are annuities worth it or too expensive?

[allanlevy]

That is why it is so important to look at cash flows - cash flows don't lie.

I suspect in the case of the product you are looking at the 2.7% is applied to the higher of the annuity base amount (whatever they call it) or the account value. This would be fairly typical (rather than what you deposited, just like mutual fund expenses are based on account value rather than what you deposited).

The other expenses that you didn't mention is on top of the 2.7% you are also paying investment management and administration expenses for each subaccount in the VA.

I think you now understand the initial reactions that you got.

Yes I now do understand the initial reactions I got. The thread educated me significantly (thanks all!). I was particularly shocked by the fee and its application to the virtual account. I can accept a fee at the real amount, even raising it when the real amount rises. But to tack it to a higher virtual amount is pretty disgusting. And the representation of the cost a s just a % iteslf is pretty disguising. And i am personally feeling should be brought to the attention of FINRA.

The question seems to me to be when being opaque and misleading crosses the legal line vs a single sentence in the bowels of a contract. I believe it can be argued as being predatory, even if its a single line in the bowels of a contract. Sure its caveat emptoire (sp?). But where is the legal line on financial products being clear and not misleading.

By extreme example, so what does a consumer have to do--when quoted the cost is 2%, check that they didn't really mean its 2% of GNP vs 2% of the amount you are giving them for the product?!

Anyone care to offer a legal or educated opinion? I would be curious.


.

 

[Kimo]

Yes I now do understand the initial reactions I got. The thread educated me significantly (thanks all!). I was particularly shocked by the fee and its application to the virtual account. I can accept a fee at the real amount, even raising it when the real amount rises. But to tack it to a higher virtual amount is pretty disgusting. And the representation of the cost a s just a % iteslf is pretty disguising. And i am personally feeling should be brought to the attention of FINRA.

The question seems to me to be when being opaque and misleading crosses the legal line vs a single sentence in the bowels of a contract. I believe it can be argued as being predatory, even if its a single line in the bowels of a contract. Sure its caveat emptoire (sp?). But where is the legal line on financial products being clear and not misleading.

By extreme example, so what does a consumer have to do--when quoted the cost is 2%, check that they didn't really mean its 2% of GNP vs 2% of the amount you are giving them for the product?!

Anyone care to offer a legal or educated opinion? I would be curious.


.

This is why I wrote the post above yours......

 

[nun]

That is why it is so important to look at cash flows - cash flows don't lie.

I suspect in the case of the product you are looking at the 2.7% is applied to the higher of the annuity base amount (whatever they call it) or the account value. This would be fairly typical (rather than what you deposited, just like mutual fund expenses are based on account value rather than what you deposited).

The other expenses that you didn't mention is on top of the 2.7% you are also paying investment management and administration expenses for each subaccount in the VA.

I think you now understand the initial reactions that you got.

If the fees end up being in the range of 5% of what you actually deposit and you get the 7% to 8% dogmatic return, the the net return of 2% from a stable value fund is very competitive. You don't get the guarantee of life time income, but you also don't have to pay the extra fee for that either.

 

[allanlevy]

If the fees end up being in the range of 5% of what you actually deposit and you get the 7% to 8% dogmatic return, the the net return of 2% from a stable value fund is very competitive. You don't get the guarantee of life time income, but you also don't have to pay the extra fee for that either.

That is correct. And that is why I ended up "net net" comparing this more to a bond fund return than anything else. The fees eat up the equity return making it more like a long term bond return at today's (very) low yields. Net net I think what one gets from a VA is

a) some equity exposure in the exceptionally rare perspective that markets behave very VERY optimistically in the next 30 years (the double "very" because the fees eat up the equity premium returns),

b) the long tail longevity insurance that keeps paying you if you are lucky enough to live 95-100 or beyond (not this is not so unlikely, these days there is a 1 out of 4 chance 1 member of a couple will be alive at 95--my wife has already declare that is her intent!--and there is a realistic chance medical advance will make a dent in cancer treatments to the point of a sudden jump in longevity--if they just could nip that, returns would be huge and I would feel vindicated--that would serve the insurance companies right for producing such an opaque product--but then they might vindicate me back by going belly up in the event of a positive cancer treatment longevity bounce).

