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Old 06-03-2012, 10:52 AM   #41
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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.
And unfortunately, the mention of state guaranty associations is probably the least egregious of the misstatements that some agents make during the sales process. Caveat emptor!
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Old 06-03-2012, 11:03 AM   #42
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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).
I was hoping to paste a link on the failure into my response but I couldn't find the article. They are on a list of failed insurance companies. The failure was over 20 years ago now. I think two principals at Lutheran Brotherhood saw the inside of a federal prison or got very close. I can't remember all of the details.

I do know someone that had to deal with their failure. It wasn't very pretty and they were without their income stream for almost two years because of all the legal mess. Eventually, they were awarded an equivalent stream of income and back payments made. Because the person was about 10 years older than when they originally purchased the annuity, the "face amount" of the annuity was significantly lower but he was still getting the same monthly payments. That pissed the guy off royally and would not agree that the value put on the annuity didn't matter if he still got the same payment.

As for badmouthing a good company, my search turned up a nice collection of recent enforcement actions against them. Is this unusual? Unfortunately, these are all too common in the wonderful world of annuities -- especially variable annuities which I realize is not the specific topic here.

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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.
I'll agree that carrier risk is not a major risk factor. I do not know of anyone or heard of anyone not getting all their money (eventually) if the value of their SPIA is under the state guarantee fund limit. The performance of the funds are not so good on other types of insurance products. The limitations of coverage are very, very specific to active insurance based payments. Nothing covers policies not collected on but still being paid on or all the fancy variable annuity riders.

As for changes, my FIL was getting a small SPIA and suddenly the checks started coming from someone else. We were managing his finances and never got contacted other than the statements had a different corporate logo on them. I can't say whether it was "administrative" or a complete legal transfer. We didn't complain because my FIL was in hospice so there wasn't enough time to screw his cash flow up unless they failed really fast. They didn't.
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Old 06-03-2012, 11:35 AM   #43
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I was hoping to paste a link on the failure into my response but I couldn't find the article. They are on a list of failed insurance companies. The failure was over 20 years ago now. I think two principals at Lutheran Brotherhood saw the inside of a federal prison or got very close. I can't remember all of the details......
So you are sure that Lutheran Brotherhood failed but you can't find anything to substantiate it. OTOH, Executive Life failed over 20 years ago and the web is replete with articles on that event. With all due respect 2B, I think you are mistaken. I also looked at the listings on the NOLHGA website and there is no mention of an insolvency for LB or AAL. It sounds to me like perhaps the event you are referring to might be some rogue agents or something, but much less severe than a receivership.

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.....I do know someone that had to deal with their failure. It wasn't very pretty and they were without their income stream for almost two years because of all the legal mess. Eventually, they were awarded an equivalent stream of income and back payments made. Because the person was about 10 years older than when they originally purchased the annuity, the "face amount" of the annuity was significantly lower but he was still getting the same monthly payments. That pissed the guy off royally and would not agree that the value put on the annuity didn't matter if he still got the same payment.....
Once you buy a SPIA or annuitize a deferred annuity, there is no "value" - your only right is to monthly payments. There is no face amount. There is a reserve and that would increase for interest and decrease as monthly payments are made and it would be lower 10 years into the contract but it typically isn;t disclosed to the policyholder. If your friend was still getting the same monthly payments, he was getting what he was entitled to so the "problem" was in his head.

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As for badmouthing a good company, my search turned up a nice collection of recent enforcement actions against them. Is this unusual? Unfortunately, these are all too common in the wonderful world of annuities -- especially variable annuities which I realize is not the specific topic here.
Care to post them? I also did a search and could not find much. Virtually all insurers will have some and based on my experience Thrivent should be better (less complaints) than most.

