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Old 12-12-2010, 08:45 PM   #21
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I think you are sold, for better or worse. Good luck and report back from time to time.

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Old 12-13-2010, 01:42 AM   #22
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I think it's interesting to read the incorrect assumptions of some people that post here regarding FIA's because they saw their sister's mother's brother's dog's FIA and it was a bad deal. I'm an insurance agent and licensed to sell FIA's, and I know how they work inside and out, and the games insurance companies play to make the marketing sound good and in the end the contract is confusing or it sucks in general. They could give you 10% compound, but if they reduced the payout from 5.5% to 2%, you'd still be worse off even though the sweet marketing piece "guaranteed" you 10%!

With all FIA's you have to give up what you don't care about (e.g. long surrender period, high surrender charges, etc) to get what you want (guaranteed income rate, higher caps, etc). You can't have everything.

All that said, I'd be curious what company is offering the product you mentioned. Sounds like the Allianz MasterDex annuity, but that one has an 8% simple interest, not compounded.

Every company I can think of has lowered their caps and lowered their income guarantees. I don't know of any companies with an 8% compound on the income side with a 10% bonus. RBC had an annuity like that last year but reduced their rates and bonus. There is one company I can think of, but they have an A- financial rating and I think the surrender period is like 16 years...
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Old 12-13-2010, 04:18 AM   #23
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Originally Posted by dgoldenz View Post
I think it's interesting to read the incorrect assumptions of some people that post here regarding FIA's because they saw their sister's mother's brother's dog's FIA and it was a bad deal. I'm an insurance agent and licensed to sell FIA's, and I know how they work inside and out, and the games insurance companies play to make the marketing sound good and in the end the contract is confusing or it sucks in general. They could give you 10% compound, but if they reduced the payout from 5.5% to 2%, you'd still be worse off even though the sweet marketing piece "guaranteed" you 10%!
A lot of us are pretty sophisticated investor with both paper credentials and decades of real life experience. I generally read all 120+ page of prospectus before investing in products I don't understand.

Admittedly the last 4 or 5 year so far have been pretty reasonable time to invest in EIA/FIA, which is probably why the insurance companies are making them less attractive.

However, you have claimed there are good ones out there. If so show me.
I'd like to see two things a link to the prospectus, and second and more importantly a FIRECalc-like history of what the returns would have been like over the last say 60 years of the S&P.

For instance if Joe and Susan bought 100K worth Allianz xyz Annuity back in 1950 when they 40, what would have been their monthly income in 1975 at age 65, the same thing if they invested in 1960.

I'll make a deal show me current product that would have performed historical better than a diversified portfolio. I'll stop bad mouthing annuities.

What do you say?
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Old 12-13-2010, 04:42 AM   #24
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I think it's interesting to read the incorrect assumptions of some people that post here regarding FIA's because they saw their sister's mother's brother's dog's FIA and it was a bad deal. I'm an insurance agent and licensed to sell FIA's, and I know how they work inside and out, and the games insurance companies play to make the marketing sound good and in the end the contract is confusing or it sucks in general. They could give you 10% compound, but if they reduced the payout from 5.5% to 2%, you'd still be worse off even though the sweet marketing piece "guaranteed" you 10%!

With all FIA's you have to give up what you don't care about (e.g. long surrender period, high surrender charges, etc) to get what you want (guaranteed income rate, higher caps, etc). You can't have everything.

All that said, I'd be curious what company is offering the product you mentioned. Sounds like the Allianz MasterDex annuity, but that one has an 8% simple interest, not compounded.

Every company I can think of has lowered their caps and lowered their income guarantees. I don't know of any companies with an 8% compound on the income side with a 10% bonus. RBC had an annuity like that last year but reduced their rates and bonus. There is one company I can think of, but they have an A- financial rating and I think the surrender period is like 16 years...

They position the information deceptively. Simple Interest vs Compound.

Simple Interest Calculator

$100k:

  1. 10 years of simple interest 8% is $80,000 total of $180K... About 6% compounded (where the money you earn is working for you)
  2. 10 years of compound interest 8% is $115,892.50 total of $216k.

