Attitudes Toward Annuities Affected by How They Are Presented

[Art G]

The problem is this.

In order to get the 7% guarantee you have to put what for most people is a large portion of their assets into one credit. Yes, your assets are in a separate account should the company go BK, but you would lose the guaranteed benefit.

Recently our firm has come close to putting some seven figure sums into some of these VAs. (I even came close to putting some of my own money into one) But, I've read the 300 page prospectus on these things and there has always been a couple of huge issues that have stopped us (besides the fees) to me, the issue I can't get over is that should we get a market environment where you really need to guarantee, it will be the same environment that will make it too expensive for the insurer to keep hedging their exposure. The more I study them, the more I see that the restrictions they place on the benefits are the only things that keep them from being really appealing, but they have no choice otherwise it would be too good to be true which with insurance isn't as good thing. Just ask Brewer, VA companies have a history of making promises they later decide they can't keep.

Very valid concerns. That is why I'd strongly suggest anyone with a large sum of money split their contracts between more than one company, make sure those companies are large and highly rated, and find out what percentage of their business is in annuities vs. other forms of safer insurance.
I haven't seen insurance companies reneging on payouts, but I have seen them discontinue features once they figured out they bit off more than they could chew. I think some of those soon to be eliminated features are currently in existence. JMO

 

[Art G]

1. Yes, lets say you deposit $100K. They may promise you a 7% growth (not in your account balance but in your benefit base) however that 7% is only good as long as that base doesn't exceed $250K which would be 2.5* your deposits.

2. In most cases that guarantee ends at a specific age like 75 or 80. In addition, just as you would find Firecalc telling you that your chance of running out of money goes down the longer you wait the insurers know the same thing. The lifetime income benefit of 5,6% etc is only available if you take it after age 59 or 60.

That's not correct. The guaranteed growth rate stops at a certain age. Not the guaranteed income. So if your account grows 300%, that's what your income for life is figured from, however, if the market tanks and they guarantee you a 7% annual growth, then that $100k would stop at say $250k and your income for life would be figured from that number at the very least. It is the greater of value. If the market is tanking, tell me what's wrong with a 7% guaranteed growth rate?
Some of the new products are allowing you to start taking income at any age. In fact, I looked at one where you name the elder person as the owner, the daughter or son as the beneficiary, and the grandchild as the annuitant. In this manner, you've created lifetime income for a baby potentially.
BTW, still looking into this because it sounds way to good to be true.

You do need to keep in mind if the original contract was for someone to start taking income before 50 it may be penalized for early withdrawals.

 

[Art G]

Someone asked me about "hedge funds." There are hedge funds for the "masses" although to be in one you are supposed to be a "qualified" investor. I think that means you have $500K in liquid assets and/or a $200K/year salary. I'm sure my numbers are off but you get the idea. I've also seen that the typical hedge fund doesn't care but they do make you sign a document saying you meet the requirements (wink, wink). You then get hit with fees and risks that make the typical annuity contract turn green with envy.

Just like the uber-weathy don't buy retail annuities available to us mortals, they also have access to different forms of wealth management vehicles that are also called hedge funds. They are less fee oriented and can generate stable returns because they truly "hedge" their exposures to reduce risk. The retail hedge funds are mostly playing long shots on derivatives and are going for the big score. I agree with the comment that said/implied that the typical retail hedge fund has "below market returns."

At my non-uber-wealthy financial position I won't be interested in either hedge funds or annuities.

You can create a "can't lose" principle, simulated variable annuity by buying zero coupon bonds that mature at your selected payout date. The balance of the cash would go into an index mutual fund. Right now interest rates are low so the bond portion would be pretty high but you would have the US government's guarantee you'd get your principle back but not indexed to inflation. Any non-zero balance in the stock fund would be "gain."

Of course, a DIY VA wouldn't have a salesman telling you how smart you are to protect your assets. It also wouldn't have the commission.

