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Old 05-16-2015, 04:23 PM   #41
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if i had to bet on whether it was the insurers failing to pay on an annuity or these low rates and high stock valuations hurting many of us more likely , it would be no contest .
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Old 05-16-2015, 04:25 PM   #42
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He assumes that our 35 year old couple is so naive regarding asset allocations that they need to pay 75 bp to an adviser to get them into the right mix of stock and bond funds. And, that adviser buys funds with average expenses of 84 bp. (Those are his Target Fund expenses.)
He's been caught stacking the deck before. Remember the high advisory expenses and fees he built into his projections for individual retirees?
He did it in this paper.
Reaction here and here.
Sure, if a retiree gives away 1% (or more in advisory fees, etc), then he might only be able to take home 3% safely. But the withdrawal rate was still close to 4%--it's just that Wade and others got to spend it.
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Old 05-16-2015, 04:31 PM   #43
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Let's look at the illustrated values.
At age 65, the illustrated cash surrender value is $257,337.

The annual premium is $4,500. I'll make some guesses about what happens to the premium. 100% of the FY premium goes to acquisition expenses (agent commission, other field expenses, HO marketing, underwriting, and physical policy issue). After the first year, $540 (the term premium) covers death benefits, annual administration, and profit goals. 2% of the difference between $4,500 and $540 goes to premium taxes. The rest of the premium is invested in bonds and eventually accrues to $257,000.

The company needs to average 4.7% on those bonds to hit that target. Pfau apparently believes that is plausible. But, his median return on bonds available to the 401k saver starts at 1% and eventually gets to 4% after 30 years. (page 26) It's no surprise that the WL looks better than the mutual fund.

Once again, I don't think he is apples-to-apples in his assumptions.
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Old 05-16-2015, 04:31 PM   #44
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Whatever the next crash turns out to be, it will be different than the last one. I would make no assumptions about how stable the insurers are in the next crisis. What if the states sign off on principles based reserving in the interim and the insurers all get their fox-in-the-henhouse freak on big time?
Obviously if the regulatory scheme changes significantly then the conclusions might also change. My remarks are based on the current regulatory environment and how the insurers weathered the 2008 financial storm much better than banks and others.

As is however, the likelihood of "the system" failing to pay any guaranteed benefits is very remote even under some pretty bad economic conditions based on history.

When I was working in the industry I recall it being frequently stated that no life insurer had ever defaulted on any guaranteed benefit...ever. I never got any clarity as to whether that was for life contracts or also included annuity contracts and I was never able to find a source so in my mind it is a bit of an urban legend.
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Old 05-16-2015, 04:33 PM   #45
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There was a lot of uncertainty at that time with the financial system as a whole and there was no real cost for applying for TARP . . .
There was a cost, and there should continue to be one--the loss of their "rock solid" public reputations and the diminution in the value of their "guarantees." When things looked cloudy, they turned to me (the taxpayer) for money to make good on promises they had made. If they didn't think that would shake my (our) confidence, they were wrong. If they realized that they were risking their reputation but applied for TARP anyway, then I'd say they were pretty scared. Either way, it does not inspire confidence.
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Old 05-16-2015, 04:46 PM   #46
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[QUOTE=pb4uski;1593485]Obviously if the regulatory scheme changes significantly then the conclusions might also change. My remarks are based on the current regulatory environment and how the insurers weathered the 2008 financial storm much better than banks and others.
QUOTE]

Well, there is the rub. If one keeps their assets in a traditional portfolio, it is easy to make changes. If you instead choose to follow Dr. Pfau's bullpucky advice, you are wedded to whatever insurers you chose for the long haul. I think cases like UnumProvident and (especially) Phoenix are very much worth keeping in mind when you consider buying an expensive guarantee.
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Old 05-16-2015, 05:18 PM   #47
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There was a cost, and there should continue to be one--the loss of their "rock solid" public reputations and the diminution in the value of their "guarantees." When things looked cloudy, they turned to me (the taxpayer) for money to make good on promises they had made. If they didn't think that would shake my (our) confidence, they were wrong. If they realized that they were risking their reputation but applied for TARP anyway, then I'd say they were pretty scared. Either way, it does not inspire confidence.
Ok, other than full faith and credit instruments and FDIC insured bank accounts, name a safer place to put your money.
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Old 05-16-2015, 05:25 PM   #48
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I've just come from the SS discussion, where the consensus is unclear to me, but it certainly does not seem overwhelmingly in favor of taking SS at 70. Yet SS, and by extension the additions to SS that one gets by waiting are easily the best annuities available to garden variety Americans. Yet this thread seems to have at least some potential commercial annuity fans. And some of these people have already stated that they do not favor taking SS late.

