Attitudes Toward Annuities Affected by How They Are Presented

[clifp]

Most likely the payout will be the same. The Ameriprise guy might use a lower quality company than AIG (which Vanguard uses for SPIAs) but assuming the same quality company the payout will be the same.

Also, don't think that Vanguard doesn't get a commission. They're getting the same 2.5-3% everybody else gets on SPIA's

Really? Just spending a few minutes looking around the web. I found pretty significant differences from three online quotes for a basic
100K SPIA for a 65 year old male living in Hawaii. $660-$725 (Vanguard)

Other than Vanguard (AIG) I don't know who the insurance company is.
I am not interested in in talking to a salesman, but I have a sneaking suspicious that if I really was 65 years old and I talked an Amerprise rep without doing any homework I wouldn't end up with $725/month.

 

[donheff]

See, these products are confusing.......... You're NOT getting a guaranteed rate of return of 7%. You are getting the RIGHT to withdraw against a 7% crediting rate if the market doesn't return 7% average in the time you hold it. In effect, you have two pieces in one.........

Yup, I am confused. Move over 2B - I don't trust anything that leaves me scratching my head. I though you said with a $100K investment you could walk away with $200K in 10 years. Do you mean that in 10 years you will be able to start pulling an annuity as if you were purchasing one then with a minimum of $200K?

 

[FinanceDude]

Yup, I am confused. Move over 2B - I don't trust anything that leaves me scratching my head. I though you said with a $100K investment you could walk away with $200K in 10 years. Do you mean that in 10 years you will be able to start pulling an annuity as if you were purchasing one then with a minimum of $200K?

Yes..........see, you understand..........

Complexity alone does not make something suck...........

 

[RockOn]

Thanks FDude, that explanation was excellent. Sorry I couldn't get in on the dialogue, I usually can only respond in the evening.

Someone suggested that I might be one of a few for which this product might be suitable due to high compensation. My income is as high as it has ever been but I am not highly compensated. I am no longer looking to buy VA's, I'm only looking for options for the VA's I have owned since about 1990. To date I've just been trying to keep the M&E fee low (currently 0.6%, I know I could get that down to 0.25% at Fido) my fund fees are about the same as anywhere else.

You are correct that these new plans are complicated. So far, I have a hard time seeing downside to the living benefit plans you described. I'm not shooting for the fences with my investments, the 7% floor looks interesting even though I see I cannot walk away with the money.

Am I wrong here, the catch seems to be that you become locked into staying with the plan forever, and they get the 2.5% year after year. To get the 2.5% fee for the rest of my life, they offer the juice, i.e. the 7% floor for 10 years and 5% income for life.

I know you already put enough time into this. Maybe you already covered this but if you wouldn't mind, what happens if my intial $100,000 is only $25,000 in 10 years? I would still get the $5000 (non-COLA'd) for life. Correct?

What would they base the 2.5% fee on? The $25k or the $100k?

 

[FinanceDude]

Thanks FDude, that explanation was excellent. Sorry I couldn't get in on the dialogue, I usually can only respond in the evening.

Someone suggested that I might be one of a few for which this product might be suitable due to high compensation. My income is as high as it has ever been but I am not highly compensated. I am no longer looking to buy VA's, I'm only looking for options for the VA's I have owned since about 1990. To date I've just been trying to keep the M&E fee low (currently 0.6%, I know I could get that down to 0.25% at Fido) my fund fees are about the same as anywhere else.

Your M&E would go up to get the guarantees, to about 1.25%.......

You are correct that these new plans are complicated. So far, I have a hard time seeing downside to the living benefit plans you described. I'm not shooting for the fences with my investments, the 7% floor looks interesting even though I see I cannot walk away with the money.

The riders have a yearly cost of .50-.70%, and that goes on as long as you own the rider. Yiu cannot walk away with the money, but you could get a rough doubling of your income in 10 years to draw from at that time........

Am I wrong here, the catch seems to be that you become locked into staying with the plan forever, and they get the 2.5% year after year. To get the 2.5% fee for the rest of my life, they offer the juice, i.e. the 7% floor for 10 years and 5% income for life.