Your zero coupon idea for muni bonds is a great one and one I do use. However, you're limiting your upside to around 4.5% tax free and many of those AAA insured bonds are now the ones being reconsidered because the insurance companies are being downgraded.
It is a nice strategy though if you start early enough. Of course if you die early, there's no death benefit and if your heirs want to sell the bonds, they will be doing so at market value.

 

[rs0460a]

At my non-uber-wealthy financial position...

My condolences ...

- Ron

 

[Art G]

If they write a significant amount of life insurance, they are arguably macro hedged, since a ramp in longevity would make the money on the life side and offset the payouts on the annuity side.

Personally, I think that these guarantees must be extremely hard to properly hedge and that the writers of these things are taking significant risk.

In theory you're right, but it's not like we haven't seen companies just spin off subsidiary companies and dump their bad debts into them and let them flounder. Consider what GM has done with GMAC. Is GM responsible if GMAC declares bankruptcy?
AIG is a huge company, but their annuities fall under SunAmerica.

 

[73ss454]

They don't have to be directly investing in them to be getting hurt by them. Consider the mega-huge hedge funds that are shorting down the price of safe dividend paying stock.

True, but I don't have to leave my money in the market and if I take it out I don't have to pay anyone.

If I signed for an annuity and choose to get out I have to pay.

It's the cost of doing business I guess.

 

[Art G]

True, but I don't have to leave my money in the market and if I take it out I don't have to pay anyone.

If I signed for an annuity and choose to get out I have to pay.

It's the cost of doing business I guess.

Again, not true. You could always move your money to a money market fund within the annuity. Granted it will probably pay a tad less than your typical money market, but probably more than your local bank savings account and definitely more than the zero you get on checking.
You can also go to money market, then dollar cost average back into the market. And all without being hit with any taxes from past gains, something you can't do with mutual funds.
BTW, for a tad higher in annual cost, you can have a VA that keeps your money totally liquid if you should decide to get out.

 

[brewer12345]

Again, not true. You could always move your money to a money market fund within the annuity. Granted it will probably pay a tad less than your typical money market, but probably more than your local bank savings account and definitely more than the zero you get on checking.
You can also go to money market, then dollar cost average back into the market. And all without being hit with any taxes from past gains, something you can't do with mutual funds.
BTW, for a tad higher in annual cost, you can have a VA that keeps your money totally liquid if you should decide to get out.

ENOUGH WITH THE SHILLING!

 

[73ss454]

Again, not true. You could always move your money to a money market fund within the annuity. Granted it will probably pay a tad less than your typical money market, but probably more than your local bank savings account and definitely more than the zero you get on checking.
You can also go to money market, then dollar cost average back into the market. And all without being hit with any taxes from past gains, something you can't do with mutual funds.
BTW, for a tad higher in annual cost, you can have a VA that keeps your money totally liquid if you should decide to get out.

And if I would like to take the money and put it in my pocket??

 

[brewer12345]

And if I would like to take the money and put it in my pocket??

They refer you to t he "customer retention" department, run by Ben Dover.

 

[73ss454]

And I thought is was Mike Hunt who ran that department.

 

[Art G]

And if I would like to take the money and put it in my pocket??

Take the money out and put it in your pocket. Like I said, they have fully liquid VA's. Do you do this with mutual funds though?

 

[Art G]

ENOUGH WITH THE SHILLING!

I'm not shilling. I'm trying to clarify. It seems silly to have misconceptions floating around. Get the facts, then decide if you hate them. But at least get the facts.

 

[73ss454]

Take the money out and put it in your pocket. Like I said, they have fully liquid VA's. Do you do this with mutual funds though?

So I'd just pay a tad more for this option. OK I'll take it if you can keep the fees under 4%.

I like to have some idea what I'm investing in and with my limited brain power annuities don't do it for me. I might as well read the Dead Sea Scrolls.

 

[FinanceDude]

Of course, a DIY VA wouldn't have a salesman telling you how smart you are to protect your assets. It also wouldn't have the commission.

VG and Fido already have them............

 

[RockOn]

Personally, I think that these guarantees must be extremely hard to properly hedge and that the writers of these things are taking significant risk.

