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Old 06-03-2012, 06:16 AM   #21
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there are state guaranty funds, but they are a far cry from the FDIC because nobody stands behind the guaranty funds.
<--- considering buying a SPIA or two, and I have always believed that the state guaranty fund would step in up to their limit. Are they backed by either general obligations of the state, or other insurance companies, or something secure? Although certainly not FDIC guaranteed, I had thought they were similarly backed by the state fund. Not so ??
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Old 06-03-2012, 06:43 AM   #22
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Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.
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Old 06-03-2012, 07:47 AM   #23
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I've known people that have had the "lifetime annuity" company go broke. In the one case I know the whole story for (Lutheran Brotherhood), they were eventually "made whole." This would have been limited by the state guarantee fund if they would have been over that limit. It took several years to get the past due money. Life's a bitch if you were planning to live on that cash.

The state funds are not backed by the states in any way - no "full faith and credit" stuff here. The funds are a mutual guarantee of companies selling that class of product within the state. Theoretically, a company can refuse to pay for another company's failure but they would lose the right to sell that product in that state.

Another thing to consider is that companies can sell your annuity to another company. You have no control over that. You might find yourself having bought a triple A annuity only to find a decade later that the new holder is single A. That's happened to my term life insurance twice. The new company always has a lower rating.
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Old 06-03-2012, 08:05 AM   #24
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Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.
I'm one who wouldn't buy an annuity at present interest rates/yields, though I realize there are circumstances where others might. And while your comment on returns is understandable, they are two different things IMO.

I'd supplement my income with an annuity for the longevity insurance aspect, my portfolio may not be able to meet that need if I live to be 110. I expect to buy an annuity when my portfolio value approaches my annuitization hurdle, though if future real returns are good enough I may never annuitize at all. Hopefully I will be very old then, which also shortens the window I expose myself to "the risk potential associated with the carrier" like you. And if I annuitize, it will be with more than one source.
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Old 06-03-2012, 08:15 AM   #25
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...And while your comment on returns is understandable, they are two different things IMO. I'd supplement my income with an annuity for the longevity insurance aspect, my portfolio may not be able to meet that need of if I live to be 110.
Exactly.

Most folks who look at an annuity (specifically an SPIA) still look at it as an investment, rather than an income vehicle, for the rest of your life (if that is the option you take).

Can you make more "on the outside"? Sure. However, you can also lose due to investment risk.

Additionally, folks forget that over time, your own money (preimum) is returned to you to cover a portion of your current retirement expenses, every month, and the remaining amount available for investment (by the insurance company) gradually is reduced. Again, much different than an investment program.

Interest rates have less to do with SPIA payments when compared to your age (the older you are, the higher payments - since you have less time to collect, much like SS) and the options you select (such as inflation adjusted, remaining spousal coverage at 100% of current payments, just to name a couple).

It's just another tool in the retirement income toolbox and is not meant to cover all your needs, but just a "foundation" of income, as our SPIA does for us, while moving a bit of "market risk" from our remaining retirement investment portfolio.

And yes, it's not for everybody ...
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Old 06-03-2012, 08:25 AM   #26
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The state funds are not backed by the states in any way - no "full faith and credit" stuff here. The funds are a mutual guarantee of companies selling that class of product within the state. Theoretically, a company can refuse to pay for another company's failure but they would lose the right to sell that product in that state.
Thanks for that clarification !
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Old 06-03-2012, 08:33 AM   #27
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Can you make more "on the outside"? Sure. However, you can also lose due to investment risk.
This seems to be the $64,000 question in the end. While you can avoid a potential portfolio loss by buying an annuity, you also forego years if not decades of gains if returns are average or above. You can't really change your mind once you buy an annuity, but if you hold your money on the "outside" you can buy an annuity next week, next month, next year, next decade or later. To me waiting is having your cake and eating it too. YMMV

If you're bearish on the future, your portfolio is already close to your annuitization hurdle, you aren't comfortable managing a portfolio and/or you just can't sleep with uncertain floor income - you're a good candidate for an annuity. If you expect future real returns to be no worse than the past, your porfolio is greater than your annuitization hurdle, and your risk tolerance allows you to sleep well for now - you might be well served to wait for higher interest rates/annuity yields and shorten the years of exposure to insurer default (admittedly a remote possibility if the past is any indication).
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Old 06-03-2012, 08:34 AM   #28
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Also remember that any insurance company operating in your respective state is prohibited to discuss/advertise anything related to this type of default coverage (strange as it may seem):

Advertising Prohibition - Google Search
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Old 06-03-2012, 08:46 AM   #29
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...you just can't sleep with uncertain floor income - you're a good candidate for an annuity.
That was certainly the driver in our case, with the plan to both retire at age 59, but deferring SS till DW's FRA age (66) and mine at 70 (primarily for her benefit, assuming I will pass first).

Sure, we could have just tapped our respective retirement portfolios, but "converting" 10% of the then current value to provide a base ER income made more sense, along with "trading up" to a superior COLA'ed "pension" in the form of SS by delaying it well into the future. BTW, we did exceed the state guarantee, but that's a form of "risk taken" in our total plan. Our continued SPIA monthly payments will just be "icing on the cake" after our other income streams (including two small pensions for DW start in a year) come on line.