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....As for changes, my FIL was getting a small SPIA and suddenly the checks started coming from someone else. We were managing his finances and never got contacted other than the statements had a different corporate logo on them. I can't say whether it was "administrative" or a complete legal transfer. We didn't complain because my FIL was in hospice so there wasn't enough time to screw his cash flow up unless they failed really fast. They didn't.
So what is the big problem you are referring to in post #23? I don't see why you think getting a check from someone else is a problem - you are still getting a check. In the event of a transfer or name change or similar event typically there would be a letter or some notification - perhaps you missed it.
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Old 06-03-2012, 11:56 AM   #44
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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.
Well, here's how confident the insurance companies were in all their investments and backup plans the last time we had a little burble. In part:

Quote:
Insurers, including The Hartford, Prudential and MetLife, have pushed the Bush administration to include them in the [bailout] plan. Many firms have taken losses from mortgage-related securities and other investments and are struggling to replenish their coffers.
And I didn't even mention AIG, the country's largest insurer that reportedly ran into some difficulties.

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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.
And that's another, separate, shortfall of most annuities.
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Old 06-03-2012, 12:21 PM   #45
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Well, here's how confident the insurance companies were in all their investments and backup plans the last time we had a little burble. ....

The fact is that many significant banks failed during the recession but there were NO significant insurance company failures. There were some (Lincoln, Hartford, Genworth) that had significant difficulties, but none failed. A few did take bailout funds and are in the process of paying them back.

And I didn't even mention AIG, the country's largest insurer that reportedly ran into some difficulties.

AIG's problems were related to unregulated derivatives up at the holding company but their insurance operations were sound and it is the proceeds from the sale of many of those insurance operations that is providing the funds to pay back the bailout of AIG's unregulated operations.

And that's another, separate, shortfall of most annuities.

I agree, but the reason that you don't see a lot of cola'd payout annuities in the marketplace is because insurers understand the risks associated with them and are unwilling to take the risk.
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Old 06-03-2012, 12:55 PM   #46
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Not trying to hijack this thread...but when I went to the link posted for the state annuity guaranty associations (http://www.nolhga.com/policyholderinfo/main.cfm) , I saw that the Missouri association also guarantees health insurers. (probably varies from state to state).

I guess I never really thought much about a health insurer needing/having this protection. The eye-opening thing is that the limit they reference was $100,000....so, the moral of the story is, if you happen to be anticipating a major health care situation/expenditure, and your health insurer has any hint of running into financial trouble, best to keep on your toes and verify those EOBs and push through all of those bills to be processed ASAP to avoid being stuck with bills exceeding your state insurance guaranty association's cap (if it covers health insurers).
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Old 06-03-2012, 02:10 PM   #47
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Not trying to hijack this thread...but when I went to the link posted for the state annuity guaranty associations (nolhga.com :: Policyholder Information) , I saw that the Missouri association also guarantees health insurers. (probably varies from state to state).

I guess I never really thought much about a health insurer needing/having this protection. The eye-opening thing is that the limit they reference was $100,000....so, the moral of the story is, if you happen to be anticipating a major health care situation/expenditure, and your health insurer has any hint of running into financial trouble, best to keep on your toes and verify those EOBs and push through all of those bills to be processed ASAP to avoid being stuck with bills exceeding your state insurance guaranty association's cap (if it covers health insurers).
I'm not totally sure how the medical guarantee works in Mo. but the guarantee association only covers the legally allowed disbursements. There is no guarantee of continued coverage. If a medical insurance firm fails, other companies are not required to insure you for the same rate. If you have incurred bills those are included. I'm sure it could get messy if you were in the middle of an expensive treatment.

