Attitudes Toward Annuities Affected by How They Are Presented

[RockOn]

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Originally Posted by FinanceDude The "Reader's Digest" version of that complication means that Prudential has the right to move money from your asset allocation to a bond fund when the formula indicates it's a "good time" to do so. At least that's what I understand it to be............

That's interesting.

So if I start to make more than their 7% guarantee they can just move me to bonds to make sure that I don't? Can you see the distrust building? I really don't know why they'd do that, but interesting it is.

No need to answer, I am clearly in over my head. What do they do? Send a letter saying sorry Mr Jones, we've just moved you into bonds, you better sit down and read your contract.

[Art G]

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Originally Posted by RockOn That's interesting. So if I start to make more than their 7% guarantee they can just move me to bonds to make sure that I don't? Can you see the distrust building? I really don't know why they'd do that, but interesting it is. No need to answer, I am clearly in over my head. What do they do? Send a letter saying sorry Mr Jones, we've just moved you into bonds, you better sit down and read your contract.

Why would they want to prevent you from profiting? Their guarantees only come into effect if your account is losing money, so they'd much prefer your account do well and they got to keep the cost of insurance.
The problem is they move the money to bonds when the market is dropping, thus preventing you from any quick bounces back in the market. In effect, their goal is to keep you from losing too much money, not to keep you from gaining, but the end result is that they may be keeping you from both. JMO.

[RockOn]

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Originally Posted by Art G Why would they want to prevent you from profiting? Their guarantees only come into effect if your account is losing money, so they'd much prefer your account do well and they got to keep the cost of insurance. The problem is they move the money to bonds when the market is dropping, thus preventing you from any quick bounces back in the market. In effect, their goal is to keep you from losing too much money, not to keep you from gaining, but the end result is that they may be keeping you from both. JMO.

As I said I am over my head, it is pretty complicated. When you said "why would they want to keep me from profiting", here is why I thought that. If my account is at a loss and I am using thier guarantee instead, I am also locked into staying with them forever and they get to keep making the 2 1/2% plus fees on my account. Maybe that isn't correct?

[brewer12345]

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Originally Posted by RockOn As I said I am over my head, it is pretty complicated. When you said "why would they want to keep me from profiting", here is why I thought that. If my account is at a loss and I am using thier guarantee instead, I am also locked into staying with them forever and they get to keep making the 2 1/2% plus fees on my account. Maybe that isn't correct?

Naah they make more money the bigger your account gets. The scenarios where they really go into the ditch as far as what they lose are where your portfolio plunges really far. So they reserve the right to switch you to bonds if you start to get down too far. But supposedly they are hedging all of this so that its not a problem. I guess we will find out who has been naughty and who has been nice when the equity market really drops.

[RockOn]

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Originally Posted by brewer12345 Naah they make more money the bigger your account gets. The scenarios where they really go into the ditch as far as what they lose are where your portfolio plunges really far. So they reserve the right to switch you to bonds if you start to get down too far. But supposedly they are hedging all of this so that its not a problem. I guess we will find out who has been naughty and who has been nice when the equity market really drops.

I haven't looked at the living benfits plans hard enough to understand them yet. I did a rough IRR if my account did fairly poorly (maybe 4% a year nominal after fees) and I resorted to the guaranteed outcome. I came up with just under 5%. Does that sound about right? (That would be the worst case assuming the insurance company stays solvent as I understand it)

[brewer12345]

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Originally Posted by RockOn I haven't looked at the living benfits plans hard enough to understand them yet. I did a rough IRR if my account did fairly poorly (maybe 4% a year nominal after fees) and I resorted to the guaranteed outcome. I came up with just under 5%. Does that sound about right? (That would be the worst case assuming the insurance company stays solvent as I understand it)

Dunno. These things are inordinately complicated and it would be really hard to be sure you had appropriately modeled them.

[RockOn]

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Originally Posted by brewer12345 Dunno. These things are inordinately complicated and it would be really hard to be sure you had appropriately modeled them.

I jst did a rough cash flow calc based on what I thought would happen under the guarantee. You are correct, what I think is supposed to happen may not be what would actually happen. How can anyone buy something this hard to understand?

I'd have to do a lot more learning before I would ever commit to something like this.

[brewer12345]

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Originally Posted by RockOn I jst did a rough cash flow calc based on what I thought would happen under the guarantee. You are correct, what I think is supposed to happen may not be what would actually happen. How can anyone buy something this hard to understand? I'd have to do a lot more learning before I would ever commit to something like this.

Put it this way: I see stuff just as complicated trade all the time. Supposedly the people trading it are sophisticated and experienced at modelling and understanding what it is they are dealing in. They have teams of analysts, expensive software, etc. The y still screw up from time to time.