The participation in the investments or indexes can be deceiving too.


The insurance company is mitigating the clients risk and their risk.... plus the insurance company pays big commission (another cost) and wants to make a nice profit. All of those expenses are on top of the expenses from the securities markets.


I comes down to the expenses and they never stop... bad market or good market. Lay on top the participation limits (in various ways) and it seems to me that the upside potential is not very great.


I do not know what kind of illustrations must be provided. But realistic Illustrations over a 20 or 30 year period would help people to understand what it means. Including the effects of expenses. If those illustrations were compared to the total return of their indexes... It would not surprise me if the only illustration provided is the guaranteed illustration and market participation is left up to the prospects imagination.


Mitigating risk costs in two ways... fees/expenses and opportunity cost.

I believe many people that are targets of these contracts do not know what they are buying. All they hear is: You can't lose and you get the gains from the market.... no risk stock market gains. Insurance companies are well aware of what they are doing in the name of marketing with clever wording.

I suppose you could be the one agent that knows these things inside out. Congratulations, you are one of the few.

I suspect most actuaries don't know them inside out... for that matter based on the retrenchment of the pricing... even the ones that designed them.
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Old 12-13-2010, 06:59 AM   #25
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To OP, if you dig around on the forum there is a post I did a few years ago that explains in detail how you could replicate one of these contracts in your own account for a lot less expense and with far more flexibility. No credit exposure to an insurer, either.
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Old 12-13-2010, 07:01 AM   #26
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A lot of us are pretty sophisticated investor with both paper credentials and decades of real life experience. I generally read all 120+ page of prospectus before investing in products I don't understand.

Admittedly the last 4 or 5 year so far have been pretty reasonable time to invest in EIA/FIA, which is probably why the insurance companies are making them less attractive.

However, you have claimed there are good ones out there. If so show me.
I'd like to see two things a link to the prospectus, and second and more importantly a FIRECalc-like history of what the returns would have been like over the last say 60 years of the S&P.

For instance if Joe and Susan bought 100K worth Allianz xyz Annuity back in 1950 when they 40, what would have been their monthly income in 1975 at age 65, the same thing if they invested in 1960.

I'll make a deal show me current product that would have performed historical better than a diversified portfolio. I'll stop bad mouthing annuities.

What do you say?
There is no prospectus and it is not an investment as these are not securities. They are not meant to compete with true index funds on a long term 30, 40, 50 year basis. You are talking about a product that is specifically designed for a 5-15 year period to lock in the principle and have a potential return which may or may not be better than a regular fixed annuity, depending on how the overall index performs. EIA's/FIA's are NOT designed to maximize returns, otherwise there would be risk of principle loss, which is common sense.

Most companies require signed product illustrations that at least show the performance over the best 10 years, worst 10 years, and last 10 years (or however long the surrender period is) compared to the benchmark index.

I'm not sure what you want me to show you for "the good ones out there." What do you consider good? What do you want out of the product? Guaranteed income? Higher guaranteed minimums? Return of premium option? I have said before on this forum that with the constant lowering of caps over the past two years, they are much less attractive than they used to be when there were 10-12% caps (they are now 4-6.5% mostly) unless you are specifically looking to use one of the guaranteed income riders and don't care about the caps. Most companies are reducing their guaranteed income because of the continuous low interest rate environment though, so that ship is starting to sail.

Ask someone who bought an EIA/FIA with a 12% cap if they've been satisfied with the product. Then ask them how the rest of their retirement accounts did in comparison.
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Old 12-13-2010, 07:19 AM   #27
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Dgoldenz, the product is American Equity’s Bonus Gold with the LIB rider. A similar one from North American Charter Series pays 4.5% instead of 5.5% for our joint lives. If I do this, I will likely split the premium between these two, unless I find a better deal. Both have 14-16 year surrender periods, but as you said, I’d be giving up things I don’t care about to get what I want – the 10% premium bonus, the 8% compound growth over the next 12 years and the lifetime income rider at 4.5% – 5.5%.

clifp, I am currently reading a paper from the Wharton School, titled “Real World Index Annuity Returns” that I’m hoping can shed some light on actual FIA performance. Here’s the link: http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf

Wow 73ss454, I would certainly read 80 pages if it had even a slight chance of securing my financial future. And I would pay an independent professional to review it if I did not understand all of it. I can’t believe any open-minded, rational person wouldn’t. But thanks for your opinion.