Pretty much the idea.

I know you already put enough time into this. Maybe you already covered this but if you wouldn't mind, what happens if my intial $100,000 is only $25,000 in 10 years? I would still get the $5000 (non-COLA'd) for life. Correct?

yes, that is the idea.........

What would they base the 2.5% fee on? The $25k or the $100k?

it is based applied to the contract based on the value at anniversary date.

 

[RockOn]

Thanks, your information is priceless. I'm not sure I will run out and get one, but it is a interesting option. I wouldn't take the plunge without a lot more research but at least I understand the basics. I understand the fees are large.

For those of us already locked into a VA structure these may be good options. To run out and buy a VA to get the living benefits, that's another thing IMO.

 

[RockOn]

ArtG.....Thanks for your help also

 

[Art G]

Thanks, your information is priceless. I'm not sure I will run out and get one, but it is a interesting option. I wouldn't take the plunge without a lot more research but at least I understand the basics. I understand the fees are large.

For those of us already locked into a VA structure these may be good options. To run out and buy a VA to get the living benefits, that's another thing IMO.

In all likelihood, by upgrading to a new VA, your annual expenses would go up. However, consider that right now you're paying an annual expense on an unnecessary feature vs. paying another 1% or so for a living benefit that you will in all likelihood use, and you have to ask yourself if it's worth it.
On your home owners insurance, do you have a high deductible with a lower annual expense or do you have a low deductible and pay more for the insurance?

 

[RockOn]

In all likelihood, by upgrading to a new VA, your annual expenses would go up. However, consider that right now you're paying an annual expense on an unnecessary feature vs. paying another 1% or so for a living benefit that you will in all likelihood use, and you have to ask yourself if it's worth it.
On your home owners insurance, do you have a high deductible with a lower annual expense or do you have a low deductible and pay more for the insurance?

So I can now drop the M&E fee and only pay the Living Benefits rider?

I go with the high deductible.

 

[FinanceDude]

So I can now drop the M&E fee and only pay the Living Benefits rider?

Doesn't work that way..........

 

[RockOn]

I thought not

 

[FinanceDude]

I thought not

Think of it as three costs:

1)M&E cost (mortality and expense): mortality expense is the cost of "insuring: the contract. Expense cost goes to pay the agent and their company.

2)Subaccount Expense Ratio: Goes to pay the money managers of the subaccounts, etc.

3)Rider costs: Somewhat menu driven, as you can pick some and not others, change them during the contract period, etc. The living benefit riders are a seperate cost from the other costs.........

 

[RockOn]

I got it. I thought ArtG was saying otherwise when he said I was paying for an unneccessary feature. You wouldn't happen to have a link to a living benefit rider?

 

[FinanceDude]

I got it. I thought ArtG was saying otherwise when he said I was paying for an unneccessary feature. You wouldn't happen to have a link to a living benefit rider?

Not sure what you mean by that. Every company has a living benefit rider, and they all have their own nuances...........

 

[RockOn]

Not sure what you mean by that. Every company has a living benefit rider, and they all have their own nuances...........

I just thought if you had a link to any living benefit rider handy, I'd like to read it. I wouldn't care which product it was. If I were to buy one I'd find and read them all before I took the plunge. If not, that's ok I can find one. Thanks for your time on this.

(I just found one at Prudential, you don't need to look, thanks) (Holy Sh**, it's about impossible to understand all that, 277 pages of detail after detail, I'd likely have to take the salemans word on interpreting how it works, I guess that's part of the sale )

 

[Art G]

I got it. I thought ArtG was saying otherwise when he said I was paying for an unneccessary feature. You wouldn't happen to have a link to a living benefit rider?

Actually, some insurance companies will let you drop a rider if you like, some won't. But what I was referring to is that annuities with living benefit riders are in all likelihood more expensive than those without, however, since you already have the annuity, the difference to you would be the additional cost of the more useful rider.
For example, I've got a particular companies guarantee that after 10 years of holding, the worst case scenario is that I get the original amount invested minus withdrawals back. At the time of the market, I was happy to pay to insure against losses, but due to a nice performance, the annuity is up about 40% in value and I'm still paying to insure what now amounts to a 40% loss. Some companies will allow you to cancel that rider, this particular one won't, so my choice now is to continue to pay for a useless rider, or else move the money to a new product keep my gain, and add a living benefit which offers me some value. The added expense is probably about .55 more or so.
BTW, I pay more insurance for a lower deductible. What good is insurance that you can't use?

