Annuity question and How do Amerprise agents sleep at night

[Gumby]

My understanding of the capital structure of insurance companies is generally the same as Brewer's, although I am not certain as to whether the regulated insurer issues the annuity or another subsidiary of the holding company.

Corporate structure has been a hot topic of discussion in the context of the monoline bond insurers. The creditors and equity holders of the holding company want the (profitable) municipal bond insurance sub and the proposed (unprofitable) CDO insurance sub to be sister companies just below the holding company, so the holding company will continue to have access to the dividend from the muni insurance business. The CDO insurance policy holders call foul, because they want access to the muni bond insurance dividend before it gets up to the holding company. Accordingly, they argue that the muni insurance company should be a subsidiary of the CDO insurance company. It's all about who is closest to the valuable assets

In any event, I really have no dog in this fight. I'm sure that for the right people, in the right circumstances, for the right reasons, an annuity might be appropriate. However, I have determined that I am not among that group.

Rather, my point was more generally directed to those who invest in preferred stock of any company. In my opinion, the yield on a preferred stock issue rarely compensates for the fact that you will likely recover squat in a bankruptcy.

 

[brewer12345]

My understanding of the capital structure of insurance companies is generally the same as Brewer's, although I am not certain as to whether the regulated insurer issues the annuity or another subsidiary of the holding company.

Regulated insurer always issues the annuity. Otherwise the insurance regulators come shut you down.

 

[2B]

NPV is a better tool, certainly more useful than IRR.

You need to have a couple of other factors to produce a reasonably accurate figure for either one. Death data, bankruptcy rate, and adherence of the annuitants personal rate of inflation over 20-40 years to the CPI (in the case of a CPI adjusted annuity) are all, unfortunately, unknowable and cant even be guessed at.

Guessing at future rates of return of various investment asset classes based on 30-100+ years of past performance or guessing at 3 things...two of which have no reasonable historic data or basis for a good guess...?

Tough call...

I'm pretty much assuming a SPIA which would only need the mortality tables and the bankruptcy rate which I must admit is small. There is a real risk even with the state insurance but annuities still aren't T-Bills. The, hopefully, very long duration of the payout makes credit risk a factor and highlights the need for diversification.

The CPI adjustments I've seen or heard about are always capped and usually are not the "inflation rate." The sales people have great explanations for this since "retirees don't see the full impact of inflation the way the government calculates it."

My biggest hangup with annuities is that your money is gone. Number 2 is that the payments you receive is marginal return on your money with no hope of doing better. The third concern is that over the next 40 years or more (we can dream) is that your annuity company turns out to be the finacial equivalent of Enron. Then you are back to Number 1.

 

[2B]

Rather, my point was more generally directed to those who invest in preferred stock of any company. In my opinion, the yield on a preferred stock issue rarely compensates for the fact that you will likely recover squat in a bankruptcy.

My limited experience is that bond holders also generally receive squat. Just before the collapse upper management manages to issue super-debentures that are senior to everything else. Supposedly, this is to make one last effort to save the company but it generally goes to management's severence package. Any residual assets then go to the recently issued super-bonds giving them a nice profit while everyone else goes home.

 

[Gumby]

My limited experience is that bond holders also generally receive squat. Just before the collapse upper management manages to issue super-debentures that are senior to everything else. Supposedly, this is to make one last effort to save the company but it generally goes to management's severence package. Any residual assets then go to the recently issued super-bonds giving them a nice profit while everyone else goes home.

It all depends on the covenants in the existing bonds. If they have anti-layering provisions, "equal and rateable" clauses, cross-stream or upstream guarantees, and/or strict limits on additional indebtedness, the scenario you have described may be avoided. This is why distressed debt investors spend hours upon hours reading bond indentures.

 

[brewer12345]

This is why distressed debt investors spend hours upon hours reading bond indentures.

I can confirm this is the case.

Generally speaking, bondholders have the least protection against these kinds of shenanigans when the bonds were issued as investment grade. If the company was always a junk-rated issuer, they usually have a lot more restrictions on what they can do.

 

[clifp]

Moving somewhat back to the original topic.
Who typical insures Amerprise's annuities?
It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer?


Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else.

In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

 

[brewer12345]

Moving somewhat back to the original topic.
Who typical insures Amerprise's annuities?
It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer?


Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else.

In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

Ameriprise has its own in-house insurance companies that write this business. IIRC, they are rated Aa3 for insurance obligations, which is a pretty high rating. The main protection is in fact the value of teh separate account, but much of what is sold as a VA has guarantees from the insurer. The guarantees would produce lots of credit exposure if they came into the money (like when the equity market plunges).

