FIA looks like just what I need.

[TJAY]

First time poster.

I have read a lot of awful things about fixed index annuities (FIA). But it looks like just what I need for my situation. My wife and I are both retired, in our late 50’s, and have a nice nest egg for the future. It’s nice because it was invested in a diversified portfolio of low-cost stock and bond funds for a lot of good years in the markets. And we plan to stay invested for a long time. We currently live very well off of her pension, her part-time job, our non-qualified savings, and my golf winnings (OK, maybe not too much of that). In 10-12 years when the savings run out, we will have a cash flow shortfall. By that time, we can tap into our IRA’s.

But I can take 1/3 of the money in our qualified plans today, buy a FIA with a Lifetime Income Benefits Rider that guarantees (“subject to the financial health and claims paying ability of the insurer”, of course) to pay me, starting at age 70, an annual benefit that is sufficient to cover our cash flow shortfall for the rest of our joint lives. It has a 10% premium bonus, 8% compounded growth on the income base every year, 5.5% of the income base paid out annually for the rest of our joint lives. And that’s the WORST it can do. Guaranteed.

I don’t plan to cash it out early, so outrageous surrender charges are irrelevant. I have the other 2/3 of the nest egg to tap for emergencies, maybe even buy a LTC plan. It makes no difference to me what the market index side of the FIA account does – my income base is growing 8% per year, regardless of the market swings. If the market side, with all of its caps and participation rates, somehow beats the income base, great; our payments are based on whichever is larger. What if the account value goes to zero? So what, I’m still guaranteed our lifetime income benefit. There is little or no death benefit left after a few years of payments. It doesn’t matter to me; the payments are on our joint lives and it’s my job to fund our retirement, not the next generation’s. I don’t care that the agent gets paid a hefty commission or that the company makes obscene profits. Hell, I want the company to profit, the obscener the better. As long as they can pay me what they have contracted to do.

The great thing to us about this plan is we can be more aggressive with the other 2/3 of the nest egg in the stock market, knowing that our future basic needs are covered. No more losing sleep when the markets are crashing.

Sorry about the length of this post. I’m not an insurance salesman; forgive me if I sound like I’m pitching FIA’s. But this looks like a great deal for us. What am I missing?

 

[brewer12345]

Probably lots. Get the prospectus and start reading, taking notes and building a spreadsheet.

 

[kumquat]

This emoticon:

 

[clifp]

What would be helpful is you posted some real numbers so that we could help you to compare alternatives.

For example at age 59 we invest $200,000 at age 70 we get $11,000 year which increase by 8% ($880) for the rest of our lives.

Also if you are looking at investing much more than $100,000 you should check out the state guarantee funds. Fundamentally, I don't see anything wrong with you are proposing to do with 1/3 of your funds. However, annuities have a nasty tendency to be sold by insurance salesman, rather than being bought by informed consumers. All to often what the customer thinks is being guaranteed is significantly different than what is actually guaranteed.

 

[TJAY]

Thanks

Thanks brewer12345 . Prospectus is on its way, as well as the contract to be signed. Both will be reviewed thoroughly. I’ve taken lots of notes and the spreadsheet is done.

Which leads me into clifp’s input. If I put in $100,000 at age 59, the income account increases by 8% compounded per year to $277,000. I can get 5.5% ($15,235) of that amount every year for our joint lives or 4.5% ($12,465) the first year, increasing by 3% per year for our joint lives. I don’t care if it’s being sold by Willie Loman, can somebody guarantee me a better deal? (Subject to the financial health and claims paying ability of the insurer, of course).

And kumquat , thanks for the valuable insights.

 

[brewer12345]

(Subject to the financial health and claims paying ability of the insurer, of course).

There's the rub, of course. Be careful who you play with in the insurance industry. The FDIC does not back insurance contracts.

 

[REWahoo]

What am I missing?

The effective use of Google.com perhaps?

Here are two examples out of a boatload of information I found by Googling "fixed index annuities good or bad". (fixed index annuities = equity indexed annuities)

FundAdvice.com - Fixed index annuities: Perfect product or a ripoff?

There’s an old – and very good – rule of thumb that recommends against putting your money into anything you don’t understand. It’s hard to do that with equity index annuities, which are very complex products. To fully understand them, a doctorate degree in math could be helpful. I recently talked to an investor who was disillusioned after purchasing one of these. If he had understood the details, I don’t think he would have done so.

Consumer Reports Money & Shopping Blog: Q&A: What are fixed indexed annuities?

...there are several reasons why we are not big fans of these products. Because there are several different methods of calculating interest, it’s very hard to compare products. The commissions on most of these annuities are high, so the insurance company that sponsors them pass on those costs to investors in the form of high fees.