 

[FinanceDude]

(I just found one at Prudential, you don't need to look, thanks) (Holy Sh**, it's about impossible to understand all that, 277 pages of detail after detail, I'd likely have to take the salemans word on interpreting how it works, I guess that's part of the sale )

Pages 1-33 should help on this link:

http://www.annuities.prudential.com...s/ams_investor/ASCombProspectus.pdf?siteID=25

 

[RockOn]

BTW, I pay more insurance for a lower deductible. What good is insurance that you can't use?

I read your entire post, I now know what you meant about dropping riders.

On the above quote, I go for higher deductible because if you do use insurance they raise your rates. I'd rather never use it and get the lower rates. I have not used my policies for many years and my rates are a bargain compared to any new quotes I get.

 

[RockOn]

Pages 1-33 should help on this link:

http://www.annuities.prudential.com...s/ams_investor/ASCombProspectus.pdf?siteID=25

Believe it or not, that's the one is started to read. I didn't known the meat of the plan stopped at page 33, it looked to me by scanning it that it went all the way to page 277. What gets really confusing is that they talk about 3 or 4 different riders all at once. How much more confusing can you make it?

The following is an interesting clip: ​

The formula begins by determining the value on that Valuation Day that, if appreciated at the applicable discount rate,
would equal the guarantee amount at the end of the Base Guarantee Period or Step-Up Guarantee Period. We call the
greatest of these values the “current liability (L).”
L = MAX (Li), where Li = Gi / (1 + di)(Ni/365).
Next the formula calculates the following formula ratio:
r = (L – B) / V.
If the formula ratio exceeds an upper target value, then all or a portion of the Account Value will be transferred to the
bond fund Sub-account associated with the current liability. If at the time we make a transfer to the bond fund Subaccount
associated with the current liability there is Account Value allocated to a bond fund Sub-account not associated
with the current liability, we will transfer all assets from that bond fund Sub-account to the bond fund Sub-account
associated with the current liability.
The formula will transfer assets into the Transfer Account if r > Cu.
The transfer amount is calculated by the following formula:
T = {Min(V, [L - B - V*Ct] / (1 – Ct))}
If the formula ratio is less than a lower target value and there are assets in the Transfer Account, then the formula will
transfer assets out of the Transfer Account into the elected Sub-accounts.
The transfer amount is calculated by the following formula:
T = {Min(B, - [L – B- V*Ct] / (1 – Ct))}
If following a transfer to the elected Sub-accounts, there are assets remaining in a bond fund Sub-account not associated
with the current liability, we will transfer all assets from that bond fund Sub-account to the bond fund Sub-account
associated with the current liability.​

HUH​

 

[FinanceDude]

Believe it or not, that's the one is started to read. I didn't known the meat of the plan stopped at page 33, it looked to me by scanning it that it went all the way to page 277. What gets really confusing is that they talk about 3 or 4 different riders all at once. How more confusing can you make it?

The following is an interesting clip: ​

The formula begins by determining the value on that Valuation Day that, if appreciated at the applicable discount rate,
would equal the guarantee amount at the end of the Base Guarantee Period or Step-Up Guarantee Period. We call the
greatest of these values the “current liability (L).”
L = MAX (Li), where Li = Gi / (1 + di)(Ni/365).
Next the formula calculates the following formula ratio:
r = (L – B) / V.
If the formula ratio exceeds an upper target value, then all or a portion of the Account Value will be transferred to the
bond fund Sub-account associated with the current liability. If at the time we make a transfer to the bond fund Subaccount
associated with the current liability there is Account Value allocated to a bond fund Sub-account not associated
with the current liability, we will transfer all assets from that bond fund Sub-account to the bond fund Sub-account
associated with the current liability.
The formula will transfer assets into the Transfer Account if r > Cu.
The transfer amount is calculated by the following formula:
T = {Min(V, [L - B - V*Ct] / (1 – Ct))}
If the formula ratio is less than a lower target value and there are assets in the Transfer Account, then the formula will
transfer assets out of the Transfer Account into the elected Sub-accounts.
The transfer amount is calculated by the following formula:
T = {Min(B, - [L – B- V*Ct] / (1 – Ct))}
If following a transfer to the elected Sub-accounts, there are assets remaining in a bond fund Sub-account not associated
with the current liability, we will transfer all assets from that bond fund Sub-account to the bond fund Sub-account
associated with the current liability.​

