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Old 04-15-2008, 08:34 PM   #161
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I know that Pension funds, and others invest in hedge funds. What I meant is that not many individuals invest in hedge funds on their own. Maybe via a broker who puts them in or they just have a ton of money and can take the risk.

I would think that average folks living off their assets aren't putting money into hedge funds IMHO.
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Old 04-15-2008, 08:43 PM   #162
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I just find this so intriguing. I don't know how old you are so it's hard to tell you what you can get, however, IF you could get a 7% guarantee, would you even care what your expenses were?
The problem is this.

In order to get the 7% guarantee you have to put what for most people is a large portion of their assets into one credit. Yes, your assets are in a separate account should the company go BK, but you would lose the guaranteed benefit.

Recently our firm has come close to putting some seven figure sums into some of these VAs. (I even came close to putting some of my own money into one) But, I've read the 300 page prospectus on these things and there has always been a couple of huge issues that have stopped us (besides the fees) to me, the issue I can't get over is that should we get a market environment where you really need to guarantee, it will be the same environment that will make it too expensive for the insurer to keep hedging their exposure. The more I study them, the more I see that the restrictions they place on the benefits are the only things that keep them from being really appealing, but they have no choice otherwise it would be too good to be true which with insurance isn't as good thing. Just ask Brewer, VA companies have a history of making promises they later decide they can't keep.
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Old 04-15-2008, 08:45 PM   #163
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Problem is that the contracts are extremely complicated, so modelling isn't that easy even to go replicate it.
I tried to build a model for us to use internally to explain to some other investment professionals how they would hedge these risks. My head nearly exploded before I gave up.
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Old 04-15-2008, 08:51 PM   #164
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The more I study them, the more I see that the restrictions they place on the benefits are the only things that keep them from being really appealing, but they have no choice otherwise it would be too good to be true which with insurance isn't as good thing.
Can you briefly describe the type of restrictions on benefits that you are talking about? (Non-Cola'd? things like that?)
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Old 04-15-2008, 08:56 PM   #165
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Can you briefly describe the type of restrictions on benefits that you are talking about? (Non-Cola'd? things like that?)

1. The 7%, 8, 9% guarantee is limited in (depending on the company) to 2-3 times the net premium deposits. This alone limits their usefullness to people in their late 50's to early 60's.

2. Often times the living benefits have significant age limitations which also limit their usefullness.
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Old 04-15-2008, 09:01 PM   #166
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1. The 7%, 8, 9% guarantee is limited in (depending on the company) to 2-3 times the net premium deposits. This alone limits their usefullness to people in their late 50's to early 60's.

2. Often times the living benefits have significant age limitations which also limit their usefullness.
1) So you are saying the guarantee has a cap that could be hit if started too soon. Correct?
2) Age limitations, I haven't come across that, I'm not sure what you mean, guaranteed growth has to stop at a specific age?
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Old 04-15-2008, 09:13 PM   #167
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1) So you are saying the guarantee has a cap that could be hit if started too soon. Correct?
2) Age limitations, I haven't come across that, I'm not sure what you mean, guaranteed growth has to stop at a specific age?
1. Yes, lets say you deposit $100K. They may promise you a 7% growth (not in your account balance but in your benefit base) however that 7% is only good as long as that base doesn't exceed $250K which would be 2.5* your deposits.

2. In most cases that guarantee ends at a specific age like 75 or 80. In addition, just as you would find Firecalc telling you that your chance of running out of money goes down the longer you wait the insurers know the same thing. The lifetime income benefit of 5,6% etc is only available if you take it after age 59 or 60.
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Old 04-15-2008, 09:15 PM   #168
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1. Yes, lets say you deposit $100K. They may promise you a 7% growth (not in your account balance but in your benefit base) however that 7% is only good as long as that base doesn't exceed $250K which would be 2.5* your deposits.

2. In most cases that guarantee ends at a specific age like 75 or 80. In addition, just as you would find Firecalc telling you that your chance of running out of money goes down the longer you wait the insurers know the same thing. The lifetime income benefit of 5,6% etc is only available if you take it after age 59 or 60.
Thanks for the clarification.
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Old 04-16-2008, 04:43 AM   #169
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Someone asked me about "hedge funds." There are hedge funds for the "masses" although to be in one you are supposed to be a "qualified" investor. I think that means you have $500K in liquid assets and/or a $200K/year salary. I'm sure my numbers are off but you get the idea. I've also seen that the typical hedge fund doesn't care but they do make you sign a document saying you meet the requirements (wink, wink). You then get hit with fees and risks that make the typical annuity contract turn green with envy.