Now imagine doing the same thing with a significant fraction of your life savings without doing the slightest bit of analysis and you can imagine why I have such a lofty opinion of the annuity industry.

[clifp]

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Originally Posted by FinanceDude The "Reader's Digest" version of that complication means that Prudential has the right to move money from your asset allocation to a bond fund when the formula indicates it's a "good time" to do so. At least that's what I understand it to be............

What I really like about these products is how simple they are to understand..

[2B]

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Originally Posted by clifp What I really like about these products is how simple they are to understand..

That's why they make so much money for the salesman and the insurance company. If people could easily understand them, they wouldn't sell any.

My impression of the typical sales presentation is the empasis on safety, guaranteed return, no loss... did I mention guaranteed? By the time they are done, the (usually) elderly person signs on the dotted line(s) convinced they will be able to stay in their home until they die. The details of fees and penalties are never brought up in a meaningful way.

When I've been asked about how to get a "financial advisor" to stop trying to sell someone an annuity, I've figured out that if the person asks for a complete list of any fees and penalties associated with their product they never hear from them again.

I periods of market turmoil and large drops the sales pitches for annuities gets real active. They are selling safety and security in a troubled world.... Did I mention guaranteed?

[RockOn]

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Originally Posted by 2B That's why they make so much money for the salesman and the insurance company. If people could easily understand them, they wouldn't sell any.

I understand why you are not for annuitites. Some of us already own them so we have different choices to make. What do you think, go with the plain vanilla lowest costs, or look into the riders to see if any of them make sense for me?

[FinanceDude]

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Originally Posted by RockOn I understand why you are not for annuitites. Some of us already own them so we have different choices to make. What do you think, go with the plain vanilla lowest costs, or look into the riders to see if any of them make sense for me?

Do a cost benefit analysis of what you have and what you could have. Decide what's important to you, and see if there is a way to accomplish it.

[RockOn]

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Originally Posted by FinanceDude Do a cost benefit analysis of what you have and what you could have. Decide what's important to you, and see if there is a way to accomplish it.

I'd love to do a cost/benefit analysis but they are extremely complicated from what I see. I don't trust anyone enough to do that for me. I think I'll be sticking with looking for the lowest costs, at least for now. If they were simplified I might be interested in a guarantee rider as I do value lowering risks, but then again if they were simplified, I very well might not be interested after seeing all the facts.

I like probing (from the annuity sales force) on what some of the best riders might be so I can begin to look at them. Do you know of any impartial resource to sort through the details of how they work? You have been helpful, I appreciate that.

Am I correct that if I were to buy one, I would have to sign a statement saying that whatever the saleman told me does not change the terms of the contract? I've seen language like that before.

[2B]

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Originally Posted by RockOn I'd love to do a cost/benefit analysis but they are extremely complicated from what I see. I don't trust anyone enough to do that for me. I think I'll be sticking with looking for the lowest costs, at least for now. If they were simplified I might be interested in a guarantee rider as I do value lowering risks, but then again if they were simplified, I very well might not be interested after seeing all the facts. I like probing (from the annuity sales force) on what some of the best riders might be so I can begin to look at them. Do you know of any impartial resource to sort through the details of how they work? You have been helpful, I appreciate that. Am I correct that if I were to buy one, I would have to sign a statement saying that whatever the saleman told me does not change the terms of the contract? I've seen language like that before.

I hate to say it but if the choices are too complicated to evaluate you are probably better off taking whatever you can get now and doing a simple, understandable asset allocation.

When you enter the world of VAs you enter the dark side of financial planning. You will probably have better choices if you really understood all of the options but if you don't understand the game it's time to get out.

[RockOn]

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Originally Posted by 2B I hate to say it but if the choices are too complicated to evaluate you are probably better off taking whatever you can get now and doing a simple, understandable asset allocation. When you enter the world of VAs you enter the dark side of financial planning. You will probably have better choices if you really understood all of the options but if you don't understand the game it's time to get out.

I understand the game that I'm in now which is VA M&E charges and fund fees. That's really not complicated. Venturing into the riders, now that is the dark side. I can picture a room of salaried insurance actuaries sitting around a table figuring out ways to get my money.

I always just tossed the rider proposals in the trash as they were sent to me, but a few have said I should be looking at them, especially the living benefits. I'm just trying to figure out if it's worth my time.

