Another annuity question

[palomalou]

What would be the right questions to ask re an annuity? I've read many conversations here and understand that many people don't like them. What might be problems with one which guarantees 5-6% for life but would pay more, say 1% less than the Dow, if the Dow does better than that? We have no kids, and no problem with dying with only enough $$ to be "disposed of". Will have wills, but only for what happens to remain.

 

[DblDoc]

Sounds like an equity indexed annuity. Run away! The Truth About Equity-Indexed Annuities - Forbes.com.

The only type of annuity that may be appropriate for some is a single premium immediate annuity or SPIA. For Some Retirees, This Annuity Makes Sense - Forbes.com

DD

 

[REWahoo]

What would be the right questions to ask re an annuity? I've read many conversations here and understand that many people don't like them. What might be problems with one which guarantees 5-6% for life but would pay more, say 1% less than the Dow, if the Dow does better than that? We have no kids, and no problem with dying with only enough $$ to be "disposed of". Will have wills, but only for what happens to remain.

The question you need to ask yourself is "Do I fully understand each and every aspect of this highly complex insurance contract? "

Unless you are shopping for a single premium immediate annuity (SPIA), I seriously doubt that you can say yes to the above question, at least not without some very dedicated research and translation of the fine print into a series of, "Oh, so that's what that means!" moments.

 

[73ss454]

Since I'm not smart enough to understand any of the 60 pages of nonsense, I'd have to pass.

My first and last question would be, where's the door.

 

[GregLee]

What would be the right questions to ask re an annuity?

An annuity should at least give you a better return than interest or appreciation on the same amount invested in stocks or bonds. So I think that's the first question: Does it? If so, there are other questions, but if not, you can just stop right there.

 

[rescueme]

The only type of annuity that may be appropriate for some is a single premium immediate annuity or SPIA. For Some Retirees, This Annuity Makes Sense - Forbes.com

DD

Agreed (yes, DW/I have one ).

Additionally, an SPIA is the only vehicle that you can match, plan against plan. Just look at the monthly payment (assumed under the same policy criteria, such as lifetime vs. fixed term, indivudial vs. joint, etc.)

Since your quoted monthly payment is what you actually get, all expenses (along with investment risk) is taken by the company. You don't get an annual expense charge for the policy which is much different from the computations and expenses of an indexed annuity (which is also based upon market return).

I'll just add that you have to really have to examine the need for an SPIA. It is not an answer to every need, and in every case. The reason we have it (ER pre-SS gap income) fits our needs, but that reason probably would not be the same for the others who persue such an action...

 

[East Texas]

The only annuity I would consider is a SPIA and the rates are so darn low right now (thanks, Bernanke!) that it just doesn't make sense to get one at this time.

 

[Berkshire_Bull]

What would be the right questions to ask re an annuity? I've read many conversations here and understand that many people don't like them. What might be problems with one which guarantees 5-6% for life but would pay more, say 1% less than the Dow, if the Dow does better than that? We have no kids, and no problem with dying with only enough $$ to be "disposed of". Will have wills, but only for what happens to remain.

You're talking about a variable annuity with a GMIB (Guaranteed Minimum Income Benefits) Rider. You don't have enough information to make a deciision. You shouldn't buy it, you need more information. Focus on the actual benefit to you more than the nuts and bolts. They will turn, the features of the contract will not. Also be sure to ask yourself, do you want single or joint life? Single may be 1%, Joint will be 1.5% expense, does your spouse need the income to continue, or will the death benefit be sufficient for her?

You could buy Vanguard Total Bond Market Index Fund and get 3.17% and just draw down on principal for the additional needed and cross your fingers and go for it. It's only lost money twice in 23 years. However it's never seen a rapidly rising rate environment so we don't know what happens then. Do you have a palate for cat food?

That said, there is no simple answer.

If I were retired I'd split my money into 3 buckets and fill each before I earmarked for the next:

Must Have: This is the money that must absolutely be there no matter what. Expenses for food, shelter, healthcare etc.
- Asset classes for this include social security, pension, and annuities

Want to Have: Extras in retirement.
- If I didn't understand individual stocks & fixed income, I would use a mutual fund asset allocation program. If I did do individual stocks & fixed income, I'd manage half, and farm out the other half

Legacy: Doesn't sound like you're concerned. Nothing further needed.

