Another federal annuity study

[haha]

I was surprised at the answer: Kohl self-finances over 90% of his campaigns. He has also announced he will retire when his term ends.

Yes, that was just a reflexive shot at Herb Kohl, who is a very high class person. Way too honest to be a politician.

Ha

 

[Independent]

Everything I read say I am doing it wrong if doing it differently is wrong.

As far as the GAO report goes, I think it would be good if employers offered an annuity option but the devil is in the details. I've seen some of the 401K's offered to employees that were awful with high fees and poor or inadequate selections. I don't know that I would want to depend on the employer for selection of an annuity insurance company. Also, NOOOOO, to annuity defaults. The people I worked with were smart and highly educated but chose to remain quite ignorant of their retirement needs. I don't think they would even know that, if they didn't want an annuity, they would need to declare this before they defaulted to it. Also, they would make about 0% on a test on their knowledge of annuities.

I agree.

I would like to know what people think about the "Deeply deferred annuities, or longevity insurance" recommendation. Certainly my extremely negative reaction means I don't understand this so I won't offer that extremely negative reaction.
.

Let's be clear on the idea. You pay the insurance company a lump sum at (for example) you age 65. The insurance company owes you a monthly benefit starting at 85. If you die before then, you get nothing.

Because half the 65 year olds will die before they get to 85, and the company has 20 years to earn interest on your money, the survivors get a pretty good payout compared to their premiums.

To me, the benefit is that I don't need to "insure the risk" of living the first 20 years. I just plan for that and make scheduled withdrawals from the funds I didn't use for the annuity. Because I've got a fixed date when the annuity begins, I've taken the mortality uncertainty out of my planning.

Then I use the insurance company only for the risk that's worth pooling, which is the chance of living unusually long.

That concept makes a lot of sense to me. Buy insurance for unlikely events, plan for likely events. The catch is that the insurer carries all the long-tail longevity risk. The insurer is going to use conservative assumptions on future improvements in mortality, and that makes the numbers worse.

I don't see any unusual problems with state guarantee funds. If the insurer goes under, I just become a claimant whose expecting a stream of monthly payment, which may not have started yet.

 

[FinanceDude]

It's no different. We did not pay a fee for our SPIA. Any costs are recovered by the insurance company (FIDO), and they are taking the investment risk - same as a bank with a CD.

You paid a fee for your SPIA, you just didn't see it..........

 

[FinanceDude]

Yes, that was just a reflexive shot at Herb Kohl, who is a very high class person. Way too honest to be a politician.
Ha

Really? How long have you known Senator Kohl?

 

[Nords]

Because half the 65 year olds will die before they get to 85, and the company has 20 years to earn interest on your money, the survivors get a pretty good payout compared to their premiums.

The insurance company gets a pretty good payout too... as long as medical science doesn't figure out a way to triple the survival rates of Alzheimer's patients.

 

[GregLee]

Much of the debate is rooted in people mismatching the assets (they think they will wind up with more) and the associated risks (real chance of having less).

I think much of the debate is caused by some not distinguishing between the theoretical cost of an annuity for a given interest rate and life expectancy, on the one hand, and on the other, an actual product you can buy from an insurance company.

 

[Independent]

The insurance company gets a pretty good payout too... as long as medical science doesn't figure out a way to triple the survival rates of Alzheimer's patients.

I think we'd have to study a pricing model to see what "pretty good" means. I'm going to guess that tripling survival rates of Alzheimer's patients would more than wipe out the profit margins.

That's the rub. Insurers want to insure a lot of people with non-correlated risks. The possibility of medical advances is a non-diversifiable risk to them, and hence I'd be concerned that they are pricing that pretty conservatively.

(I was going to say "they" was a stretch. But according to this source, at least five companies offer the product. Longevity insurance solves one problem, but not without downsides Robert Powell - MarketWatch )

 

[ziggy29]

I think much of the debate is caused by some not distinguishing between the theoretical cost of an annuity for a given interest rate and life expectancy, on the one hand, and on the other, an actual product you can buy from an insurance company.

The thing is, insurance companies are pretty good at pricing risk in "old age" policies when there isn't an unknown in the cost of servicing the policyholder in old age. In an annuity, the life expectancy isn't known but the cost to insurer is known in terms of their liability per year.

With products like health insurance and long term care, insurers often underpriced their product by underestimating the persistent and rampant inflation in providing these benefits, and it's those which are in trouble. Over a large group of insureds, it's not hard to properly price an annuity or life insurance. Coverage related to the cost of senior care, on the other hand, is harder to price.

 

[GregLee]

Over a large group of insureds, it's not hard to properly price an annuity or life insurance.

