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Question about old thread on Fixed Index Annuity
Old 04-25-2014, 11:27 AM   #1
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Question about old thread on Fixed Index Annuity

There was an old thread on a product by AVIVA called BPA12. This product no longer exists, but it was claimed it had an 8% guarantee, which everyone said was too good to be true. I did not see anyone, though, argue that the 8% was not really 8% on the income side. (Of course it's not 8% on the accumulation side. Fees, fees, fees.)

Quote:
Originally Posted by FINANCE DAVE
I'm sorry but I can't be convinced. Calling it an 8% return is misleading IMO, if the returns are deferred. If we're allowed to do that, then give me $1M, and 50 years from now I'll give you 10% guaranteed return...how's that?

If I had 2 hours extra time I'd run a complete NPV analysis on this with DCF model, and show that return to be substantially less than the 8% mentioned.
From my understanding of the product, the income side received a guaranteed 8% and whatever was not taken from this account as income (once income was turned on) would be passed on to beneficiaries. In this scenario only (income play and death benefit), what part of the 8% guarantee would not be received by annuitant and/or beneficiaries?
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Old 04-25-2014, 12:31 PM   #2
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Just curious, why are you asking? Do you own a BPA12 annuity?
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Old 04-25-2014, 03:07 PM   #3
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I don't own one, but I wish I did. It sounds too good to be true, but a friend swears to me this is how the income rider works on his contract. I've had this also verified by financial professionals. If this is how it works, I don't really see a downside. And in hindsight, I probably would have purchased one. If there's something I'm missing though, I'd want to know.
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Old 04-25-2014, 03:30 PM   #4
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Some of that 8% will be a return of principal for any normal annuity. You don't want to include that in any return rate calculation. In addition, a deferred annuity will have a higher return percentage the longer you delay if you count it as delayed income versus your original investment. I'd guess that's where the rest of the 8% comes from. Even the guarantee is most likely to be a return of your original investment. That would be a 0% investment gain.

You need to figure out the true rate of return by looking at the dollars input over time and the dollars output over time. Excel can do that fairly easily. That's its value as an investment. Its value as insurance is up to you.
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Old 04-25-2014, 03:35 PM   #5
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Originally Posted by Animorph View Post
Some of that 8% will be a return of principal for any normal annuity. You don't want to include that in any return rate calculation. In addition, a deferred annuity will have a higher return percentage the longer you delay if you count it as delayed income versus your original investment. I'd guess that's where the rest of the 8% comes from. Even the guarantee is most likely to be a return of your original investment. That would be a 0% investment gain.

You need to figure out the true rate of return by looking at the dollars input over time and the dollars output over time. Excel can do that fairly easily. That's its value as an investment. Its value as insurance is up to you.
I think you're mistaken. Most annuities are single premium, so someone hypothetically opening an annuity with a one-time $500,000, that $500,000 would have a guaranteed growth of 8% with an income rider. (And that's compound growth.) In 20 years, with no more contributions, the income value would be a whopping $2,330,478.57. If the annuitant turned on income and died before the receiving his first payment, his beneficiaries would receive $2,330,478.57. If he received $2,000,000 in income payments over his lifetime, his beneficiaries would receive $330,478.57. How is this not a true net 8% ROR?
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Old 04-25-2014, 03:38 PM   #6
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I wouldn't touch a fixed index annuity with a 10-foot pole today. But this does negate the fact that hindsight is 20/20. This particular annuity seems like it was a legit financial vehicle. What rate of return would you have to get gross in mutual funds to net out 8% year after year?
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Old 04-25-2014, 03:58 PM   #7
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I think you're mistaken. Most annuities are single premium, so someone hypothetically opening an annuity with a one-time $500,000, that $500,000 would have a guaranteed growth of 8% with an income rider. (And that's compound growth.) In 20 years, with no more contributions, the income value would be a whopping $2,330,478.57. If the annuitant turned on income and died before the receiving his first payment, his beneficiaries would receive $2,330,478.57. If he received $2,000,000 in income payments over his lifetime, his beneficiaries would receive $330,478.57. How is this not a true net 8% ROR?
Even 8% for 20 years isn't 8% if they feed it back to you over a 30 year period with 0% growth after the 20 years. I haven't read the original thread, so I don't know what the catch is. There just is one.
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Old 04-25-2014, 04:02 PM   #8
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Even 8% for 20 years isn't 8% if they feed it back to you over a 30 year period with 0% growth after the 20 years. I haven't read the original thread, so I don't know what the catch is. There just is one.
I'm all ears if there's a catch. I have no idea how an insurance company could even do this.
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Old 04-25-2014, 04:06 PM   #9
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Quote:
Originally Posted by WillCD View Post
How is this not a true net 8% ROR?
Because other than your "hypothetical" qualifier, this...
Quote:
... so someone hypothetically opening an annuity with a one-time $500,000, that $500,000 would have a guaranteed growth of 8% with an income rider. (And that's compound growth.) In 20 years, with no more contributions, the income value would be a whopping $2,330,478.57. If the annuitant turned on income and died before the receiving his first payment, his beneficiaries would receive $2,330,478.57. If he received $2,000,000 in income payments over his lifetime, his beneficiaries would receive $330,478.57.8%
...is an incorrect assumption.

