VA with GMWB or GMIB~Confused?

[mickeyd]

Humberto Cruz's article (atttached) mentions GMWB and GMIB that can be added to VAs. This looks like another way to dip into the wallet (annuity) of VA customers who really should not be invested in a VA in the first place.

The cost of these "living benefits" is not revealed. I'm betting that the cost is way, way more than it is worth. I'm also betting that many VA customers will hedge their bets and sign up "just in case".

http://www.sun-sentinel.com/business...1531855.column

In industry jargon, these initials stand for "guaranteed minimum withdrawal benefit" and "guaranteed minimum income benefit." They are part of an ever-evolving breed of "living benefits" tacked onto variable annuities, which are tax-deferred, mutual fund-like investments within an insurance wrapper.

The benefits, for which you pay an additional ongoing fee, guarantee that you, or you and a beneficiary, usually your spouse, will receive a minimum lifetime income regardless of how your annuity investments perform.

[brewer12345]

They are expensive and generally a ripoff. IIRC, the diffierence between them is that the GMWB allows you to pull X% from the VA balance for Y years (after which you are on your own), while the GMIB guarantees that you will be able to annuitize at some minimum floor level no matter what happens to the account balance.

Mammoth riposs mostly loved by advisors because of the fat commissions they generate. Caveat Emptor.

[FinanceDude]

Wonder why it took the actuaries so long to figure this stuff out.........

Insurance companies only do stuff like this if there is little to no rsk to THEM, and they can make a ton of money at it...............

[brewer12345]

Quote:

Originally Posted by FinanceDude Wonder why it took the actuaries so long to figure this stuff out......... Insurance companies only do stuff like this if there is little to no rsk to THEM, and they can make a ton of money at it...............

Sometimes. And sometimes they make a big mistake or throw common sense & risk management out the window. A lot of companies decided that GMDB guarantees on VAs amounted to free money for them, because back in the 1990s the stock market only went up, right? So they didn't bother with all that inconvenient hedging. That ended well. :

[FinanceDude]

My all-time favorite was the Jackson National Vanishing Premium Whole Life product my wife's father bought her. After making 4 equal installments, the contract was paid up, and the CV accrued.

We were dating about a year, and she had taken over the policy from her dad. She got a letter asking her to make a premium payment, due to "adverse market conditions"................

I called the agent, and told him I had a copy of the policy, and it clearly stated that Jackson National was contractually obligated to keep their end of the bargain, and he began backpedaling........

Wonder how many people SENT IN money on those policies

[REWahoo]

Quote:

Originally Posted by FinanceDude My all-time favorite was the Jackson National Vanishing Premium Whole Life product...

Didn't I see a post earlier today about a German lady who had one of these policies on her husband?

No, I guess not. Hers was a "National Vanishing Johnson" product...

[maddythebeagle]

Quote:

Originally Posted by REWahoo! * Didn't I see a post earlier today about a German lady who had one of these policies on her husband? No, I guess not.* Hers was a "National Vanishing Johnson" product...

I heard that product is great if you ever find yourself in a pickle....

[d]

Quote:

Confused?

?? where's the confusion?

[donheff]

I read an interesting Canadian financial paper that shed some light on GMWBs. The paper describes what it calls the "retirement risk zone" - the first decade of retirement, during which a bear market can have devastating effects on sustainable withdrawal rates. The first part of the paper explains why "average" returns are not key to success during the withdrawal phase since the pattern of returns has such dramatic impact. None of this is new to regulars on this board but the paper is easy to read and could be useful for new people who wonder why our recommended SWRs seem low.

The paper then goes on to suggest the use of "derivative securities, namely put and call options to reduce the dispersion of portfolio returns -- both positive and negative -- and thus concentrate investment returns around a central value..." The strategy envisions buying a "retirement collar" by buying puts and selling calls that together limit the downside potential. It would limit the "very bad" possibilities in the retirement risk zone giving the nest egg a much higher probability of sustaining a given income flow. The risk reduction would come, of course, with a reduction in upside potential.

(Brewer - you or someone else once raised the idea of using put and call option to hedge risk didn't you?) At any rate, the paper notes that the transaction costs and complications would be prohibitive (as did the earlier discussion here as I recall). The paper suggests that Canada needs to come up with some instruments to offer this kind of protection at reasonable cost. It favorably describes American GMWBs at some length as an example of where this might go.

The problem is that it doesn't address the costs of the American products which sound like the Achilles heel from the posts above.

[FinanceDude]

Quote:

Originally Posted by donheff I read an interesting Canadian financial paper that shed some light on GMWBs. The paper describes what it calls the "retirement risk zone" - the first decade of retirement, during which a bear market can have devastating effects on sustainable withdrawal rates. The first part of the paper explains why "average" returns are not key to success during the withdrawal phase since the pattern of returns has such dramatic impact. None of this is new to regulars on this board but the paper is easy to read and could be useful for new people who wonder why our recommended SWRs seem low. The paper then goes on to suggest the use of "derivative securities, namely put and call options to reduce the dispersion of portfolio returns -- both positive and negative -- and thus concentrate investment returns around a central value..." The strategy envisions buying a "retirement collar" by buying puts and selling calls that together limit the downside potential. It would limit the "very bad" possibilities in the retirement risk zone giving the nest egg a much higher probability of sustaining a given income flow. The risk reduction would come, of course, with a reduction in upside potential. (Brewer - you or someone else once raised the idea of using put and call option to hedge risk didn't you?) At any rate, the paper notes that the transaction costs and complications would be prohibitive (as did the earlier discussion here as I recall). The paper suggests that Canada needs to come up with some instruments to offer this kind of protection at reasonable cost. It favorably describes American GMWBs at some length as an example of where this might go. The problem is that it doesn't address the costs of the American products which sound like the Achilles heel from the posts above.

It was Brewer that suggested calls and puts. I guess the "reasonable cost" is the problem? Insurance companies, whether mutual, private are looking to make money on whatever "guarantees" they offer. Whether it's a long surrender schedule, paying extra for riders, etc, they charge a lot for peace of mind.

Can't Canadien folks buy low cost annuities through Vanguard or someone in the US??

[brewer12345]

Quote:

Originally Posted by donheff (Brewer - you or someone else once raised the idea of using put and call option to hedge risk didn't you?) At any rate, the paper notes that the transaction costs and complications would be prohibitive (as did the earlier discussion here as I recall). The paper suggests that Canada needs to come up with some instruments to offer this kind of protection at reasonable cost. It favorably describes American GMWBs at some length as an example of where this might go. The problem is that it doesn't address the costs of the American products which sound like the Achilles heel from the posts above.

Yes, I suggested simple put and call (or just put) positions if you are hysterical about a portfolio flame-out in the early years. The idea that transaction costs and complexity would be a problem is absurd.

The total absence of discussion of the costs levied on Merkin buyers of these monstrosities seems odd, until you look at the typical fees Canadian investors get shaken down for.