REWahoo, I actually used a couple search engines in addition to Google and have read a number of articles (including the two you posted) by many knowledgeable people and, let’s just say, other folks.
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Old 12-13-2010, 09:27 AM   #28
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These threads always remind me of the "Money Merge" mortgage account threads.
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Old 12-13-2010, 12:29 PM   #29
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TJay....


A long time ago my mom wanted to buy an annuity... at the time I was not as educated as I am now... so we looked and bought one...

What we were looking for was to have an annuity that looked more like a whole life policy... in other words, she did not think she would ever need the money but did not want to give it away....

Almost all of the policies that we got was having her pay for life insurance for the full amount as she got older.. IOW, when she bought it at 65, she paid life insurance for a 65YO... when she was 80 she paid like an 80YO.. etc. etc.. All of these showed that her balance grew until she was in her mid 80s and then the cost of insurance got real high and all of her money would be gone by the time she was 95... this was the 'worst case' and all were saying 'it will never happen'....

We were finally shown one that only charged for life insurance on the difference between the cash we had with them and the amount they would have to give us if she died and it was life insurance... their worst case had her money growing no matter how long she lived.. also, the fee to the insurance agent was a LOT less than the other products we were shown...

My mother is now 91... and still in good health.. if we had bought one of the other products that 'sizzled', we would have had to take all the money out as the cost of insurance would have been way to high... all of our planning would have been for nothing... I am glad I looked at the worst case and saw which products were not for us.... but if I know what I now know... I would have made other suggestions to her... the tax issues are just to big to overcome so we continue to hold what we have....
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Old 12-13-2010, 01:42 PM   #30
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To OP, if you dig around on the forum there is a post I did a few years ago that explains in detail how you could replicate one of these contracts in your own account for a lot less expense and with far more flexibility. No credit exposure to an insurer, either.
You did, and quite eloquently. But, it included buying options as he hedge, something a lot of folks won't do.........
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Old 12-13-2010, 01:47 PM   #31
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You did, and quite eloquently. But, it included buying options as he hedge, something a lot of folks won't do.........
It also doesn't work when the interest rates on fixed instruments are less than 1% and won't guarantee an income for life at some point in the future.
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Old 12-13-2010, 02:26 PM   #32
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To OP, if you dig around on the forum there is a post I did a few years ago that explains in detail how you could replicate one of these contracts in your own account for a lot less expense and with far more flexibility. No credit exposure to an insurer, either.
How to replicate an equity-indexed annuity (EIA)
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Old 12-13-2010, 02:33 PM   #33
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He assumed a one year CD at 4%?
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Old 12-13-2010, 02:38 PM   #34
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He assumed a one year CD at 4%?
Hey, it was an old post, from way back in the GWB era.
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Old 12-13-2010, 02:57 PM   #35
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He assumed a one year CD at 4%?
Check the date on the post.

In any case, its not like the insurers have a magical alternate interest rate environment with whhich to work with.
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Old 12-13-2010, 03:02 PM   #36
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What am I missing?
Read this Scott Burns column
Real Money vs. Not-Real Money - Registered Investment Advisor
and this article
Perils of the Free Dinner - Registered Investment Advisor
and this article
Buy a Life Annuity and Invest the Difference - Registered Investment Advisor
and perhaps this article
When Comparing Investments Don't Rely on a Single Source
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Old 12-13-2010, 03:21 PM   #37
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Most companies require signed product illustrations that at least show the performance over the best 10 years, worst 10 years, and last 10 years (or however long the surrender period is) compared to the benchmark index.

I'm not sure what you want me to show you for "the good ones out there." What do you consider good? What do you want out of the product? Guaranteed income? Higher guaranteed minimums? Return of premium option? I have said before on this forum that with the constant lowering of caps over the past two years, they are much less attractive than they used to be when there were 10-12% caps (they are now 4-6.5% mostly) unless you are specifically looking to use one of the guaranteed income riders and don't care about the caps. Most companies are reducing their guaranteed income because of the continuous low interest rate environment though, so that ship is starting to sail.