If they are taking significant risk, wouldn't it make sense that I can benefit by being on the other side of that position?

For me this was an excellent thread, I learned a few things. May I ask, does anyone know of a source online to learn about the various living benefit riders other than reading the prospectus or calling an agent?

 

[brewer12345]

If they are taking significant risk, wouldn't it make sense that I can benefit by being on the other side of that position?

Unless they succeed in blowing themselves up and defaulting.

 

[Art G]

I would think the risk is actuarial risk. You could open up a "hit service" and save insurance companies millions!
I think I should write a Sue Grafton book "A is for Annuities". The main character will be a hit man for insurance companies that have risked too much on living benefits.

 

[RockOn]

Unless they succeed in blowing themselves up and defaulting.

That's true

 

[FinanceDude]

Unless they succeed in blowing themselves up and defaulting.

Brewer, do you see ING, Prudential, John Hancock, Pacific Life, or Hartford blowing up?

 

[Texas Proud]

Brewer, do you see ING, Prudential, John Hancock, Pacific Life, or Hartford blowing up?

I bet that I could ask "Do you think Bear Stern will blow up" last year and you would have said "no"...

But then again... JPM bought it all and guaranteed everything so in a sense as far as clients.... it did not blow up...

 

[brewer12345]

Brewer, do you see ING, Prudential, John Hancock, Pacific Life, or Hartford blowing up?

ING as a whole? Nope, the Dutch bank and life companies are too strong, and many of the far flung subs elsewhere are solid (Canadian P&C, US Bank, etc.). I am "less sanguine" about the US life companies, but since they have put their name on them, I expect they would bail them out in times of trouble as they have in the past.

Prudential: Probably not. Its just so damn big, and they still have big life, etc. operations. But I am still waiting for the fallout from buying one of the least disciplined players in the VA industry (Skandia).

Hancock: Before they buyout, I could have seen it. As part of Manulife, I think it is highly unlikely.

Pac Life: I think highly of them, but despite the high ratings they are definately entrpreneurial. Sometimes that is good (made a couple billion off PIMCO), sometimes it isn't. It is worth remembering the shambles they were in in the early 90s. But ultimately I think t hey are OK.

Hartford: Probably OK. Perfect storm would probably be the VA thing hitting them while the P&C ops got hit with either a big cat loss or a persistently soft market.

 

[FinanceDude]

ING as a whole? Nope, the Dutch bank and life companies are too strong, and many of the far flung subs elsewhere are solid (Canadian P&C, US Bank, etc.). I am "less sanguine" about the US life companies, but since they have put their name on them, I expect they would bail them out in times of trouble as they have in the past.

VAs are only 5% of their total income from operations.......

Prudential: Probably not. Its just so damn big, and they still have big life, etc. operations. But I am still waiting for the fallout from buying one of the least disciplined players in the VA industry (Skandia).

I think Pru is ok, but VA is a higher part of their total income.........I have heard 20% or so, now that they have American Skandia......

Hancock: Before they buyout, I could have seen it. As part of Manulife, I think it is highly unlikely.

I agree........

Pac Life: I think highly of them, but despite the high ratings they are definately entrpreneurial. Sometimes that is good (made a couple billion off PIMCO), sometimes it isn't. It is worth remembering the shambles they were in in the early 90s. But ultimately I think t hey are OK.

Pacific Life has the least amount of "promises" in their VAs........

Hartford: Probably OK. Perfect storm would probably be the VA thing hitting them while the P&C ops got hit with either a big cat loss or a persistently soft market.

Moshe told me that 40% (yikes) of Hartford's income is from the annuity side............

 

[brewer12345]

FD, income isn't the real determinant of risk. Its how much exposure they have via guarantees, and how aggressive thoese guarantees are.

 

[FinanceDude]

FD, income isn't the real determinant of risk. Its how much exposure they have via guarantees, and how aggressive thoese guarantees are.

I agree.....but if 40% of your income is from annuities, and 85% of all VAs are sold with the "guaranteed income riders", that might be a problem.........in the future...........