The decision on when to surrender and how much of a beating its worth taking depends on the expense ratio of the annuity. So if the expense ratio of this $150k annuity is, say, 3.25% and your alternative is a Vanguard fund that costs .25%, you would make up your $7k surrender fee in about a year and a half. More modelling would be indicated before making a decision, but you get the general idea.

 

[2B]

Moving somewhat back to the original topic.
Who typical insures Amerprise's annuities?
It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer?


Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else.

In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

I don't know anything about Amerprise's annuity products. I know a little about how VA's are constructed and they vary widely.

If you have an "index" annuity, the company is probably funding it out of a general pools of their investments and the payment is calculated. It's not really a separate account (it's more like our SS "lockbox").

Some accounts let you pick real mutual funds. Here the VA is more like a brokerage account that extracts fees Blackbeard the pirate would have envied. Frequently, these are also tied up with various insurance products to "protect principle" and other features.

I'm sure FinanceDude will pop in with a better recap.

As for cashing in, the fee is really just prepaid commission the insurance company would lose if someone takes their money out too soon. They want to be "made whole" for this commission and probably turn a little extra profit. I suggest you look at how much the annuity is draining in management fees both for the annuity itself and any of the funds inside the annuity. You can then see how long it would take to "break even" with an early withdrawl.

The other consideration is the quality of the funds inside the annuity. If the funds are seriously underperforming their index that provides an extra incentive to get out quickly.

I don't know about transfers but I suspect they would want their pound of flesh. My gut instinct is always to get out ASAP.

EDIT: Brewer beat me to the punch

 

[Texas Proud]

It all depends on the covenants in the existing bonds. If they have anti-layering provisions, "equal and rateable" clauses, cross-stream or upstream guarantees, and/or strict limits on additional indebtedness, the scenario you have described may be avoided. This is why distressed debt investors spend hours upon hours reading bond indentures.

And you should see what a bond trustee has to do on one of these...

I had one where I owned EVERYTHING of the company (as the trustee)... every car, truck, building, gas well, etc. etc... they could not do anything without my signature... it made it tough for me...

It also had language on how much they could sell, and how much other debt they could take on... and they kept trying to get around the limitations... took a lot of my time saying 'no'... and a lot of lawyer fees..

I was happy when the refinanced and we refused to be the trustee... but I had to sign like 3,000 to 4,000 car titles over to the new trustee

 

[RockOn]

RockOn, if you want an annuity, buy one. Don't waste your time trying to convince the rest of us its a good idea.

Very good advice.

I'm not really trying to convince anyone it's a good idea. Obviously most of you already know annuitites are not part of your retirement plans. I just wanted some help on how safe they are and a confirmation that the returns I calculated were correct. Both were answered.

From what I see annuities can be set up to work exactly like many defined benefit plans. Should one always take the lump sum option because 1) one could always die and all the payouts would be gone; and, 2) there might be single company risk? I wonder if all the defined benefit pension people on the site would give up thier pensions for a lump sum and a 60/40 4% SWR plan. I really doubt it. That's what doesn't make sense about all of this to me. The only drawback to the annuity as compared to a defined benfit plan is the risk of the insurance company not paying off, a private company plan may not pay off either and this has happened many times already, the government pension plans are safer.

But I'll let it go at that. I might buy an annuity, but not for a few years. I have to get my kids through college first and then see where I am. From what I read 60 seems to be a good time to take the serious look, the payouts are higher (clearly more than 4%) and there is less time for the insurance company to get in trouble.

 

[FinanceDude]

Moving somewhat back to the original topic.
Who typical insures Amerprise's annuities?

The company behind them is Riversource........

It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer?

The account value of the sub-accounts is the real value, because that's what you would get if you wanted the lump sum, NOT the "income base" or "living benefit" base.......

Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else.

He will be out the $7K if he moves it. I guess it might depend on him if he feels like he wants to "take the hit" and move it. If he has made money in this contract, and he's more than $7,000 ahead, maybe. What I can tell you is that if I told him to take a hit on it, even if I didn't put him in another investment, I would be in deep doo-doo with my Compliance department.........sounds crazy, but it's true..............

I guess I would be cautious on that.........

In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

If it was me, even if the annuity wasn't all that great, I would wait. You have to make up 4.5% just to get back, that may take time. However, if he agrees that he's ok with it, then maybe it would be ok. And YES, you have to pay surrenders on 1035 exchanges..........

One thing I DEFINITELY would do is to have him call the annuity company and ask how much of a surrender-FREE amount he has. Most annuities have an amount that gets bigger every year that you can take out without a penalty. Maybe in his case, he could take out $60K penalty-free. You could help him set up an account at VG and transfer that amount IRA to IRA. That should work pretty easily. Then every year, one day after the contract anniversary date, move the next piece. That way, he doesn't take a surrender, and you are helping him move over time to VG.............