Shield Annuity Product?

[Ready]

Here is a link to the one I am looking at:

https://www.brighthousefinancial.com/products/annuities/shield-annuities/


To reiterate, this product was chosen because:
-it helps reduce exposure of our assets to my kids' college FAFSA (they will be applying for public schools, not private)
- it allows us to continue having some exposure to the market
- it offers a little downside protection, but in return for a cap on potential gains.



Once the kids are out of school and we are 59 1/2 (avoiding the 10% early withdrawal penalty), we will take out the funds, pay income tax only on the gains, and redeploy to appropriate investments at that time.


The advisor informed us he gets paid from the issuer if we utilize this product, which is acceptable for us since he does not charge us for anything of the other financial planning advice he provides us.

The question you have to ask yourself is do you fully understand how the rate of return on this product will be determined. Looking at the brochure your link points to, I can’t make heads or tails of it, and I’ve reviewed many annuity products.

And again, a fiduciary does not provide free financial advice in return for pitching commissionable financial products. That is a role exclusively reserved for financial product sales people, who you should never take financial advice from.

 

[MI-Roger]

Maybe this is a stupid question, or a method with its own painful future fishhooks, but......

If the goal is to move investments into vehicles that will qualify as retirement funds when completing the FAFSA, can a person create an IRA shell to contain higher return investments which can be moved from fund to fund, or market segment to market segment in the future to chase the high return & low risk combination?

I agree those Brighthouse rate sheets are confusing! Nice TV commercials but I have no idea how much an investor is guaranteed to earn, or the annual maximum cap, or the annual minimum return/protection point after reading the sheets. The whole purpose of these ratesheets is obviously to make people believe they will earn an 85% to 100% return in 6 years because the ratesheets quote the returns of major indexes during the previous 6 year period.

Enough opacity to make me say "Stay Away!", and I own some similar products to act as pseudo pension income as we potentially age past the point of being able to make clear and informed financial investment decisions.

 

[Independent]

Here is a link to the one I am looking at:

https://www.brighthousefinancial.com/products/annuities/shield-annuities/

Thanks for the link. I haven't read the prospectus, but this is what I get from the marketing material.

I get to choose a term, index, and protection level.
As an example, I picked 6 years, S&P 500, and 10%
In that case, reading the rate page here: https://www.brighthousefinancialpro...shield/SLS-Select-6-Yr-New-Contract-Rates.pdf

I see that my cap rate is 100%

So, I pay a $10,000 single premium today with the intention of leaving the money for 6 years. At the end of the 6 years, we look at the change in the S&P 500 price index. The first two columns in the tables say if the change in the index is ___ , my surrender value is ___ . I've taken a very simple approach to the cap and protection, which may not be correct.

6 year gain	Shield index annuity value	S&P 500 value	Vanguard VA value
0%	10,000	11,200	10,951
10%	11,000	12,249	11,979
50%	15,000	16,430	16,080
100%	20,000	21,633	21,188
125%	20,000	24,228	23,737
-10%	10,000	10,149	9,921
-20%	9,000	9,096	8,889
-30%	8,000	8,040	7,854

Is this the way you think it works?

(I haven't looked to see what happens if I want to surrender before 6 years.)

If this is the entire story, then this is a simpler than average indexed annuity.

Note that my numbers are all based on the S&P 500 prices. If I owned the stocks directly, I would also have the dividends paid over the six years. The dividend yield is approx 2%, so that's $200/year. In that case, a 0% increase in price might lead to an ending value of $11,200. (that's based on some simplifying assumptions)

So I put $11,200 in the third column of the first row in the table.
Then I calculated possible (again, with very simple assumptions) values for the S&P 500 accumulated total return for the other possibilities and filled in the rest of the third column.

I'm just kind of guessing here, does this math look at all reasonable?

Note that I can't buy the S&P 500 directly. I could use the Vanguard Index 500 mutual fund instead, but that's not an annuity.

So I tried the Vanguard variable annuity with the S&P 500 index option. That appears to have a total expense ratios of 0.42%. So I put a fourth column in the table. It is the accumulated value using an annual dividend of $200 and an annual expense load of 0.42%. https://personal.vanguard.com/us/funds/annuities/variable?View=EF

Warning: I'm just some anonymous guy on the internet spit-balling some numbers on a Saturday morning. Don't believe anything I say until you've checked it yourself.