 

[Nords]

What if the account value goes to zero? So what, I’m still guaranteed our lifetime income benefit. There is little or no death benefit left after a few years of payments. It doesn’t matter to me; the payments are on our joint lives and it’s my job to fund our retirement, not the next generation’s. I don’t care that the agent gets paid a hefty commission or that the company makes obscene profits. Hell, I want the company to profit, the obscener the better. As long as they can pay me what they have contracted to do.

Seems almost too good to be true, doesn't it?

You appear to be placing a huge amount of faith in the insurance company that thinks it can pay this annuity. There's no other entity backing up the insurance company like you'd find the FDIC backing up bank CDs.

You could always hope that the federal govt would step in to bail out any insurance company that was going down the tubes. However I think AIG has already consumed far more govt goodwill than will be available for the next 25 years, let alone the next hapless insurer to fall off the perch.

If you're looking for a guaranteed annuity the way other investors look for guaranteed CDs or Treasuries, then it's a fairly straightforward answer: there aren't any. It's "best fiduciary effort", not "guaranteed to be made whole by an authority with the power to tax the heck out of its citizens".

Look at the way insurers are backing away from writing any more LTC policies or are jacking premiums way up on existing policies. It's because they didn't get the model/math right when they first started offering the policies, and there's no other way to fix the problem other than to stop doing it or to charge more money for it.

 

[Onward]

It's "best fiduciary effort", not "guaranteed to be made whole by an authority with the power to tax the heck out of its citizens".

TJAY is in Tennessee, which guarantees $100,000 max liability for present value of an annuity, so $100k per annuity is safe, right?

Or maybe he should be looking at the liability limits in the state in which the annuity provider is headquartered? Hmmmm.

 

[clifp]

The effective use of Google.com perhaps?

Here are two examples out of a boatload of information I found by Googling "fixed index annuities good or bad". (fixed index annuities = equity indexed annuities)

My god those clever little insurance salesman, the term fixed index annuity had me fooled now that I am know what I am dealing with a EIA with a new name, the short answer is run away.

I looked over a similar product that my 62 year old sister and BILs[-] insurance slimebag[/-] financial adviser was trying to sell them. Their interpretation was the same as yours. This is great I get a guarantee 8% return for every year until they are 70, then they get an income from life.

The only catch and it is a monster one is they believed the 8% number was a floor on the minimum earnings the income account could earn. It certainly was presented that way by the salesman. Sadly when I read the Prospectus 8% is the MAXIMUM the income account can earn in anyone year. Actually it was worse than that 2% was the max the account could earn in any one quarter and it dependent on the S&P increasing by more than 2.5%.

My guess is you are making the same incorrect assumption as my sister and BIL, don't feel bad virtually everybody gets confused which is why everybody from the FINRA, to the SEC has warnings about these products.

The earnings floor for my sisters EIA was actually 0%. Now compared to the returns of say 2008 0% isn't bad. However, I think if you actually ask them to run calculation you will find that if the market stays flat for the next 11 years, your actual lifetime payment will be close to 5.5% of 100,000 or $5,500/year rather than $15K plus. Even if we see S&P 3000 by 2021 when you are 70, the payments are more likely to be in the $7500-8000 range.

Finally, I should add that a product that lets you invest $100K now and the withdraw 15K+ year at age 70 is a terrific product. The joint life expectancy for 2 70 year olds is around 21 years so your payback period, with current interest rates would be very quick around 10 years. In fact it is such such a good investment that I am almost positive it is too good to be true.

 

[chinaco]

These things are tricky and can have high expenses. Plus your assumptions about the future may not turn out as expected. Read the prospectus carefully.

Make sure you understand how the product works and under what circumstances you might be better off compared to other options. For that matter... make sure you understand all of your options.

To understand your options... make sure you really understand the problem you are trying to solve! Spend some time on it!

Spend some time educating yourself about those products... do not rely on your insurance agent. There are books on the subject.


I am considering an annuity. But a vanilla SPIA ladder purchased early in our retirement. DW is from a family of long-lived of women so I figure buying it young puts the odds in our favor for getting our money back (as opposed to buying a deferred annuity). Plus the income early will take pressure off the portfolio to produce income (especially during market corrections).

I will build the COLA myself with our other investment assets.

 

[TJAY]

State insurance fund

Onward, the policy holder’s primary residence determines which state’s insurance fund backs the contract value.

Thanks Nords. You’re right; I am placing a lot of faith in the issuing insurance company. If I go the FIA route, I will likely split the premium between at least two companies. I am not counting on the government, state of federal, to bail me out. If I take the risk, I pay the consequences.

I have read quite a few references to AIG’s problems and how the government bailed out an insurance company. The following is from the TN Department of Commerce and Insurance on 9/17/2008:
“AIG is a federally regulated legal entity that is distinct and separate from the insurance companies it holds” (one being American General Life and Accident Insurance Company). “Those insurance companies are governed by state laws designed to protect the interests of policyholders by ensuring that reserves are available to meet policyholder obligations.”
And later on 9/26/08:
“The AIG insurance companies are separately regulated by state insurance regulators and do not have the financial stress that their parent company, AIG Holdings Inc., is experiencing.”
As I said, I’m not looking for any government to save me out if I’m wrong. But it does not appear to me that the fed’s bailed out AIG’s life and annuity insurance customers.