HUH​

The "Reader's Digest" version of that complication means that Prudential has the right to move money from your asset allocation to a bond fund when the formula indicates it's a "good time" to do so.

At least that's what I understand it to be............

 

[RockOn]

The "Reader's Digest" version of that complication means that Prudential has the right to move money from your asset allocation to a bond fund when the formula indicates it's a "good time" to do so.

At least that's what I understand it to be............

That's interesting.

So if I start to make more than their 7% guarantee they can just move me to bonds to make sure that I don't? Can you see the distrust building? I really don't know why they'd do that, but interesting it is.

No need to answer, I am clearly in over my head. What do they do? Send a letter saying sorry Mr Jones, we've just moved you into bonds, you better sit down and read your contract.

 

[Art G]

That's interesting.

So if I start to make more than their 7% guarantee they can just move me to bonds to make sure that I don't? Can you see the distrust building? I really don't know why they'd do that, but interesting it is.

No need to answer, I am clearly in over my head. What do they do? Send a letter saying sorry Mr Jones, we've just moved you into bonds, you better sit down and read your contract.

Why would they want to prevent you from profiting? Their guarantees only come into effect if your account is losing money, so they'd much prefer your account do well and they got to keep the cost of insurance.
The problem is they move the money to bonds when the market is dropping, thus preventing you from any quick bounces back in the market. In effect, their goal is to keep you from losing too much money, not to keep you from gaining, but the end result is that they may be keeping you from both. JMO.

 

[RockOn]

Why would they want to prevent you from profiting? Their guarantees only come into effect if your account is losing money, so they'd much prefer your account do well and they got to keep the cost of insurance.
The problem is they move the money to bonds when the market is dropping, thus preventing you from any quick bounces back in the market. In effect, their goal is to keep you from losing too much money, not to keep you from gaining, but the end result is that they may be keeping you from both. JMO.

As I said I am over my head, it is pretty complicated. When you said "why would they want to keep me from profiting", here is why I thought that. If my account is at a loss and I am using thier guarantee instead, I am also locked into staying with them forever and they get to keep making the 2 1/2% plus fees on my account. Maybe that isn't correct?

 

[brewer12345]

As I said I am over my head, it is pretty complicated. When you said "why would they want to keep me from profiting", here is why I thought that. If my account is at a loss and I am using thier guarantee instead, I am also locked into staying with them forever and they get to keep making the 2 1/2% plus fees on my account. Maybe that isn't correct?

Naah they make more money the bigger your account gets. The scenarios where they really go into the ditch as far as what they lose are where your portfolio plunges really far. So they reserve the right to switch you to bonds if you start to get down too far. But supposedly they are hedging all of this so that its not a problem. I guess we will find out who has been naughty and who has been nice when the equity market really drops.

 

[RockOn]

Naah they make more money the bigger your account gets. The scenarios where they really go into the ditch as far as what they lose are where your portfolio plunges really far. So they reserve the right to switch you to bonds if you start to get down too far. But supposedly they are hedging all of this so that its not a problem. I guess we will find out who has been naughty and who has been nice when the equity market really drops.

I haven't looked at the living benfits plans hard enough to understand them yet. I did a rough IRR if my account did fairly poorly (maybe 4% a year nominal after fees) and I resorted to the guaranteed outcome. I came up with just under 5%. Does that sound about right? (That would be the worst case assuming the insurance company stays solvent as I understand it)