 

[OldShooter]

Here is a link to the one I am looking at: https://www.brighthousefinancial.com/products/annuities/shield-annuities/To reiterate, this product was chosen ...

@JustKickItForward, it's clear that you want to buy this thing. Maybe you came here unconsciously looking for affirmation. Clearly that is not what you're getting. Please, please, do a few things before you sign anything:

1) Read and understand the prospectus in every detail. I downloaded one of them from your linked page and it was 72 pages. This may take you an afternoon, but that is far less effort than you expended to earn the money that you are thinking of giving to these people.

2) Comparison shop. Here is TIAA's brochure on their similar products: https://www.tiaa.org/public/pdf/Intelligent-Life-Advantage-Life-Insurance.pdf and here is Vanguard's page: https://investor.vanguard.com/annuity/variable Certainly any time in the past where you have looked at spending a large amount of money you have comparison shopped. Don't neglect it here.

3) "The insurance company pays my commission." One way or another the customer always pays the commission. Do not be deluded. In the prospectus I looked at the commission was 6% plus soft money. Use 6% of your proposed purchase amount and divide by your estimate of how many hours he has spent giving you financial advice, and see what hourly rate you will be paying.

 

[gauss]

^ To some it may be worth it.

If they outsource this analysis to the nice and knowledgeable [-]salesman[/-] financial adviser then they don't have to do the w*rk. And lets agree that although many of us consider this hobby, to the average person, learning about this is indeed w*rk.

The financial adviser will tell them at the end that they are doing great, reaffirming the decision and making the customer feel very good about themselves. In some cases they will lead the customer to believe that the adviser is a Fiduciary, because the customer may have heard that is important. Customer doesn't want to know that if adviser is dual-licensed he can take his Fiduciary hat off at any time and put his broker-dealer hat back on.

Heck, the financial adviser may be even trained to think that it is a good deal for the customer.

At the end of the day the customer will feel good about the decision -- maybe even brag to his friends.

Bottom line, if OP has enough money, and is satisfied with the performance he is getting then it is good for him.

He probably won't know and won't care that, over a long period of time, 2/3 of the return of the typical financial adviser investment will go to the companies and adviser and he will only get 1/3 of the return. (See the PBS Frontline episode described earlier for easily digestible details).

Many of us here at ER.org, who want to retire early, will want to get that 2/3 ourselves and not give it to the financial companies, so this seems crazy to us.

In summary, if OP is using his own money and wants to use it in this fashion, then it is not wrong - it is just different.

-gauss

p.s. This is starting to remind of the red-pill/blue-bill scene in the original Matrix movie.

 

[CoolRich59]

The advisor informed us he gets paid from the issuer if we utilize this product, which is acceptable for us since he does not charge us for anything for the other financial planning advice he provides us.

Yep. He’s a salesman, not a fiduciary.

 

[ImaCheesehead]

The advisor informed us he gets paid from the issuer if we utilize this product, which is acceptable for us since he does not charge us for anything for the other financial planning advice he provides us.

I am curious about what other financial planning advice he provides to you for free? I mean, in general, not many people work for free.

 

[Another Reader]

I am curious about what other financial planning advice he provides to you for free? I mean, in general, not many people work for free.

OP: Does this adviser invest other money for you, such as IRAs and taxable investments? If so, you should be looking at the other products he sold you. Worst case, they are front loaded, high ER mutual funds or other annuity products. If the OP lists those investments, the forum may be able to help the OP understand why the "adviser" is not charging him directly for financial advice.

 

[pb4uski]

OP.... if you want to keep assets from being recognized for aid go ahead and buy an annuity. but I think a Vanguard VA with equity sub-accounts is a better choice than an equity indexed annuity.

 

[samclem]

Ed

OP.... if you want to keep assets from being recognized for aid go ahead and buy an annuity. but I think a Vanguard VA with equity sub-accounts is a better choice than an equity indexed annuity.

It still might not make financial sense, it would require a hard look at cost and benefit. But the Vanguard option would accomplish the same thing, and would almost certainly be less expensive for the OP. However, it wouldn't be better...for the "advisor" who loses this juicy payday.

 

[Chuckanut]

Interesting article in the WSJ stating that with the Fiduciary rule on the ropes, annuity sales are up, Up and UP!