[FinanceDude]

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Originally Posted by RockOn I understand the game that I'm in now which is VA M&E charges and fund fees. That's really not complicated. Venturing into the riders, now that is the dark side. I can picture a room of salaried insurance actuaries sitting around a table figuring out ways to get my money. I always just tossed the rider proposals in the trash as they were sent to me, but a few have said I should be looking at them, especially the living benefits. I'm just trying to figure out if it's worth my time.

Adding a living benefit rider cost about .60-.85 a year, depending on the carrier. The average cost today is about .65. Yes, that's on top of any M&E and fund ER. And if you have a policy older than 3-4 years old, you would have to buy a NEw policy to get access to the riders in all likelihood. That means a NEw surrender period, and NEW possibly higher fees inside...........

[RockOn]

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Originally Posted by FinanceDude Adding a living benefit rider cost about .60-.85 a year, depending on the carrier. The average cost today is about .65. Yes, that's on top of any M&E and fund ER. And if you have a policy older than 3-4 years old, you would have to buy a NEw policy to get access to the riders in all likelihood. That means a NEw surrender period, and NEW possibly higher fees inside...........

I realize all of that, my VA's are around 18 years old. My problem would be trying to decide if the guarantees provided with a living benefit rider exceeds the value of all the fees and surrenders etc, that could come with it. I could calculate that out if I could be sure about understanding the guarantees but some of what I think might be gauranteed might not really be there due to the complexity. I can actually get a rider at Prudential on my existing VA's, but it's rider is very complicated. As Brewer said, my model would have to be accurate to see if it was worth it. I might try reading it again, but it scared me away a few days ago.

By the way, from what I remember the rider add on fee was more like 1.65%, probably because I'm only paying a 0.6% M&E now. So I'd have about 3.25 to 4% in yearly fees including the fund fees. I might be using the guarantee with that level of yearly fees.

[FinanceDude]

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Originally Posted by RockOn I realize all of that, my VA's are around 18 years old. My problem would be trying to decide if the guarantees provided with a living benefit rider exceeds the value of all the fees and surrenders etc, that could come with it. I could calculate that out if I could be sure about understanding the guarantees but some of what I think might be gauranteed might not really be there due to the complexity. I can actually get a rider at Prudential on my existing VA's, but it's rider is very complicated. As Brewer said, my model would have to be accurate to see if it was worth it. I might try reading it again, but it scared me away a few days ago. By the way, from what I remember the rider add on fee was more like 1.65%, probably because I'm only paying a 0.6% M&E now. So I'd have about 3.25 to 4% in yearly fees including the fund fees. I might be using the guarantee with that level of yearly fees.

I doubt the add-on rider fee was 1.65%, did you get phone confirmation on that? Anyway, right now you have a long-term contract that's low cost. The first thing is, DO YOU WANT to guarantee it, and why?

[Art G]

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Originally Posted by RockOn I understand the game that I'm in now which is VA M&E charges and fund fees. That's really not complicated. Venturing into the riders, now that is the dark side. I can picture a room of salaried insurance actuaries sitting around a table figuring out ways to get my money. I always just tossed the rider proposals in the trash as they were sent to me, but a few have said I should be looking at them, especially the living benefits. I'm just trying to figure out if it's worth my time.

First off, the actuaries are not working on ways to get your money, like the compliance depts., they are looking for ways for you not to do business. The actuary is the guy telling you that it ain't gonna work.
Now, I just can't understand your viewpoint that you'd rather pay a small something to get nothing in return, then to pay less than 1% more to actually have something of value to you.
I don't see the VA's so complicated as say, an index annuity. Now that's a wasp nest of confusion! Or CMO's, or closed end funds, or just about any sort of derivative product.
How come no one complains about a CD paying a banker a commission?
On a side note, I'm just curious, but what type of vehicle to do you drive?

[RockOn]

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Originally Posted by FinanceDude I doubt the add-on rider fee was 1.65%, did you get phone confirmation on that? Anyway, right now you have a long-term contract that's low cost. The first thing is, DO YOU WANT to guarantee it, and why?

The 1.65% may include the 0.6% M&E I already pay, I didn't read it close enough to tell. There were other variations of riders in the plan at even higher add-ons, some were more than 2%. I should really check it out more before I comment.

As to if I want a guarantee, here's the situation. If I can make 7% or more annualized on the VA money, I'll have a great ER. That may sound pretty easy to most but I am risk adverse. If I make at least 4% annualized on that money I'll have an acceptable ER. If I lose money and don't have any return, my plan blows up. Therefore, if I can get a guarantee of around 4 or 5% which I believe the Living Benefits might do (at least based on a rough cash flow calculation,) I might be willing to pay for the rider to guarantee the "acceptable" ER as long as it doesn't cost too much. Another 2% in fees a year may be ok, if thing go really well I still might get close to 7%.