 

[REWahoo]

Focus on the actual benefit to you more than the nuts and bolts. They will turn, the features of the contract will not.

Are you advising the OP to focus on what the salesman and the slick brochure says rather than trying to understand how the benefits are actually calculated?

 

[Berkshire_Bull]

Are you advising the OP to focus on what the salesman and the slick brochure says rather than trying to understand how the benefits are actually calculated?

Absolutely not. I don't fully understand nor can I fully explain all the ins-and-outs of my health insurance, and I can't fully describe it's mechanics to you. However I can see how it meets my needs, and benefits me and I understand my options if I want to change.

I'd advise the OP to determine for themselves if the product will fill their need or not, and if they'll sleep better or worse at night for having bought it. What would you advise?

 

[REWahoo]

I'd advise the OP to determine for themselves if the product will fill their need or not, and if they'll sleep better or worse at night for having bought it. What would you advise?

Since I consider a variable annuity to be a product with roots tracing back to the photo below, my advice would be caveat emptor...

 

[Berkshire_Bull]

Since I consider a variable annuity to be a product with roots tracing back to the photo below, my advice would be caveat emptor...

I LOL'd at your photo. Well played!

I still believe variable annuities have their place in certian circumstances. Not this one since the OP doesn't have enough information.

 

[obgyn65]

Hello palomalou - it may useful to use the google function on this website to find interesting discussions about annuities. I like the concept of annuities, as I have no heir. I may end up annuitizing 30-50% of my NW if reach 62 years, but it is too early to tell as I am only 46.

What would be the right questions to ask re an annuity? I've read many conversations here and understand that many people don't like them.

 

[Koolau]

I actually read the equivalent of a "prospectus" for one of the "indexed annuities" one time. Took hours! Someone was trying to sell it to me. What I could understand of it made it clear that the company basically got theirs long before I got mine. Their slick sales brochure made it sound like I couldn't lose. Reading the fine print made me realize the company couldn't lose.

Run, don't walk from anything other than a well researched SPIA - and wait for better rates as others have pointed out. YMMV.

 

[Berkshire_Bull]

I actually read the equivalent of a "prospectus" for one of the "indexed annuities" one time. Took hours! Someone was trying to sell it to me. What I could understand of it made it clear that the company basically got theirs long before I got mine. Their slick sales brochure made it sound like I couldn't lose. Reading the fine print made me realize the company couldn't lose.

Run, don't walk from anything other than a well researched SPIA - and wait for better rates as others have pointed out. YMMV.

What can you lose in an index annuity? The only thing I can think of is purchasing power and the same holds true for a SPIA, CD, or bond. Just curious, why are they good and an index annuity is evil?

 

[REWahoo]

What can you lose in an index annuity? The only thing I can think of is purchasing power and the same holds true for a SPIA, CD, or bond. Just curious, why are they good and an index annuity is evil?

Your last name wouldn't happen to be VanWinkle by any chance?

I ask because you've been a member of this forum since 2004 and suddenly awaken and begin defending annuities? Have you really not read the countless annuity threads and discussions here?

Or has an insurance salesman hacked Berkshire_Bull's computer...

 

[DblDoc]

What can you lose in an index annuity? The only thing I can think of is purchasing power and the same holds true for a SPIA, CD, or bond. Just curious, why are they good and an index annuity is evil?

Everything you need to know about why these products are unsuitable - and why the Insurance companies are fighting tooth and nail to keep selling them. http://www.slcg.com/pdf/workingpapers/EIA White Paper.pdf

Equity-indexed annuities are contracts offered by insurance companies that pay investors part of the capital appreciation in a stock index and guarantee a minimum return if the contract is held to maturity. Since their introduction in the U.S. in 1995, sales of equity-indexed annuities have grown dramatically. Although good data is not available,
commentators have estimated that $25 billion in equity-indexed annuities were sold in 2007.2 Sales have increased because equity-indexed annuities limit downside risk, offer some participation in stock market gains and generate extraordinary commissions to salesmen and profits to issuers. Despite the growth in sales, merits of equity-indexed annuities have remained obscured by their complexity and abusive sales practices targeting the least sophisticated and most vulnerable investors have flourished.