This is also an issue for life insurance and LTC insurance. I've asked about these but haven't received a solid answer.
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Old 06-03-2012, 02:52 PM   #48
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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.
My advice to you is to learn all of the many negatives about annuities because NO BROKER will ever discuss all of the negatives with you. They just want to earn their giant sales commission, which is a whole lot more with annuities than with other "retail" investments like mutual funds.
Pros and cons of annuities: An annuity is a terrible investment
Don't be suckered into purchasing variable annuity | The San Diego Union-Tribune
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Old 06-03-2012, 03:38 PM   #49
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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
Good catch.
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Old 06-03-2012, 05:39 PM   #50
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My advice to you is to learn all of the many negatives about annuities because NO BROKER will ever discuss all of the negatives with you. They just want to earn their giant sales commission, which is a whole lot more with annuities than with other "retail" investments like mutual funds.
Pros and cons of annuities: An annuity is a terrible investment
Don't be suckered into purchasing variable annuity | The San Diego Union-Tribune
I read the first article: Pros and cons ........ It seems that that is specific to variable annuities and I believe that this thread is mostly referring to SPIAs.
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Old 06-03-2012, 06:02 PM   #51
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SPIA's it appears will become an increasingly talked about option for retirement planning and I included it as an option in my personal "investor policy statement and plan" that I finished this weekend. From all I have gathered there are a couple of important points: 1. find a good rated company with the lowest costs, 2. waiting until later in retirement will decrease the likelihood that the insurance company will default just by the odds conferred by fewer years, 3. waiting until later in retirement should allow you to get a smaller SPIA and therefore probably fly under the maximum of state guarantee. I personally may investigate SPIA's for me and spouse with two different companies and purchasing at or under state guarantee limit AND only after I see what happens to social security. Regarding the last point, here comes the paranoia: if you have an SPIA, you now have a fixed income stream that cannot be hidden, reduced, etc. as an asset in any way, or given away to others. There is a very real concern by some, that our Uncle is going to reduce benefits for those who saved, because the ones who didn't save get an equal vote. Just my two cents.
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Old 06-03-2012, 08:22 PM   #52
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I have been interested in this topic for some time and done a bit of research. Although I am sure that Brewer has forgotten more than I know on the subject. I also should note I never worked for an insurance company so there is lots I don’t understand about the business.


First it is rare that that people loss money on annuities. Executive Life is by far the largest failure in the last 30 years. While the bankruptcy of insurance companies isn’t uncommon, generally state regulators

find other insurance companies to take the over or transfer policies. . In addition to Exec Life, in doing research I found a handful of other insurance companies bankruptcies which resulted in loses to policy but couldn’t find details. In the case of Exec Life, it was one of the largest insurance companies in CA. It failed in 1991, and lawsuit continue for more than decade. From what I can tell policy holders got between $.40 to $.70 on the dollar, with those over the State Guaranty Fund getting less. What I am unsure from Googling the subject in the past is when did people get paid, getting your money 10 years after the company went may not be very valuable.


As Brewer said policy holders have first claim on companies assets, and much like banks, they have regulators and policy and procedures to make sure they don’t take excessive risks. Still since we have catastrophic failures in the savings loan back in the 1990s and most recently with investment banks in 2008, and the near collapse of bank system and hundreds of individual banks failures since 2008, so some caution is order. After the AIG bailout, I think it is wise to at least question the overall safety of annuities and the life insurance business. Overall I’d be significantly more worried about the safety of an annuity than I would my money in a bank under the FDIC limit.

A few of the things that bother about the insurance business. First that it is regulated at the state level and the competence and professionalism of the regulators varies widely. In most case state insurance commissioner are either an elected official or a political appointee, it is relatively rare that the commissioner has any experience in the insurance business. Like the banking business, insurance business involves a lot of math and finance and in general I worry about the ability of a state to attract the best and the brightest to become insurance regulators. This is especially true for regulating a multinational like AIG, in theory money is suppose to stay in the entity that is licensed to sell insurance in your state. In practice as the Exec Life case proves money is fungible and can be relatively easily moved. Next industry profit margin are pretty small, most companies suffered large losses in 2008 and 2009 and there is a lot of competition.

I also question the value of insurance company rating. The good news is that insurance companies are rated by the major agencies and for the most part the agency ratings are within two notches of each other (a company rated AA by one agency is very likely to be rated between AAA- and A+ by the others). While an agency credit rating is certainly more valuable than assurances from the insurance agent that a company is “rock solid”, forecasting the financial strength of a company 30 years seems virtually impossible for anybody. After the recent scandal where Moody’s S&P, Fitch etc rated securities like CDO as AAA only to seem them turn in toxic waste less than two years later it is hard have a great deal faith in the rating agencies competence. As practical matter it is also very difficult to judge the value of a higher rated insurance company. Imagine a 65 year old couple who sole income is from social security $2K/month and 250K annuity, AAA company insurance says they’ll give them $1200/month AA $1250 and single A company $1300 for joint SPIA. I have no idea if the higher rated insurance company is worth giving up $100 month in income. As people get more comfortable buying stuff over the internet I expect to see less involvement by insurance agents, and more price competition between insurance companies and hence more pressure by lower rated companies to offer better rates.