As far as the peace of mind value of the VA, if anyone has read the thread here and think I am walking around with increased piece of mind return on investment, I have a bridge to sell them (hmmmm make that a VA)!

Allan

 

[nun]

That is correct. And that is why I ended up "net net" comparing this more to a bond fund return than anything else. The fees eat up the equity return making it more like a long term bond return at today's (very) low yields.

I'm zeroing in on the following strategy:

I have an old TIAA-Traditional account that is giving me 4.5% interest in the accumulation phase and the annuity will be calculated using a 7.75% rate so I'll keep that, but for the rest of my income I'll use a stable value fund, a short term bond fund and deferral of SS until 70. I think SS deferral is the best way to boost your income in latter life and it's index linked too.

 

[brewer12345]

Guys, remember that you are exposed to the insurer's credit for the value of whatever guarantee you are buying. If most of the value of what you buy is the guarantee, be very careful who you buy this stuff from. Some of the companies that have been mentioned in this thread are not credits I would touch with the 10 foot pole of your choice.

 

[ejman]

Yes I now do understand the initial reactions I got. The thread educated me significantly (thanks all!). I was particularly shocked by the fee and its application to the virtual account. I can accept a fee at the real amount, even raising it when the real amount rises. But to tack it to a higher virtual amount is pretty disgusting. And the representation of the cost a s just a % iteslf is pretty disguising. And i am personally feeling should be brought to the attention of FINRA.

The question seems to me to be when being opaque and misleading crosses the legal line vs a single sentence in the bowels of a contract. I believe it can be argued as being predatory, even if its a single line in the bowels of a contract. Sure its caveat emptoire (sp?). But where is the legal line on financial products being clear and not misleading.

By extreme example, so what does a consumer have to do--when quoted the cost is 2%, check that they didn't really mean its 2% of GNP vs 2% of the amount you are giving them for the product?!

Anyone care to offer a legal or educated opinion? I would be curious.


.

Unfortunately not any help to you but over the years I've looked at a few variable annuities. Each one came with a telephone book worth of small print and pages of term definitions meaning that very, very smart lawyers, accountants and other experts spent a considerable amount of time and effort figuring out how they were going to separate me from my money. Realizing I'm no match for such a team of experts I've stayed away from such products.

 

[samclem]

I think SS deferral is the best way to boost your income in latter life and it's index linked too.

It's the best bang-for-the-buck. Just remember that, unlike an annuity, promised SS benefits are not an enforceable contract. They can change at any time, and a person probably should make an assessment of whether they'll likely be the "target" of any change.

 

[nun]

It's the best bang-for-the-buck. Just remember that, unlike an annuity, promised SS benefits are not an enforceable contract. They can change at any time, and a person probably should make an assessment of whether they'll likely be the "target" of any change.

Yes I realize that, but I can defer with both US and UK SS so I hope at least one will pay off.

 

[clifp]

Which brings up a point. The word CON and the regulatory environment "governing" this kind of product.

First, after all reflection, much generated from the intelligent comments in this thread, I agree with you to limit the % of the portfolio you put in a VA. There is valid reason to purchase longevity insurance. VAs are NOT an in

Third, an most interesting to me is the CON aspect. Maybe CON is too big a word, but as I have learned about this product, it is 1000% clear to me that the insurance company, and broker were anything but forthcoming about the expense level of this product. Not only is what you write above true about a) tax at ordinary income levels vs cap gains and b) the no step up basis on the estate when passing, but there is a totally hidden, massively expensive cost, and I am astounded that the regulatory industry has not picked up on this (Personally I think they/FINRA/SEC are again asleep at the switch).

Ask: the broker and insurance company the cost. The reply" 2.7%" (1.3% mortality, 1.4% guaranteed life). OK is every other financial product when the answer is a % when referring to cost, it means a % of the money you put in. But NO, not in the VA! Since the insurance company has an income base (virtual) and an account value (real) they can apply the % cost to the former. They choose the former!! (at least that is what NationsWide does).This effectively doubles the cost of the annuity since you end up paying 2x2.7% (ie., 2.7% on twice what you put in).

