Is this the nail in the annuity coffin?

[Focus]

I know there aren't many annuity partisans here, but there's some evidence that fixed annuities, in particular, could play a constructive role in a portfolio -- as long as you live long enough. But if the approach spotlighted in the article below becomes a trend, then it appears even fixed annuities might be off the table:

Wall Street Puts Retirement at Risk (Bloomberg Businessweek, April 25, 2013)

 

[ejman]

I know there aren't many annuity partisans here, but there's some evidence that fixed annuities, in particular, could play a constructive role in a portfolio -- as long as you live long enough. But if the approach spotlighted in the article below becomes a trend, then it appears even fixed annuities might be off the table:

Wall Street Puts Retirement at Risk (Bloomberg Businessweek, April 25, 2013)

Wow, makes you all warm and fuzzy about turning your nut over to an insurance company forever doesn't it? The thing that really scares me is that one could do all of the research in the world and end up with an insurance company that is absolutely sterling TODAY. That doesn't mean that a bunch of yahoos couldn't take it over tomorrow and your money (and future) are stuck there and there ain't nothing you can do about it.

 

[plex]

Ugh, in 30-40 years, I was planning to possibly get a SPIA to finish creating a floor for my basic expenses if needed, but that sort of activity could certainly cause a nasty domino effect and wipe out most of the industry before I get to that point. I highly doubt a 50%, 100%, or even 200%+ increase in volatility in exchange for not much additional return was originally priced into those annuities. That sort of product would be completely incompatible with my potential goal of creating a very safe floor.

It sounds like the firms are setting up any sort of remotely legal method they can think of to introduce products with the absolute highest fees possible, and those already in the annuities are locked in.

On the other hand, I doubt this will be possible with the largest companies, unless this becomes an industry standard.

 

[Kimo]

I have annuities with Vanguard and I think they are great. You can get out of them at anytime with no fee/cost if you change your mind. I got them after I retired.

 

[Kimo]

I guess I should also say they only make up a portion of my portfolio. I have mutual funds, CD's etc. I use my annuities, rental income and SS for all my bills during the year and my investments are for all the "fun" stuff......

 

[brewer12345]

Wow, makes you all warm and fuzzy about turning your nut over to an insurance company forever doesn't it? The thing that really scares me is that one could do all of the research in the world and end up with an insurance company that is absolutely sterling TODAY. That doesn't mean that a bunch of yahoos couldn't take it over tomorrow and your money (and future) are stuck there and there ain't nothing you can do about it.

Actually, there is something you can do about it. If you are buying a long term or possibly lifetime insurance product, shop the carrier at least as much as the product. If you look at the companies mentioned in the article, they are smaller, lower rated stock companies with, um, checkered pasts. This isn't hard to avoid. Buy your insurance products from large, highly rated mutual insurers and you are far less likely to have a problem.

 

[ejman]

Actually, there is something you can do about it. If you are buying a long term or possibly lifetime insurance product, shop the carrier at least as much as the product. If you look at the companies mentioned in the article, they are smaller, lower rated stock companies with, um, checkered pasts. This isn't hard to avoid. Buy your insurance products from large, highly rated mutual insurers and you are far less likely to have a problem.

Is there some sort of iron clad mechanism in place that would prevent a large highly rated mutual insurer from being taken over by management that would eventually go down the path mentioned by the article?

I'm 62 now so potentially if I'm lucky I might be looking at how solid an insurance company might be 30+ years from now. I realize there are no absolutes in this world but with most single premium annuities I've seen once you fork over the money that's it. I know there are all kinds of other types of annuities but the one's I've seen come with a telephone book worth of small print which tells me a whole bunch of very smart lawyers and accountants have put in a lot of work to figure out how to part me from my money.

 

[james7]

I have annuities with Vanguard and I think they are great. You can get out of them at anytime with no fee/cost if you change your mind. I got them after I retired.

So what you are saying is that you contributed to annuities to build up a nestegg and then started to take distributions from them after you retired?

 

[Kimo]

Actually, I built up the nest egg like everyone else for 40 years and when I retired I put some of it in the annuity. I would really look at these instead of insurance companies. You can even pick your AA you want. I decided to go 65/35. I never worry about an insurance company because all the money is in a managed mutual fund. (Wellington is where mine is) and if I change my mind I can change the AA or I can pull it all out, just like you would with any mutual fund.

 

[ejman]

Actually, I built up the nest egg like everyone else for 40 years and when I retired I put some of it in the annuity. I would really look at these instead of insurance companies. You can even pick your AA you want. I decided to go 65/35. I never worry about an insurance company because all the money is in a managed mutual fund. (Wellington is where mine is) and if I change my mind I can change the AA or I can pull it all out, just like you would with any mutual fund.

Is this a single premium annuity where you get a set amount for life? if not, how does it differ from just owning Wellington?

 

[Kimo]

Sorry....I didn't make the answer real clear to you....I didn't build an annuity up, I just did stocks, bonds, real estate and work. I opened the annuity after I retired with the GLWB to create a permanent lifetime income stream with the annuity.

 

[pb4uski]

Actually, there is something you can do about it. If you are buying a long term or possibly lifetime insurance product, shop the carrier at least as much as the product. If you look at the companies mentioned in the article, they are smaller, lower rated stock companies with, um, checkered pasts. This isn't hard to avoid. Buy your insurance products from large, highly rated mutual insurers and you are far less likely to have a problem.