There is no free lunch but there are any number of sales people who knowingly and unknowingly misrepresent the "guarantees" in these annuities. Return of capital is frequently used to puff up the "return" percentages in the sales pitch.

You can find the 75-100+ page prospectus of these annuity contracts online. Please provide us with a quote from one of these agreements showing the above 8% (or 7%, or 6%, or even 5%) compound annual growth guarantee and a link for verification. The devil truly is in the details.

Good luck.
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Old 04-25-2014, 04:12 PM   #10
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Originally Posted by WillCD View Post
I wouldn't touch a fixed index annuity with a 10-foot pole today. But this does negate the fact that hindsight is 20/20. This particular annuity seems like it was a legit financial vehicle.
Perhaps it was.

Have you tried locating the prospectus/contract online? The only way to know for sure is to see, read and thoroughly understand the annuity contract. Until you can do that you'll never find out, no matter how many posts this thread runs.
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Old 04-25-2014, 04:16 PM   #11
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Quote:
Originally Posted by WillCD View Post
I don't own one, but I wish I did. It sounds too good to be true, but a friend swears to me this is how the income rider works on his contract.
I'd ask to see his contract and plan on spending a significant amount of time attempting to understand the alarming number of pages of fine print you'll have to wade through.

And if it sounds too good to be true...
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Old 04-25-2014, 04:24 PM   #12
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You'll get 8% (maybe minus some significant fees) and that will come from both principal and investment return.

The best guaranteed return I've seen on an contemporary SPIA is with TIAA-Traditional and that's 7% starting at 55 years old. They are completely up front that this is a payout rate not an interest rate.
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Old 04-25-2014, 04:34 PM   #13
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I think I figured it out. Those who die at the beginning of their income will actually get 8% (or close to it) and this is subsidized by those who live a long time and get much lower rates of return, probably closer to 2-3%.
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Old 04-25-2014, 05:25 PM   #14
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Quote:
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I think I figured it out. Those who die at the beginning of their income will actually get 8% (or close to it) and this is subsidized by those who live a long time and get much lower rates of return, probably closer to 2-3%.
Hmmmm.....I'm betting you'll get 8% of your principal payment (minus fees etc) and that if you live a long time your beneficiaries will get nothing.
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Old 04-25-2014, 05:40 PM   #15
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Quote:
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I think I figured it out. Those who die at the beginning of their income will actually get 8% (or close to it) and this is subsidized by those who live a long time and get much lower rates of return, probably closer to 2-3%.
Don't you think it's a little unproductive to make guesses about the merits (or lack thereof) of an annuity product that's no longer being sold, and for which we have no documentation of the terms and conditions? You may be right, or you may be wrong. In either case there is little risk that anyone will be able to confirm or refute your opinion. The truth lies somewhere in the fine print of a complicated annuity contract, and none of us has a copy.

For the record, I am not inflexibly opposed to all annuities. They can provide a guaranteed income stream that might take the place of a traditional pension. But DIY investors like me also tend to approach them with a jaundiced eye, since they are heavily promoted by slick salespeople who have a vested interest in pocketing the fat commissions they make from each sale.
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