Behind a paywall:

https://www.wsj.com/articles/steak-...+Y/JynsYksZWw==&reflink=article_copyURL_share

“Annuity sales totaled $59.5 billion in the April-to-June period, the highest since late 2015, according to the Limra Secure Retirement Institute. Sales are expected to remain strong through at least the rest of the year.”

 

[Independent]

More numbers. I looked at total 6 year price changes on the S&P 500 (from Shiller's data). I grouped them into bands that seem appropriate for this indexed product. The "Distribution" is the percent of 6 year periods with the corresponding price change.

Band...........	Distribution	Average Growth
Over 100%	22%	142%
0% - 100%	66%	49%
-10% - 0%	8%	-5%
Below -10%	4%	-17%

The indexed deal as I see it is that you give up the dividends, and you give up the gains over 100%, in exchange for trimming 10% off your losses on the down side.

 

[Tiger8693]

I have always considered mine and DW's SS as our COLA adjusted annuity portion of our retirement income plan. Maybe that's wrong, but I feel adding a lot more to it skews our AA too much.

As for FAFSA income, I would research other ways to try and minimize that, but if already close to college age, probably a lost cause.

 

[JustKickItForward]

OP: Does this adviser invest other money for you, such as IRAs and taxable investments? If so, you should be looking at the other products he sold you. Worst case, they are front loaded, high ER mutual funds or other annuity products. If the OP lists those investments, the forum may be able to help the OP understand why the "adviser" is not charging him directly for financial advice.

We rolled $30k of my wife's 403b into an Advisor directed rollover IRA acct at Schwab. As far as I can tell/remember, investments are automatically allocated (daily?) based on her goal and risk tolerance (can be changed). This acct is charged a 1% commission based on account balance.


That's all the monies manages by this guy (aside from the $70k we are considering parking in the Shielded Annuity Product). I am managing the rest of our investments to save on advisory fees.

 

[JustKickItForward]

Can you explain a little more how "Variable Annuity with Equity Sub Accounts" works? Never head of this, but again, I do not know much about annuities

 

[Cayman]

We rolled $30k of my wife's 403b into an Advisor directed rollover IRA acct at Schwab. As far as I can tell/remember, investments are automatically allocated (daily?) based on her goal and risk tolerance (can be changed). This acct is charged a 1% commission based on account balance.

That's all the monies manages by this guy (aside from the $70k we are considering parking in the Shielded Annuity Product). I am managing the rest of our investments to save on advisory fees.

You can move the $30k to Vanguard and save most of the 1% fee. That's a definite way to increase your return every year! The annuity is not anything I'd consider for the many reasons explained in this thread. I'm certain I'd lose money over other options, but that's my perspective. Best of luck to you.

 

[Independent]

Can you explain a little more how "Variable Annuity with Equity Sub Accounts" works? Never head of this, but again, I do not know much about annuities

Think about an IRA managed by a mutual fund company that has a variety of mutual funds available within your IRA.

So you might say that you've got an IRA with 60% of your funds in a stock mutual fund and 40% in a bond mutual fund. Then, later, you may transfer some of the money from the stock fund to the bond fund, while keeping everything inside the IRA.

For most people, a variable annuity is just like an IRA. The difference is the tax rules for the "wrapper". The language in a VA is "subaccount" instead of "mutual fund", but it's the same idea. I think I posted the list earlier https://personal.vanguard.com/us/funds/annuities/variable?View=EF

The subaccount listed as "equity index 068" is intended to track the performance of the S&P 500. For the math I did above, I assumed you would put 100% of your funds into that one subaccount. That was just so I could compare to the index annuity. You would have 17 other options.

When you buy the annuity, you'll specify how much of your premium goes into each of the subaccounts. You'll get the performance of the underlying pool of assets, just like you would in a mutual fund. However, you'll pay higher fees than you would pay on mutual funds with the same underlying assets.

 

[pb4uski]

Can you explain a little more how "Variable Annuity with Equity Sub Accounts" works? Never head of this, but again, I do not know much about annuities

It is similar to a deductible tIRA or 401k... you invest in a choice of mutual funds (called sub-accounts) and get what you get. Think of the variable annuity as a bucket that has tax-deferred treatment and the sub-accounts are individual balls in the bucket. Like a tIRA or 401k is a bucket that is tax deferred and you have various investments (balls) in the bucket.

The main difference is that there are certain fees associated with the VA bucket that you don't have in tIRA or 401k.