State guaranty associations are ill equipped to handle failures of large insurance companies and I think a multiple failures would cripple the system. Unlike FDIC insurance where banks pay ~$.25 per $100 worth of deposits into a fund, state guaranty associations are purely reactive. Only after an insurance company starts to go bankrupt does the SGA assess its member for the cost of bailing out the bankrupt company. This works fine for a small insurance company, in the case of Executive Life not so well. Imagine a future financial crisis involving insurance companies, your firm already losing money gets hit with large assessment to pay for other failing firms. Rather than pay the assessment, you elect to stop doing business in the state and leave the SGA. (Sure there is a lawsuit involved) By pulling out you increase the assessment on other insurance companies doing business in the state, potentially leading to a chain reaction of companies leaving the state (much like happened in Florida after a bad hurricane season). Unlike the FDIC insurance fund which is backstopped by Uncle Sam, SGA are not backstopped by states.. Finally as practical matter annuity coverage is pretty low $100K typically with a few states providing $300K this just doesn’t buy you a lot of income. A few years ago I spent 3 weeks trying to contact Hawaii’s guaranty association, I sent 6 emails and made more than a dozen phones calls before giving up and getting my questions answered by a lawyer in Hawaii insurance commissioners office. Given this level of responsiveness for simple questions, I sure would hate to try and get money from them.

In conclusion, in theory I really like the idea of using annuities to provide a base income for somebody in retirement. In practice, I think it is a lot more difficult to do it. It seems me that it most prudent to treat an annuity as bond with the insurance company. Now to be fair, to the inherent protections of insurance contracts make a annuity safer than the equivalent 30 year corporate bond. So from a safety prospective maybe treat an annuity as the equivalent of a muni bond of a similar investment grade?? In today’s interest rates if you limit yourself to $100k per company for a 55 year old couple that is a bit above $4300 income per contract and at ~5K at 65. In some states it maybe hard to find 1/2 dozen insurance companies you want to do business with.

Finally and perhaps most important annuitizing enough to get a decent base income (say 30 to 50K) results in you having a very significant exposure to a single sector; the insurance business. As people heavily invested in tech in the late 90s or those of us in the financial or home builders sector in 2008 found out the hard way, over concentration in a sector is very dangerous. When a sector gets hit, bad companies go out of business, but good companies also get devastated. Often the damage just extends to stockholders, but sometimes bond holders (and I include annuity contracts in this group) also can get hurt. One things that bothers me most about the insurance business is the very high correlation with a retiree’s investment and worries. Worried about an extended period of low bond and equities returns? bad for you and just as bad for insurance companies. What if medical breakthrough find a cure for cancer, heart disease and obesity? It increase your likelihood for outliving your money, but also is horrible news for insurance companies. Worried about cost of nursing homes continuing to rise rapidly? guess what the same insurance company that sold you an annuity probably sold lots of long term care contracts also. In short virtually any financial concern (except for SS payments being cut/taxed) you have in retirement is equally bad news for insurance companies. When people advocate using annuities to minimize investments risk, I fear they are trading one set of risk for another. There will be a future crisis in the insurance business, just like there has been in agriculture, autos, airlines, banks, oil, real estate, technology, textiles..... If we will see it in my lifetime I have no clue
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Old 06-04-2012, 12:56 AM   #53
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From what I can tell policy holders got between $.40 to $.70 on the dollar, with those over the State Guaranty Fund getting less.
Are you saying that people got no more than 70 cents on the dollar when the so called "white night" came in to buy up the company? And then the state guaranty fund paid for some of the remaining $.30 to $.60?
I sure hope investors didn't have to pay income taxes on those settlements!!!!
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Old 06-04-2012, 02:17 AM   #54
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Are you saying that people got no more than 70 cents on the dollar when the so called "white night" came in to buy up the company? And then the state guaranty fund paid for some of the remaining $.30 to $.60?
I sure hope investors didn't have to pay income taxes on those settlements!!!!

My understanding is that most annuity holders took a 30% haircut on their payments after 1991 So your $1,000 payment became $700. Plus for many months they received nothing while the insurance commissioner, state guaranty fund, and Credit Lyons pointed fingers at each other.