 

[TJAY]

Too good to be true


Chinaco and Clifp, thanks for the good advice. I have read and understand every page, sentence and word of the fancy brochure. I will do the same for the prospectus and contract when they arrive. I have actually done a great deal of research on this and other options, and this looks like the best one for our situation. Yes, it struck me as “too good to be true”. That’s why I asked this forum: “What am I missing?" And I'm getting a lot of good feedback.

 

[brewer12345]

TJAY, forgive me if I sound presumptuous, but you sound like you are mostly convinced that this is the way to go. Ultimately, it is your money and you will decide what you want to do with it. But I suggest throwing everything you think you know about this instrument out the window when the prospectus arrives and start fresh. Up until now, all you have seen is the marketing materials. This product is a classic example of what insurance agents use to "sell the sizzle, not the steak." Most people buying these things do not look closely at the steak when it arrives because their mouths are watering from the sizzle. Don't make that mistake.

 

[TJAY]

brewer12345, excellent advice about starting fresh when the legal details arrive. And you are right - unless I read something in the prospectus or contract that "punches me in the face" (I really like that valuable insight from an unlikely source), I'll probably do it. But I won't rush it and if I see ANYTHING that conflicts with what I've been told, I'll run out the door. Well, with my knees, I'll walk quickly. Thanks.

 

[chinaco]

It looks like FIA is just a renamed EIA.

Equity Indexed Annuities Get Name Change | Annuity News Journal

Make sure the 8% is compounded. Some of those contracts are not compounded but simple against your premium.... assuming no withdrawal.

Also, look at the expenses. Are you actually netting 8% growth after expenses or are you netting less (e.g., 5% after expenses)?

Look closely at the expense terms... a little trick that some companies employ on variable annuities is to have a high expense in the contract and waive part of it now (so it is lower) with the right to raise it later...

Plus, I think those things have a cap on the participation in the index.

The guaranteed payout...


Look up a quote on a SPIA for a 70 year old. What is the rate paid?

Immediate Annuities - Instant Annuity Quote Calculator.

 

[travelover]

I'm amazed and impressed with the patience of forum members for ledge walkers. I would have yelled "JUMP" a long time ago.

 

[ziggy29]

Yep, I think EIAs are getting a (mostly deserved) bad rep, so the marketing folks created a new name ("fixed" sounds stable and safe, yes?)

I'll repeat what I've often said: for the right situation certain types of low-cost annuities may make sense. For example:

* Someone who has a large retirement nest egg and wants to increase their secure, regular income stream may wish to consider an SPIA (single premium immediate annuity) with some of it, which is similar to "buying a pension". (Having said that, this is a terrible time to buy one; with interest rates so low you are paying a VERY high and virtually unprecedented price for an income stream.)

* Someone who is interested in asset protection (i.e. protection from lawsuits and creditors) may, depending on the laws in their state, consider a self-directed variable annuity from a low-cost provider like Vanguard provided they have exhausted all other tax-deferred and asset protected vehicles in their state (such as IRAs, 401Ks, homesteaded personal residences and so on). This usually only makes sense IF (a) you have a high net worth, (b) you perform activities or occupations that are at high risk of being sued AND (c) you live in a state with strong asset protection laws for annuities and insurance products (such as Texas, Florida and Oklahoma). And even then you need to be mindful of your state's limits for protecting individual contracts (commonly $100,000) -- so it might not be a good idea to exceed these limits in a single annuity.

For most other situations I don't think annuities are usually a good way to go.

 

[clifp]

Yep, I think EIAs are getting a (mostly deserved) bad rep, so the marketing folks created a new name ("fixed" sounds stable and safe, yes?)

I am constantly impressed, as former marketing guy, by the skill that the insurance companies use to promote their products.

When the stock market was on a tear from 2002-2008 and people were envious of stock market returns they invented the EQUITY Index Annuity.
Now after the market has been harmed equities isn't a good term, so the substitute FIXED cause that sounds safer.

Of course fixed is very deceptive, the only thing fixed is the interest rate on the annuity once you reach 70. 5.5% is no bargain since current annuity are paying 6-6.5% for 70 years with joint survivor benefits.

 

[73ss454]

Any product that has 20 to 40 pages of reading attached is not for me. I'm sure most of it will be written so you won't be able to understand it anyway. Run away!

 

[haha]

I think you are sold, for better or worse. Good luck and report back from time to time.

Ha

 

[dgoldenz]

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...

 

[clifp]

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?

 

[chinaco]

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.

 

[brewer12345]

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.