regulated insurers were all in good financial shape. In fact, it is the proceeds from the sale of many of those insurance companies that allowed AIG to repay the government.

I agree that the risk of default is small - IMO less than most high quality corporate bonds. I also agree that state or the feds would probably not fill the void, but what might happen is that the government might provide some funding for a bailout and then recover the cost through future assessments on the remaining insurers. IIRC that has happened in the past (pre-RBC).
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Old 11-18-2013, 04:51 PM   #40
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I would suggest that 2006-2009 was a pretty good real-life test. As banks were falling like dominos, insurers were stressed but weathered the storm quite well with a few close calls (Lincoln, Hartford, etc). (AIG doesn't count because the AIG insurance companies weathered the storm fine, it was the yahoos at AIG corporate that screwed the pooch.) I'm hard pressed to think of any major insolvency since RBC standards were put in place in the mid 1990s.

Let's put it this way - if we end up in a situation where insurers are going insolvent, it seems likely to me that the economy would be so bad that insurer insolvencies would be a relatively minor worry.

In terms of default risk, there are a lot of corporate bonds that I would worry about before worrying about an insurer solvency.
I don't agree. Almost all the life insurance companies suffered huge losses in 2008, and 2009. While common stock holders and even many preferred shareholder suffered almost complete losses in hundreds of failed banks, senior debt holder of failed banks for the most part were unaffected. This was because of many factor including the existence of the FDIC fund,and TARP, plus fed actions.
Some of the biggest holders of bank senior debt are in insurance companies portfolio. Insurance companies losses would have been even worse but for those actions.

The bull market of the last 4.5 years has bailed out a lot of portfolio including both mine and the insurance companies.

The failure of a single large insurance company Executive Life in the 1991 stressed the state guaranty fund system to the limits. It resulted in many policy holder losing 20% of their money in California. Perhaps even more problematic for retiree was seeing their payments reduced and/or suspend while the court system worked out the details of the bankruptcy.

There is a reason that most (perhaps all states) prohibit insurance companies from a making any mention of the guaranty fund in their marketing literature. It provides adequate protection for a single insurance company going bust due to incompetent or reckless behavior by management. It does nothing to cushion the consequences of systemic failure in the industry.

I figure the insurance industry is one black swan event away from some deep dodo.
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