I agree that it's not hard to properly price them. But that is not the issue I raised.

 

[ziggy29]

I agree that it's not hard to properly price them. But that is not the issue I raised.

The point is they can and do offer the product, whereas many are pulling out of markets like LTCG because of pricing issues. Of course there's a difference between what insurers offer and the theoretical expectancy based payout. There are two reasons for this:

1 -- The insurer is a for-profit business and if they paid out 100% of the real expected annuitization based on life expectancy and interest rates, there would be no profit and hence no reason to offer the product.

2 -- Self-selection bias among annuitants. If you're 60 years old and you're somewhat sick and have a family history of ordinary life expectancy at best, you're a lot less likely to buy a SPIA than someone who is very healthy and has a family history of longevity. Thus I would expect the "average" SPIA customer to have a longer life expectancy than would be merely predicted by their current age -- and again, the insurer has to account for this by reducing the payout to be more in line with the life expectancy of the typical annuity customer rather than the overall life expectancy.

Still, these are easy to price and the insurer knows their exposure per year.

 

[BellBarbara]

My hub works for one of the large financial services companies mentioned in this thread related to annuities. He is inundated with information about them, to buy them, how they will help us to survive, etc.

I can't help but be suspicious because we are getting emails, mailings, he is bombarded at work....it is their strategy to make money off of the money we already paid to them for fees.....like a churn to me.

He is hassling me to make an appt with one of their reps, and I am dragging my feet.

 

[2B]

My hub works for one of the large financial services companies mentioned in this thread related to annuities. He is inundated with information about them, to buy them, how they will help us to survive, etc.

I can't help but be suspicious because we are getting emails, mailings, he is bombarded at work....it is their strategy to make money off of the money we already paid to them for fees.....like a churn to me.

He is hassling me to make an appt with one of their reps, and I am dragging my feet.

I am probably the most consistent voice against annuities. The only one I see any reason for is a SPIA. The only time "normal" people would want one is to create a comfort zone on insurance company guaranteed (not FDIC) income that simulates a defined benefit pension (which is guaranteed by the Federal govt). The total of SS and annuities would equal a minimum income for their existence as a theoretical safety net. I would only recommend this if someone felt truly worried about their ability to manage their money, are very healthy and come from a longlived family. I would also limit any annuity purchase to less than 20% of any portfolio. They should also be bought as late as possible to reduce inflation risk, unforseen heath problem development and to increase payout.

Other annuities for "normal" people are akin to criminal fraud IMHO. This includes all forms of variable and index annuities. The more riders attached the worse they become.

Back to your comment. Have you and DH worked out a comprehensive retirement path forward? The last thing you want to do is to walk into an insurance salesman's office without a plan. If you do, he's selling hammers and all your problems will look like nails.

 

[Koolau]

I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given. I've always assumed they do some sort of "least common denominator" approach or in some fashion factor in the fact that annuity customers self-select for their generally good health. In any case, not too many insurance companies seem to consistently lose money (not and stay in business).

So apparently, most know what they are doing. I'd bet the longevity/mortality issues of both life and annuity business is the LEAST problem insurance companies have in making money. They DO seem to get this right most of the time. I assume the volatility of the markets they invest in is the big issue for the most part.

 

[chinaco]

I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given. ...

They do... but it is up to you to tell them. If you can prove a health problem that might lead to an early death, they may increase the annuitant's payout. Otherwise they assume you are healthy.

Medically Underwritten Annuities | Rated Age Determination

There have been some studies that indicate that insurance companies are conservative in pricing of annuities because of concerns about anti-selection (assumed healthy people buy that are not expecting to die early)

 

[FinanceDude]

I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given.

Most annuity products involve lump sums, whereas most life insurance products do not................ $100,000 into an annuity which pays out 10 years from now is much easier than a guy giving them $20 a month for $500,000 of life insurance..........

 

[FinanceDude]

Over 50 years

Personally? WOW!! I guess I am a little more skeptical. He did a great thing to buy the Bucks and keep them from moving out of Milwaukee, all of us NBA fans are thankful for that. But, he is a meddler, and the reason the Bucks are not winning is because he can't let the NBA guys handle it, he feels the need to call all the shots..........

 

[clifp]

I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given. I've always assumed they do some sort of "least common denominator" approach or in some fashion factor in the fact that annuity customers self-select for their generally good health. In any case, not too many insurance companies seem to consistently lose money (not and stay in business).

So apparently, most know what they are doing. I'd bet the longevity/mortality issues of both life and annuity business is the LEAST problem insurance companies have in making money. They DO seem to get this right most of the time. I assume the volatility of the markets they invest in is the big issue for the most part.