The good news is after all the lawsuits were settled a decade latter, I believe people got additional payments. The bad news is I think people with annuities over $100K may have gotten less than $.70 on the dollar.
It was an very complicated situation and I had difficulty putting together the final result of a dozen years of lawsuits.
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Old 06-04-2012, 02:24 AM   #55
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If I got 40 cents on the dollar I'd be pissed!

If the government didn't bail out AIG, I wonder if I'd be getting pennies on the dollar for my Sun America annuity. That may have been a close shave! I am slowly pulling out portions of my Sun America annuity.
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Old 06-04-2012, 07:17 AM   #56
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RealSkiDaddy, if the government didn't bail out AIG your SunAmerica annuity should have been fine. The major risk would have been that AIG would try to draw capital out of SunAmerica to address its corporate obligations for the CDS the AIG holding company wrote, but there are numerous regulatory restrictions on such draws.

The link clifp attached was early in the workout of Executive Life and also related to guaranteed investment contracts (GICs) issued by Executive Life. I don't think one can necessarily conclude that a payout annuitant got a 30% haircut. While I don't know for sure, I suspect that GICs are not pari passu with payout annuities and payout annuities would come before GICs (and GICs would be only a step ahead of Executive Life bonds).
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Old 06-04-2012, 08:28 AM   #57
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I am slowly pulling out portions of my Sun America annuity.
I assume this is not an SPIA (the product of the discussion at hand)?
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Old 06-04-2012, 08:39 AM   #58
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...if you have an SPIA, you now have a fixed income stream that cannot be hidden, reduced, etc. as an asset in any way, or given away to others.
Well, not in the traditional sense.

I don't know what you mean as "hidden", unless you are trying to dodge the tax man (or woman ).

Reduced? Sorry, don't understand.

As far as "given away"? Well, in our case (holding a life joint/survivor SPIA), payments continue to me/DW as long as one of us are alive to collect. If not? The remaining payments go to our estate, for the benefit of others. BTW, our expected joint life span was calculated at contract time, and we do know the minimum payments we are expected to receive, based upon our calculated lifespan. This makes it very easy to calculate the true return (e.g. IRR) with the possibility to "beat" that return if one/both of us live beyond the expected lifespan defined in the contract.

There is no standard form of an SPIA (and I/DW have one, as a disclaimer of what I'm about to commment on). There are a lot of "options", each being a rider (much like your car insurance) that for a price (in an SPIA's case, a slight reduction in monthly payment) that will cover those situations that you fear most, be it fear of inflation, fear of passing the day after you sign the SPIA contract, fear of ____ (fill in the blank).

An SPIA is an asset, that reduces in value over time. Again, as an income/distribution vehicle, that is to be expected. If folks would get away from the idea that it is an "investment", a lot of the concerns would be eliminated. It's just one way of reducing risk to your remaining retirement investment portfolio, while privately ensuring an income stream for the period of time you wish - be it 10 years or the rest of your (and if desired, your spouse) lifetimes, with the option (again, for a price) to leave a bequest to your estate if either/both pass earlier than expected.

It's not rocket science, folks...
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Old 06-04-2012, 08:47 AM   #59
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I read the first article: Pros and cons ........ It seems that that is specific to variable annuities and I believe that this thread is mostly referring to SPIAs.
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I assume this is not an SPIA (the product of the discussion at hand)?
A worthwhile distinction that is often overlooked, could cause confusion among some members. Many of us use the general term "annuity" when we actually mean a SPIA or the like (I've been guilty of same). It's probably rare here when a member means variable annuity without actually specifying just that.
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Old 06-04-2012, 09:48 AM   #60
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And to add to what Midpack said, when we refer to SPIA's in many cases we are really referring to payout annuities.

One version of payout annuity is a SPIA where the policyholder pays a single premium of x in exchange for y of future benefit payments.

The other common version is where an existing deferred annuity (of which there are many kinds) has an annuitization option that is executed by the policyholder and the effect is an exchange of the deferred annuity for the future benefit payments.

At the end of the day the result is a promise by the insurer to may certain payments to the annuitant, either for life or a period certain or a combination thereof.
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