BB these things are a very dead horse around here. I would move on to something else .

DD

 

[rescueme]

BB these things are a very dead horse around here. I would move on to something else .

DD

Yes, I would agree. As one who looked at all "annuity" products, I found the indexed annuity lacking in many of the primary needs to the retiree.

Just my simple observation, as one who has an annuity - an SPIA.

 

[palomalou]

Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

 

[DblDoc]

It still seems that the downside protection of the EIA is worth losing a hair off the upside.

But the cost of that insurance is very high.

DD

 

[haha]

Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"!

These things are hard to understand, and most of us are a priori convinced that they stink, so we do not make the effort to formulate a well reasoned and likely accurate summary of what is wrong with them. There is just no perceived payoff for this work.

Ha

 

[FIRE'd@51]

What would be the right questions to ask re an annuity? I've read many conversations here and understand that many people don't like them. What might be problems with one which guarantees 5-6% for life but would pay more, say 1% less than the Dow, if the Dow does better than that?

The first question I would ask is what would be the annual payout be if the annuity contained no Dow "kicker" (i.e. a plain vanilla SPIA). There is an option on the Dow embedded in the annuity you are describing. I would like to know how much that option costs.

 

[travelover]

Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

You!

Up on the ledge!

JUMP!

 

[GregLee]

Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal.

In the case of a mutual common stock fund, I don't understand why preserving "principal" is a concern or how the fund "may pay 0 in any given year". I'm not saying it's not possible to understand these things, but really, only that I don't, and that I'm often puzzled in these conversations. I have my mutual funds set up to reinvest distributions and dividends, and (except for some tax technicalities) I just pay attention to the dollar value of my shares and the dollar value of shares I redeem. The fund pays out whatever shares I choose to redeem -- it will never "pay 0" unless I choose not to withdraw anything that year or, or course, if there's nothing at all left in my account. If you remove a fixed inflation-adjusted amount each period for your expenses, you expect the dollar amount left in the fund (the "principle"?) to gradually diminish. If that's what you mean by "losing principle", I don't think there is anything necessarily bad about it.

 

[clifp]

Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

The problem in a nutshell with EIA is that come with 4 page glossy brochure implying all of the wonderful benefits they provide during a down stock market, and assuring you that if the market goes up you'll benefit almost as much as owning a mutual fund. However, EIA also come with 200+ page insurance contract that describes in highly technical legalese how the products actually work. There is enough disconnect between these marketing brochure and the contract that everybody from FINRA, to the SEC, and various states attorney general offices have put up warning about buying EIAs on their websites. Alan Greenspan even described them as so complicated he couldn't understand them.

EIA have only been sold in large numbers in the last 6 or 7 years and because there is typically at least a 10 year holding period, there is virtually no real data about how much income they provide in retirement. I asked DGoldenz to give me an example of how much income they provide to his past clients and he said that none of the EIA he sold had matured (wrong word).

So one possibility is you were lied/mislaid by the salesman. The 100K in EIA you think provides you the higher of 75% of the S&P growth or 4%/year which is turned into a life time annuity at 10 years. But in 10 years that 100K may actually be worth only $80K* after all the various fees and charges are calculated or the annuity interest rate lowballed. *Made up number.

A second possibility is that investments do great and the 100K in the market goes up by the historically 10% or so in which case you'd be better off investing in index funds.

The third possibility is that EIA works as advertised, and we have a decade of 0 gain in the stock market and low interest rates. Now at this point it is worth asking yourself. "If the stock market makes no money over 10 years, (which is exactly what you are understandably worried about) and the total bond market is yielding 3.25% how can the insurance company afford to pay me 4%? The insurance company has to pay for salesman salaries electricity for all of those nice buildings etc. Clearly they will lose money on every EIA policy they wrote, how many of them will still be around after a decade of losses?