I am with you, I think companies writing SPIA basically know what they are doing. When interest rates drop the SPIA payouts drop and vice versa.

What concerns me more is the ability of insurance companies to price the Equity Index Annuities properly. I am sure they love all the fees and riders they collect but are insurance companies really smarter about future market returns than the rest of us. If the new normal for the next 20 years is say 3% bond yields, and and 6-7% stock returns (with a lot volatility), than I wonder how insurance that wrote EIA with 5%+ floors are going to pay them off. I think it is similar to the long term health insurance policy. Yes health care cost can continue to rise at twice the rate of inflation for long periods of time.

 

[fritz]

Actually the money has already gone to the ins. company. At some point it will end and the ins. company will stop gradually meting the money you gave them back to you - statistically before it's all been returned with interest.

+1 (and as they say - the odds always favor the house)

 

[rescueme]

You paid a fee for your SPIA, you just didn't see it..........

It's the same situation as a CD, which also has administrative costs but you don't see them.

The "profit" for a CD and an SPIA is obtained in the same way. That is the spread that the company/bank pays you and their ability to use "your" money to invest and make a profit on the excess.

Some annuities (or more specifically SPIA's) may have a stated "load", however there is none specified in either our application or contract.

If they make a profit? So be it. I have no problem with that - that's why they are in business, anyway.

 

[BellBarbara]

I am probably the most consistent voice against annuities. The only one I see any reason for is a SPIA. The only time "normal" people would want one is to create a comfort zone on insurance company guaranteed (not FDIC) income that simulates a defined benefit pension (which is guaranteed by the Federal govt). The total of SS and annuities would equal a minimum income for their existence as a theoretical safety net. I would only recommend this if someone felt truly worried about their ability to manage their money, are very healthy and come from a longlived family. I would also limit any annuity purchase to less than 20% of any portfolio. They should also be bought as late as possible to reduce inflation risk, unforseen heath problem development and to increase payout.

Other annuities for "normal" people are akin to criminal fraud IMHO. This includes all forms of variable and index annuities. The more riders attached the worse they become.

Back to your comment. Have you and DH worked out a comprehensive retirement path forward? The last thing you want to do is to walk into an insurance salesman's office without a plan. If you do, he's selling hammers and all your problems will look like nails.

I know! He used to let me handle everything, and we seemed on the same page, but I think the issue is he loves his company, and believes them when they tell him we need this.

When he first went to work for them, we had to move all financial assets except checking and my employers 401k into that company, it's a requirement to monitor for insider trading (standard in industry). Of course, they saw our account and called him and wanted to present us with a proposal. I told him to pick it up and bring it home. It was AWFUL. It was a proposal to diversify into like 30 funds....some of them really bad. I was totally shocked! I showed him how bad it was and he agreed...but I think he forgot how they tried to screw us there.

He is totally reluctant to do a comprehensive plan, totally. I have done everything. Created post retirement budget with set asides for big things I think he will want, run every calculator ever mentioned here....but he just doesn't want to get that involved. But now that we are closer I think he is afraid. I may need to find a for fee FP to help me with him.

It bums me out, and I don't like to me the nag or mom.

 

[haha]

I am with you, I think companies writing SPIA basically know what they are doing. When interest rates drop the SPIA payouts drop and vice versa.

Something not often mentioned is that annuities have an opposite systemic risk from life insurance. If something happens that either dramatically increases or decreases life spans, these efects will offset in the overall life book of business.

ha

 

[BLS53]

The non-housing debt seems low in the GAO examples. I think the average credit card debt among seniors is significant in a large portion of the population. Not to mention car loans.

Also, they assign an asset value to DB plans. I wonder what my military pension is worth?

 

[2B]

BellBarbara,

A fee only planner may be appropriate if you can get him to one. The best thing is to try to get him to read some of the better financial planning books. There's a book list here. Also, the Bogleheads Forum has suggestions. William Bernstein's latest book, The Investor's Manifesto, is a fairly easy read and it tears into many alternative products.

I was once subject to insider trading rules. There is no SEC requirement to move all your assets to a specific firm. I suspect your husband's firm looks upon their employees as sources of revenue.

 

[Tadpole]

The non-housing debt seems low in the GAO examples. I think the average credit card debt among seniors is significant in a large portion of the population. Not to mention car loans.?

What makes you think either one?

 

[rescueme]

What makes you think either one?

I would have to agree, but then I'm a retired "senior" who never carried CC debt (and paid cash for cars - only when I/we could afford them), before and after retirement.

Now if you are looking at the senior population (anybody 60+) who have CC debt and are still employed? Well, that's another story. I don't think that a lot of them are considering retirement till way "down the road".