Just like the uber-weathy don't buy retail annuities available to us mortals, they also have access to different forms of wealth management vehicles that are also called hedge funds. They are less fee oriented and can generate stable returns because they truly "hedge" their exposures to reduce risk. The retail hedge funds are mostly playing long shots on derivatives and are going for the big score. I agree with the comment that said/implied that the typical retail hedge fund has "below market returns."

At my non-uber-wealthy financial position I won't be interested in either hedge funds or annuities.

You can create a "can't lose" principle, simulated variable annuity by buying zero coupon bonds that mature at your selected payout date. The balance of the cash would go into an index mutual fund. Right now interest rates are low so the bond portion would be pretty high but you would have the US government's guarantee you'd get your principle back but not indexed to inflation. Any non-zero balance in the stock fund would be "gain."

Of course, a DIY VA wouldn't have a salesman telling you how smart you are to protect your assets. It also wouldn't have the commission.
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Old 04-16-2008, 04:48 AM   #170
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seems to me you need to put alot of dough in the index fund to get much of an effect. i like the idea of using call options. the method brewer posted gives you a 55% participation rate in the gains of the s&p but with a cap of 10%. or about a 30% participation rate with no cap on the gains. depends how you set it up. plus a 1% guaranteed return on your cd and a little dough left over too. all with but a fraction of the money in the index fund calls
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Old 04-16-2008, 08:29 AM   #171
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I tried to build a model for us to use internally to explain to some other investment professionals how they would hedge these risks. My head nearly exploded before I gave up.
Heh, now you know why there were insurer meltdowns the last time the markets cratered. Its also why the remaining players get pressured to both hedge these exposures AND hold a lot of capital against them.
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Old 04-16-2008, 09:21 AM   #172
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What I wrote up was ow to replicate an equity indexed annuitym which is an extremely fee-laden species of fixed annuity. If you wanted to run the replication the way an insurer would (basically tack some options on top of a medium duration corporate bond fund), you could easily beat the snot out of the product they push, have greater liquidity and more transparency. It wasn't meant to be a replication fora VA hung with secondary guarantees. I could probably come up with a reasonable replication for the asset part, but it would be way more complicated than a retail investor would want to bother with.
Now, if you could come up with a way to replicate a V.A., I'd be incredibly interested! I think the problem you'd have is that an insurance company can spread it's risk amongst thousands of individuals, some living longer than others, and this is what has made insurance products feasible. My concern is how these companies are going to afford to pay living benefits if people start living too long. I think actuaries are getting squeezed to make numbers work, but then again, perhaps they just plan to raise the fees in the future as well.
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Old 04-16-2008, 09:25 AM   #173
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That's a fair comment. What about the high fee poor performing Mutual Funds, they are being sold to a lot of unsuspecting people are they not?

Again, I'm not defending anuitities. But I have some VA's for about 18 years, I have done ok.

What about the crooked CEO's that are hedging their companies assets or issuing unauthorized stock? I'd say there's great risk in any investment. It depends on how much you trust the system. In my opinion, large hedge funds are doing more to screw up your investments than anything any insurance product ever could.
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Old 04-16-2008, 09:27 AM   #174
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I know that Pension funds, and others invest in hedge funds. What I meant is that not many individuals invest in hedge funds on their own. Maybe via a broker who puts them in or they just have a ton of money and can take the risk.

I would think that average folks living off their assets aren't putting money into hedge funds IMHO.
They don't have to be directly investing in them to be getting hurt by them. Consider the mega-huge hedge funds that are shorting down the price of safe dividend paying stock.
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Old 04-16-2008, 09:29 AM   #175
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My concern is how these companies are going to afford to pay living benefits if people start living too long.
If they write a significant amount of life insurance, they are arguably macro hedged, since a ramp in longevity would make the money on the life side and offset the payouts on the annuity side.

Personally, I think that these guarantees must be extremely hard to properly hedge and that the writers of these things are taking significant risk.
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Old 04-16-2008, 09:30 AM   #176
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The problem is this.

In order to get the 7% guarantee you have to put what for most people is a large portion of their assets into one credit. Yes, your assets are in a separate account should the company go BK, but you would lose the guaranteed benefit.