If annuities dominate bonds, and indexed annuities dominate unindexed ones, and government payers dominate private insurance companies, and if private indexed annuities are rare anyway, I really don't see anything to be unsure about.

Either you hate the annuity concept, or you realize that US government indexed annuities with right of survivorship are a flaming bargain, far better than anything offered in a competitive market.

Ha
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Old 05-16-2015, 05:26 PM   #49
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What are insurance products? LONG-term commitments. You have to hold these policies for LIFE! Over long time periods a diversified portfolio doesn't lose money. During the modern era the worst you would have done over any rolling 20 year time period is like 5.3%. That makes these "guarantees" pretty pointless. You're not gonna lose money anyway.
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Old 05-16-2015, 05:54 PM   #50
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Ok, other than full faith and credit instruments and FDIC insured bank accounts, name a safer place to put your money.
Well, I'm not sure why we'd rule those out. And it all depends on the definition of "safe". Pfau is pushing these annuities for "must have" returns to support basic needs. That means they can't lose ground to inflation--but these non-inflation adjusted annuities are very likely to do so. Over long periods, a diversified portfolio never has. So, we are left to wonder which approach is truly safer.
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Old 05-16-2015, 06:20 PM   #51
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In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts. My point is that there isn't much out there that is safer other than full faith and credit financial instruments or FDIC insured savings accounts. Life insurance and annuity contracts would be safer than corporate bonds, stocks, mortgage backed securities, and many others.

You're skeptical of the safety of life insurance and annuities, I'm just challenging you to name something safer other than those than obviously safer full faith and credit financial instruments or FDIC insured savings accounts.

BTW, I'm not a fan of whole life insurance or annuities either, but it is because of their mediocre returns, not because they are not safe.
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Old 05-16-2015, 06:38 PM   #52
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In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts.
I would not say there is a "lot of risk" of not getting paid, but over a contract period of 40-50 years that it is not a negligible risk.

And I think that the definition of "safety" needs to be very well defined. Is it "likelihood of receiving the illustrated rate of return," is it "likelihood of receiving the guaranteed rate of return", or is it "likelihood of keeping up with inflation so the product does what the client bought it for--to provide for his bare minimum spending needs". Mr Pfau and many other insurance advocates (paid and unpaid) make a living by blurring these lines.
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Old 05-16-2015, 07:04 PM   #53
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In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts. My point is that there isn't much out there that is safer other than full faith and credit financial instruments or FDIC insured savings accounts. Life insurance and annuity contracts would be safer than corporate bonds, stocks, mortgage backed securities, and many others.

You're skeptical of the safety of life insurance and annuities, I'm just challenging you to name something safer other than those than obviously safer full faith and credit financial instruments or FDIC insured savings accounts.

BTW, I'm not a fan of whole life insurance or annuities either, but it is because of their mediocre returns, not because they are not safe.
For individual companies there are the state guarantee funds, that cover some defined amount of value of an annuity or life insurance. Of course this is paid for by assessments on all insurance companies doing business in the state. So if enough insurance companies fail then the funds could fail. But then the various bond and other markets would have frozen up due to no buyers and lots of sellers, as the insurance companies dump assets.
As a result in the case of failure of state guarantee funds the whole financial system could well freeze up and liquidity in the whole market evaporate.
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Old 05-16-2015, 08:50 PM   #54
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I would not say there is a "lot of risk" of not getting paid, but over a contract period of 40-50 years that it is not a negligible risk.

And I think that the definition of "safety" needs to be very well defined. Is it "likelihood of receiving the illustrated rate of return," is it "likelihood of receiving the guaranteed rate of return", or is it "likelihood of keeping up with inflation so the product does what the client bought it for--to provide for his bare minimum spending needs". Mr Pfau and many other insurance advocates (paid and unpaid) make a living by blurring these lines.
i think until the first policy holder does not get paid this is a moot point.
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Old 05-16-2015, 09:10 PM   #55
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I would not say there is a "lot of risk" of not getting paid, but over a contract period of 40-50 years that it is not a negligible risk.