+1 While PE in life insurance is an emerging trend, thus far the acquired insurers have been fringe players, not well rated and pretty small in the whole scheme of things. These PE yahoos think they are the smartest guys in the room and think that they are a lot smarter than insurer investment managers. Problem is, they aren't - it is just they have much bigger heads and are extremely aggressive - and they definitely don't understand the culture of the more reputable insurers and insurance regulators.

 

[Kimo]

It is the exact Wellington fund and yes, you can do the exact same thing.....the difference is even if every stock and bond in the fund went to zero I would still get my lifetime payout and if it ever did go to zero they eliminate the fee for the GLWB.

 

[pb4uski]

Is there some sort of iron clad mechanism in place that would prevent a large highly rated mutual insurer from being taken over by management that would eventually go down the path mentioned by the article?....

Yes for all practical purposes, it is called demutualization.

IMO PE would never be patient enough to take the time or jump through the hurdles or accept all the constraints that would be associated with demutualization. Also, the culture of most of the large highly rated mutuals would never allow such a thing.

 

[ejman]

It is the exact Wellington fund and yes, you can do the exact same thing.....the difference is even if every stock and bond in the fund went to zero I would still get my lifetime payout and if it ever did go to zero they eliminate the fee for the GLWB.

I apologize for being so thick but if your annuity is invested in Wellington and all of the stocks and bonds in Wellington went to zero (an unlikely event) - where would the money come from to make your guaranteed lifetime payment?

 

[Kimo]

You are correct, a very unlikely event....the GLWB fee is paid to the insurance company that guarantees the lifetime payment so I guess you could say I could lose the GLWB if the insurance went broke....I would still have the fund though. I really did a lot of research on annuities and had so many sales reps try to sell me theirs but I would actually tell them what they were up against and they went quiet. I even kept one of their emails to me telling me I must have a special relationship to get that deal...LOL

 

[ejman]

Yes for all practical purposes, it is called demutualization.

IMO PE would never be patient enough to take the time or jump through the hurdles or accept all the constraints that would be associated with demutualization. Also, the culture of most of the large highly rated mutuals would never allow such a thing.

I see so, if the hurdles or constraints were to be changed ( sort of a Glass Steagall repeal but for the mutual insurance industry) and the resulting culture change take place over the next 15 years or so we might be there in a couple decades no?

My point is not that this will necessarily happen. Just that rules for human institutions are not physical laws and hence are subject to change. Sometimes gradual, sometimes far faster than anticipated.

 

[brewer12345]

I see so, if the hurdles or constraints were to be changed ( sort of a Glass Steagall repeal but for the mutual insurance industry) and the resulting culture change take place over the next 15 years or so we might be there in a couple decades no?

My point is not that this will necessarily happen. Just that rules for human institutions are not physical laws and hence are subject to change. Sometimes gradual, sometimes far faster than anticipated.

There are no absolutes, but it would be a difficult process to demutualize the remaining large mutuals and then you would have to try hard for decades to ruin these companies.

 

[ejman]

There are no absolutes, but it would be a difficult process to demutualize the remaining large mutuals and then you would have to try hard for decades to ruin these companies.

Not exactly the same situation but I remember a large insurance outfit (AIG) that seemed as solid as the Rock of Gibraltar. Had it not been for Bernie Santa Claus I suspect that large solid outfit might not be here today.

 

[ejman]

One additional point I would like to make. Just as we as individual investors are searching for yield under the current environment , I suspect that insurance companies that have long term commitments are doing the same. One obvious way to increase yield is to increase risk. Slowly at first, then it snowballs and the gray areas of regulations are tested and so forth...

 

[timo2]

I apologize for being so thick but if your annuity is invested in Wellington and all of the stocks and bonds in Wellington went to zero (an unlikely event) - where would the money come from to make your guaranteed lifetime payment?

Since the 'powers that be' did not let the financial industry crash in the 'great recession', they probably will not in the future, and the future funds would be OK. maybe.

 

[Kimo]

Since the 'powers that be' did not let the financial industry crash in the 'great recession', they probably will not in the future, and the future funds would be OK. maybe.

If every stock and bond in Wellington went to zero I am pretty sure we would have some real problems.........and I agree with you....

 

[Midpack]

Interesting discussion, and another reason to wait as long as possible to make the SPIA buying decision it seems...

 

[Semiretired2008]

It makes sense for them - pay 4% and collect 30+, but I cannot believe they are letting them get away with it...

 

[pb4uski]

Not exactly the same situation but I remember a large insurance outfit (AIG) that seemed as solid as the Rock of Gibraltar. Had it not been for Bernie Santa Claus I suspect that large solid outfit might not be here today.

You obviously don't understand what happened at AIG (which is a common misconception BTW). The problem with AIG was NOT with ANY of their insurance businesses. The problem was with a unit of yahoos at the holding company level that wrote credit default swaps and thought they were smarter than anyone else. (BTW I doubt that Hank Greenberg would have allowed what they did on his watch so in a way you can trace the blame back to Elliott Spitzer).

The fact that they had great insurance businesses was part of their salvation as after the federal government help stabilized AIG they were able to sell many of their insurance businesses and use the proceeds to pay back the government.