Recently our firm has come close to putting some seven figure sums into some of these VAs. (I even came close to putting some of my own money into one) But, I've read the 300 page prospectus on these things and there has always been a couple of huge issues that have stopped us (besides the fees) to me, the issue I can't get over is that should we get a market environment where you really need to guarantee, it will be the same environment that will make it too expensive for the insurer to keep hedging their exposure. The more I study them, the more I see that the restrictions they place on the benefits are the only things that keep them from being really appealing, but they have no choice otherwise it would be too good to be true which with insurance isn't as good thing. Just ask Brewer, VA companies have a history of making promises they later decide they can't keep.
Very valid concerns. That is why I'd strongly suggest anyone with a large sum of money split their contracts between more than one company, make sure those companies are large and highly rated, and find out what percentage of their business is in annuities vs. other forms of safer insurance.
I haven't seen insurance companies reneging on payouts, but I have seen them discontinue features once they figured out they bit off more than they could chew. I think some of those soon to be eliminated features are currently in existence. JMO
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Old 04-16-2008, 09:38 AM   #177
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1. Yes, lets say you deposit $100K. They may promise you a 7% growth (not in your account balance but in your benefit base) however that 7% is only good as long as that base doesn't exceed $250K which would be 2.5* your deposits.

2. In most cases that guarantee ends at a specific age like 75 or 80. In addition, just as you would find Firecalc telling you that your chance of running out of money goes down the longer you wait the insurers know the same thing. The lifetime income benefit of 5,6% etc is only available if you take it after age 59 or 60.

That's not correct. The guaranteed growth rate stops at a certain age. Not the guaranteed income. So if your account grows 300%, that's what your income for life is figured from, however, if the market tanks and they guarantee you a 7% annual growth, then that $100k would stop at say $250k and your income for life would be figured from that number at the very least. It is the greater of value. If the market is tanking, tell me what's wrong with a 7% guaranteed growth rate?
Some of the new products are allowing you to start taking income at any age. In fact, I looked at one where you name the elder person as the owner, the daughter or son as the beneficiary, and the grandchild as the annuitant. In this manner, you've created lifetime income for a baby potentially.
BTW, still looking into this because it sounds way to good to be true.

You do need to keep in mind if the original contract was for someone to start taking income before 50 it may be penalized for early withdrawals.
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Old 04-16-2008, 09:43 AM   #178
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Someone asked me about "hedge funds." There are hedge funds for the "masses" although to be in one you are supposed to be a "qualified" investor. I think that means you have $500K in liquid assets and/or a $200K/year salary. I'm sure my numbers are off but you get the idea. I've also seen that the typical hedge fund doesn't care but they do make you sign a document saying you meet the requirements (wink, wink). You then get hit with fees and risks that make the typical annuity contract turn green with envy.

Just like the uber-weathy don't buy retail annuities available to us mortals, they also have access to different forms of wealth management vehicles that are also called hedge funds. They are less fee oriented and can generate stable returns because they truly "hedge" their exposures to reduce risk. The retail hedge funds are mostly playing long shots on derivatives and are going for the big score. I agree with the comment that said/implied that the typical retail hedge fund has "below market returns."

At my non-uber-wealthy financial position I won't be interested in either hedge funds or annuities.

You can create a "can't lose" principle, simulated variable annuity by buying zero coupon bonds that mature at your selected payout date. The balance of the cash would go into an index mutual fund. Right now interest rates are low so the bond portion would be pretty high but you would have the US government's guarantee you'd get your principle back but not indexed to inflation. Any non-zero balance in the stock fund would be "gain."

Of course, a DIY VA wouldn't have a salesman telling you how smart you are to protect your assets. It also wouldn't have the commission.
Your zero coupon idea for muni bonds is a great one and one I do use. However, you're limiting your upside to around 4.5% tax free and many of those AAA insured bonds are now the ones being reconsidered because the insurance companies are being downgraded.
It is a nice strategy though if you start early enough. Of course if you die early, there's no death benefit and if your heirs want to sell the bonds, they will be doing so at market value.
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Old 04-16-2008, 09:46 AM   #179
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At my non-uber-wealthy financial position...
My condolences ...

- Ron
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Old 04-16-2008, 09:48 AM   #180
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If they write a significant amount of life insurance, they are arguably macro hedged, since a ramp in longevity would make the money on the life side and offset the payouts on the annuity side.

Personally, I think that these guarantees must be extremely hard to properly hedge and that the writers of these things are taking significant risk.
In theory you're right, but it's not like we haven't seen companies just spin off subsidiary companies and dump their bad debts into them and let them flounder. Consider what GM has done with GMAC. Is GM responsible if GMAC declares bankruptcy?
AIG is a huge company, but their annuities fall under SunAmerica.
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