And I think that the definition of "safety" needs to be very well defined. Is it "likelihood of receiving the illustrated rate of return," is it "likelihood of receiving the guaranteed rate of return", or is it "likelihood of keeping up with inflation so the product does what the client bought it for--to provide for his bare minimum spending needs". Mr Pfau and many other insurance advocates (paid and unpaid) make a living by blurring these lines.

By its definition the guaranteed rate of return or cash value or the like is all that is riskless. For whole life essentially this represents the build up until effectively you are ensuring your own life with the cash value. (A paid up at age X policy does this explictly, as does reduced paid up insurance, which in general is an option on a vanilla whole life policy.) There should be a table that shows the amounts at various ages of paid up insurance if you select the option and effectively buy a single pay life insurance policy at that time.
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Old 05-16-2015, 09:51 PM   #56
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What are insurance products? LONG-term commitments. You have to hold these policies for LIFE! Over long time periods a diversified portfolio doesn't lose money. During the modern era the worst you would have done over any rolling 20 year time period is like 5.3%. That makes these "guarantees" pretty pointless. You're not gonna lose money anyway.
I would say this is a mischaracterization of whole life. It is a long term committment from the insurer; but the insured is free to drop the coverage at anytime and receive the surrender value or "barrow" his own money from the policy.

Quite frankly, I think the good Dr. P 's comparison in this article are quite flawed. The expenses on the investment side are inflated, the returns on the WL are inflated to the illustration values and the not the guaranteed returns.
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Old 05-17-2015, 03:50 AM   #57
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meteoroids can strike the earth to but it is not a risk i would put in to my daily plan or thoughts .

the reality is anything bad enough to belly up so many insurers would have destroyed your own investments too so in that case out your money is out your money.

but on a scale of 1-10 with 10 being highest odds of the income stream being un-broken because of extreme markets i would go 9.99 in favor of the insurers.

that being said there is lots of plausibility in pfaus logic and this is nothing new.while i question the numbers , the outcomes have pretty much always shown

annuities out perform cash flow of our safe money and immediate annuities and equities have out performed bonds/cash and equities in every study i have seen.

since sequence risk can vary the bucket of money from zero to more than we started with the addition of life insurance should reduce the amount of dry powder needed in the remaining bucket increasing cash flow for spending.

i question his numbers and assumptions but not the end results.
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Old 05-17-2015, 08:30 AM   #58
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Start a thread over at Bogleheads touting whole life policies and see what happens....
Oh God no. not unless you have very thick skin. as much as I enjoy that forum never have I seen a bunch of folks more eager to pounce on a poster and proclaim them stupid.
I read, never ever would I post.

lol by the way I love your tag.
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Old 05-17-2015, 08:37 AM   #59
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In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts. My point is that there isn't much out there that is safer other than full faith and credit financial instruments or FDIC insured savings accounts. Life insurance and annuity contracts would be safer than corporate bonds, stocks, mortgage backed securities, and many others.

You're skeptical of the safety of life insurance and annuities, I'm just challenging you to name something safer other than those than obviously safer full faith and credit financial instruments or FDIC insured savings accounts.

BTW, I'm not a fan of whole life insurance or annuities either, but it is because of their mediocre returns, not because they are not safe.
true and that in itself is not bad. My father had an annuity, my father would never, ever invest heavily in the stock market. no matter what argument you try to sway him with, he pretty much believes all of wall street to be crooks and thieves and I know quite a few folks to this day that feel that way.

His annuity did what he intended. gave him 2K a month until the day he died. from age 65 to 85. Now I don't know how much he paid for it but however much it was is moot. he would have never ever sunk that money into the market.

I inherited an annuity when my dh died last year. I haven't decided on whether or not to cash it in and do something else with the money. I'm in a great position in that the annuity is only a small fraction of my overall plan but until I learn a bit more about investing I'm cool with owning one.
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Old 05-17-2015, 08:40 AM   #60
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lol by the way I love your tag.
Thanks!
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