Ask someone who bought an EIA/FIA with a 12% cap if they've been satisfied with the product. Then ask them how the rest of their retirement accounts did in comparison.
I understand that the products are getting worse. I guess I am asking for example of real world annuity you have sold that have worked out well for your clients over 10+ year, similar to the Wharton study that Tjay linked.

E.g. back in 1998 I sold a 55 year old couple an Allianz Master Bonus EIA. It had 10% cap a 85% participation rate an annual reset etc. They invested 100K back in 1998 and when the retired at 65 in 2008, they are enjoying a annual income of $9800. Which is pretty similar to what the OP expects.

We can then compare an investment in 100K diversified portfolio and then purchasing an annuity at retirement.
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Old 12-13-2010, 03:31 PM   #38
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I understand that the products are getting worse. I guess I am asking for example of real world annuity you have sold that have worked out well for your clients over 10+ year, similar to the Wharton study that Tjay linked.

E.g. back in 1998 I sold a 55 year old couple an Allianz Master Bonus EIA. It had 10% cap a 85% participation rate an annual reset etc. They invested 100K back in 1998 and when the retired at 65 in 2008, they are enjoying a monthly income of $8800. Which is pretty similar to what the OP expects.

We can then compare an investment in 100K diversified portfolio and then purchasing an annuity at retirement.
They haven't really been around that long to make that kind of comparison. We have a few from ~2006 that had 10-12% caps (depending on number of surrender years) that have done well, hit the cap a couple times, and never lost a dime. Again, you can't compare them with alternate portfolios because there is risk of principal loss, while there is not with FIA's no matter how you want to paint them. The only way to lose money with an FIA is early surrender or if the charges for optional riders exceed the overall gain. Think about it as a fixed annuity with a varying return, not as an investment.
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Old 12-13-2010, 03:41 PM   #39
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Dgoldenz, the product is American Equity’s Bonus Gold with the LIB rider. A similar one from North American Charter Series pays 4.5% instead of 5.5% for our joint lives. If I do this, I will likely split the premium between these two, unless I find a better deal. Both have 14-16 year surrender periods, but as you said, I’d be giving up things I don’t care about to get what I want – the 10% premium bonus, the 8% compound growth over the next 12 years and the lifetime income rider at 4.5% – 5.5%.

clifp, I am currently reading a paper from the Wharton School, titled “Real World Index Annuity Returns” that I’m hoping can shed some light on actual FIA performance. Here’s the link: http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf

.
Tjay that was interesting article. My only criticism of it appears to focus the returns credited to your living benefit, which as the Scott Burns column isn't "real money". That said it is an important step in understanding these complicated financial product.

To me by far the most important question to get answered is how much is my annual income at age 70. While they can't predict the future, they certainly should be able to answer the question if I bought your product in 1969, 1979, 1989, 1999 how much would my monthly check be in 11 years later when I turn 70. That number is way more important than 8% compounded amount etc.

You clearly are going into this transaction with your eye open, which isn't the case with many customers. Good luck.
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Old 12-13-2010, 03:44 PM   #40
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Tjay that was interesting article. My only criticism of it appears to focus the returns credited to your living benefit, which as the Scott Burns column isn't "real money". That said it is an important step in understanding these complicated financial product.

To me by far the most important question to get answered is how much is my annual income at age 70. While they can't predict the future, they certainly should be able to answer the question if I bought your product in 1969, 1979, 1989, 1999 how much would my monthly check be in 11 years later when I turn 70. That number is way more important than 8% compounded amount etc.

You clearly are going into this transaction with your eye open, which isn't the case with many customers. Good luck.
The monthly income would be the same if this were 1969, 1979, etc because the income account has nothing to do with the index. It is simply a set guarantee of exactly 8% each year credited to the account. Then at age 70 (or any other age), you can withdraw 5.5% (or whatever is specified in the contract depending on age) of the total income account value every year for life even if the accumulation account value reduces to $0.
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