Got that?...5.4% of your base in fees. This effectively nullifies the equity return of the VA in all but the most optimistic of market scenarios. (So all you are left with is the longevity insurance aspect of the product).

What irks me, is just how opaque this is. a) the sales folks do not tell you about it, b) the sales folks tell you 2.7% when you has for the "all in cost", and they either do not know or intentionally led you to believe that that is 2.7% of what you put in. But NO, the expense is on twice what you put in cause its assessed on the virtual account (called the income base).

This is exceptionally clever trickery and 1000% misleading to the buyer. I actually wonder if a case can be made for fraudulent. They tell you the cost is 2.7% but it turns out to be 2x2.7% because its assessed on a virtual base that is twice what you put in.

You know as I write this I do wonder--are there any lawyers out there (or others) who might respond to the question of whether the ins company is crossing the legal line (after all there is a misrepresentation when they answer and write 2.7%, leaving the buyer to assume its 2.7% of the amount you are giving them, vs a virtual figure of twice that size, effectively doubling the 2.7% to 5.4%!). At a minimum the regulator agencies should be shouting this out and smashing the insurance companies for this (what ever happened to truth in lending).

You literally need to read 1 sentence in the massive VA contract document to spot this. So maybe the insurance company has not crossed the legal line. But I wonder, if a case cannot be made for deceptive marketing.

At a minimum the regulatory agencies should be ashamed at themselves for not protecting the "average" consumer.

Thoughts?

Allan

In word the behavior is it outrageous. If you look carefully (meaning lots of googling) you can find some fairly obscure webpages on various government agencies, like the SEC, or psuedo govenrment agencies like FINRA,that provide warning on the fee and complexities associated with EIA and Variable Annuities.

But beyond that there is precious little information to educate the average consumer and CON is not at all to strong a word to use. My sister and her husband are above average in financial sophistication, yet they almost feel victim to being sold a EIA. I talked them out of it but the really wanted to believe what they thought the salesman told them. You are far from the only person to be confused on the virtual account vs the real account. I am pretty confident that this by design and not accident.

As to why this happens, your guess as good as mine. I am less cynical than most people about government. But it seems to me that the insurance industry has excellent lobbyist. It is the only explanation I can come up with for the numerous cases of special exemptions for insurance products in the tax code. I also think one of the problems with the insurance in general is that firms are national or even international, but almost all of the regulation is done at the state level. Judging by how badly outclassed even bank and SEC regulators, by Wall St were shown to be in the 2008/9 crisis, I think state insurance regulators are similarly out maneuvered by the insurance companies. I also think that it doesn't help that in many states the insurance commissioner is an elected official and is often used by a state legislator as stepping stone to bigger jobs. One guess is that the insurance commissioner finds if doesn't make waves the insurance companies will help become the next Gov Lt. Gov or Senator. If he does push for real reform the donation stop. .

I had originally hoped that the financial consumer protection bureau would do what you point out so badly needs to done. Alas it appears that will never happen. (I will say as a Republican, I am embarrassed by my parties behavior with respect to the FCPB.)


Brewer is an expert on insurance companies, he might be able to shed some light on why we were are in this sorry state.

 

[sheehs1]

Which brings up a point. The word CON and the regulatory environment "governing" this kind of product.

First, after all reflection, much generated from the intelligent comments in this thread, I agree with you to limit the % of the portfolio you put in a VA. There is valid reason to purchase longevity insurance. VAs are NOT an investment; the are insurance. They provide emotional piece of mind (that has no ROI but is a high value and yes it is an expensive to purchase value).

Second, value, is that for the conservative investor, once you "backstop" the longevity risk, you can afford to place the remaining part of your portfolio in high(er) risk/return investments. That is because your "worst case" is covered. (or thereabouts, the exact %ages of portfolio in each is a function of what you want to leave behind in your estate as a min--grand kids will need to attend university at towering costs too!).

Third, an most interesting to me is the CON aspect. Maybe CON is too big a word, but as I have learned about this product, it is 1000% clear to me that the insurance company, and broker were anything but forthcoming about the expense level of this product. Not only is what you write above true about a) tax at ordinary income levels vs cap gains and b) the no step up basis on the estate when passing, but there is a totally hidden, massively expensive cost, and I am astounded that the regulatory industry has not picked up on this (Personally I think they/FINRA/SEC are again asleep at the switch).