Every situation/desire is different (that's why they make other ice cream flavors besides vanilla - even though it is the most popular) ...
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Old 06-03-2012, 09:07 AM   #30
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<--- considering buying a SPIA or two, and I have always believed that the state guaranty fund would step in up to their limit. Are they backed by either general obligations of the state, or other insurance companies, or something secure? Although certainly not FDIC guaranteed, I had thought they were similarly backed by the state fund. Not so ??
Everything you ever wanted to know about sex state guaranty funds, but were afraid to ask:

www.nohlga.com
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Old 06-03-2012, 09:42 AM   #31
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I've known people that have had the "lifetime annuity" company go broke. In the one case I know the whole story for (Lutheran Brotherhood), they were eventually "made whole." This would have been limited by the state guarantee fund if they would have been over that limit. It took several years to get the past due money. Life's a bitch if you were planning to live on that cash.

The state funds are not backed by the states in any way - no "full faith and credit" stuff here. The funds are a mutual guarantee of companies selling that class of product within the state. Theoretically, a company can refuse to pay for another company's failure but they would lose the right to sell that product in that state.

Another thing to consider is that companies can sell your annuity to another company. You have no control over that. You might find yourself having bought a triple A annuity only to find a decade later that the new holder is single A. That's happened to my term life insurance twice. The new company always has a lower rating.
I think you are wrong. Neither Lutheran Brotherhood nor Aid Association for Lutherans went broke, or into receivership or anything like that. You're badmouthing a good company (inadvertently I hope).

It is very difficult for an annuity to be sold to another company (called a novation). While the rules vary from state to state, in many states positive policyholder consent is required or negative consent is accepted. In other states, the commissioner can approve the transfer. More typically, the economics and administration are transferred or "sold" to another carrier through reinsurance, BUT in most cases if the "buyer" is unable to perform on its obligations then the original issuing company is obligated to make up any difference (called the "primary" obligor).

IMO, carrier risk is not very significant - and certainly much less significant than credit risk of a corporate bond given the regulation of the industry, risk-based capital requirements, asset-liability matching and the impact of the rating agencies on carriers.
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Old 06-03-2012, 09:47 AM   #32
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IMO, carrier risk is not very significant - and certainly much less significant than credit risk of a corporate bond given the regulation of the industry, risk-based capital requirements, asset-liability matching and the impact of the rating agencies on carriers.
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Old 06-03-2012, 09:53 AM   #33
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Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. .....
That is why they call it longevity insurance. One way to look at it is that you are trading off what would be left of your investment if you die young for the assurance of not outspending your investment if you live to a ripe old age. There is no such thing as a free lunch.

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.....The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.
see prior post.
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Old 06-03-2012, 10:15 AM   #34
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IMHO, the key to securing long term retirement funds is diversification. If an annuity can add diversification to a financial situation that is not well diversified, and the cost is reasonable, then it could be a good thing for some individiduals. If one has only two sources of income (say SS and personal savings) adding a third source could be a smart move. Of course, one must always run the numbers and do the due dilegence.
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Old 06-03-2012, 10:22 AM   #35
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...If one has only two sources of income (say SS and personal savings) adding a third source could be a smart move.
Heck, nobody ever called me smart ...

Thanks for the vote of confidence...
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Old 06-03-2012, 10:26 AM   #36
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[QUOTE=brewer12345;1200480]Everything you ever wanted to know about sex state guaranty funds, but were afraid to ask:

Bad link, Brewer.
This is what you meant:

nolhga.com :: Policyholder Information
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Old 06-03-2012, 10:36 AM   #37
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If one has only two sources of income (say SS and personal savings) adding a third source could be a smart move. Of course, one must always run the numbers and do the due dilegence.
And part of the due diligence, of course, is looking at the source of the underlying funds. If the same factors (e.g. poor equity return over time) would undermine both one's personal portfolio and the financial stability of annuity issuers, then buying an annuity might not offer much true additional protection.
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Old 06-03-2012, 10:40 AM   #38
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Also remember that any insurance company operating in your respective state is prohibited to discuss/advertise anything related to this type of default coverage (strange as it may seem):

Advertising Prohibition - Google Search
From talking to people that have looked at annuities, I can assure you that numerous agents "casually" mention the "state guarantee" without disclosing the limitations. It's always verbal and an aside type comment.
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Old 06-03-2012, 10:46 AM   #39
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And part of the due diligence, of course, is looking at the source of the underlying funds. If the same factors (e.g. poor equity return over time) would undermine both one's personal portfolio and the financial stability of annuity issuers, then buying an annuity might not offer much true additional protection.
Absolutely! I cannot agree more.

Of course, one's own personal portfolio could be damaged by one's own poor choices or circumstances that do not affect the annuity issuer. That is why I like diversification. I carry no brief for annuities and probably would not buy one (other than annutizing SS by delaying my start date). But, I can see that they might be useful to others.
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Old 06-03-2012, 10:49 AM   #40
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And part of the due diligence, of course, is looking at the source of the underlying funds. If the same factors (e.g. poor equity return over time) would undermine both one's personal portfolio and the financial stability of annuity issuers, then buying an annuity might not offer much true additional protection.
If you are comparing annuities to a bond portfolio you might have a bit of a point, but in reality the factors are probably very different. Poor equity returns would have a much bigger adverse impact on an individual than an insurer because typically an insurer's equity investments are not very significant (as a percentage of their entire investment portfolio).

The annuity issued by the insurance company is principally backed by a portfolio of bonds that are broadly matched with the annuity obligations (the asset-liability matching referred to in a prior post) and are further backstopped by the capital that the regulators and rating agencies require and the insurer's financial strength is continuously monitored by insurance regulators and the rating agencies.

Our personal portfolios are typically much more equity heavy because of the need to increase annual withdrawals for inflation which usually isn't part of a payout annuity.
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