Ask: the broker and insurance company the cost. The reply" 2.7%" (1.3% mortality, 1.4% guaranteed life). OK is every other financial product when the answer is a % when referring to cost, it means a % of the money you put in. But NO, not in the VA! Since the insurance company has an income base (virtual) and an account value (real) they can apply the % cost to the former. They choose the former!! (at least that is what NationsWide does).This effectively doubles the cost of the annuity since you end up paying 2x2.7% (ie., 2.7% on twice what you put in).

Got that?...5.4% of your base in fees. This effectively nullifies the equity return of the VA in all but the most optimistic of market scenarios. (So all you are left with is the longevity insurance aspect of the product).

What irks me, is just how opaque this is. a) the sales folks do not tell you about it, b) the sales folks tell you 2.7% when you has for the "all in cost", and they either do not know or intentionally led you to believe that that is 2.7% of what you put in. But NO, the expense is on twice what you put in cause its assessed on the virtual account (called the income base).

This is exceptionally clever trickery and 1000% misleading to the buyer. I actually wonder if a case can be made for fraudulent. They tell you the cost is 2.7% but it turns out to be 2x2.7% because its assessed on a virtual base that is twice what you put in.

You know as I write this I do wonder--are there any lawyers out there (or others) who might respond to the question of whether the ins company is crossing the legal line (after all there is a misrepresentation when they answer and write 2.7%, leaving the buyer to assume its 2.7% of the amount you are giving them, vs a virtual figure of twice that size, effectively doubling the 2.7% to 5.4%!). At a minimum the regulator agencies should be shouting this out and smashing the insurance companies for this (what ever happened to truth in lending).

You literally need to read 1 sentence in the massive VA contract document to spot this. So maybe the insurance company has not crossed the legal line. But I wonder, if a case cannot be made for deceptive marketing.

At a minimum the regulatory agencies should be ashamed at themselves for not protecting the "average" consumer.

Thoughts?

Allan

Pretty sure the insurance company has covered their behinds on this. Plus I believe you have either 3 or 5 days to cancel once you receive the contract so they give you an out. Problem is that is not enough time for most to review and completely understand.

I believe there have been many attempts at the state levels to make the insurance companies fully disclose risks. Mainly because a few companies went bankrupt. Can't remember their names off the top of my head but it has happened. Nothing seems to stop them from using the word "guarantee". Most salesmen don't say, "guaranteed unless the company goes bankrupt".
Most will not tell you that while they will give you a 5% bonus each year that they are taking that away with the "other hand". The "give me" bonus as far as I am concerned is a sales ploy.

The regulator agencies know of this but the burden is on the buyer/consumer. Problem is they are selling into the fear of most of us particularly the elderly. Nothing motivates quite like fear of outliving your money or not having anyone to take care of you, or possibly being in a nursing home.


There is one application I used where a variable annuity was a good choice. That was as a wealth transfer vehicle in a marital trust. Why was it a good choice? My mom passed away leaving a marital trust for my Dad. My Dad had his own wealth and while I paid him the net income out of the stock held in the trust, I had to invest it's cash for the benefit of the other remainder beneficiaries, meaning I didn't want to pay out the income generated from the cash. This cash had to grow as I needed more cash to help the trust pay it's proportionate share of Federal taxes at my Dads death (which was going to be within 5 years or so). Growth in an annuity is "growth" and not "income" so I didn't have to pay it out and the death benefit went up with account value. Stocks, bonds etc. would not have allowed me that.
With that experience I realized an annuity with a guaranteed death benefit might work well as a wealth transfer vehicle PROVIDED you do not plan to take withdrawals. If you don't take the withdrawals, the death benefit should grow given market conditions.

One might say, oh...just buy insurance. Well...yes....but $200,000 of insurance is not the same as putting $200,000 into a single premium variable annuity that can grow to over $200,000 (which it did). Thankfully this was all before 2008!

Thoughts? You could try calling your states Insurance commission, tell them your story and see what they say?