Attitudes Toward Annuities Affected by How They Are Presented

[73ss454]

Rockon, I was one of those people who were being taken by my broker for 30 years. It wasn't until about 5 years ago when I found this forum and started reading the recommended books did I wake up.

Can't worry about what's in the past just look forward and you'll be OK.

 

[RockOn]

Can't worry about what's in the past just look forward and you'll be OK.

I actually am ok. I made quite a bit of tax free money in the VA annutities, I used to trade funds based on trends and it was a commission free way to do it. Many VA's offer tons of fund choices. I might not have done as well in a taxable account. They frown on any type of trading these days. At this point I'm just looking to see if the products have changed and if there are any options/guarantees out there that make sense for me.

 

[73ss454]

Good for you Rockon, I've just had enough of ins. companies in my life so I'll pass. Also if I wanted an annuity I'd just ask Brewer to make one for me without the commissions. (heh)

Hey, maybe when I sell my whole life policy, well that's another story.

 

[RockOn]

Good for you Rockon, I've just had enough of ins. companies in my life so I'll pass. Also if I wanted an annuity I'd just ask Brewer to make one for me without the commissions. (heh)

Hey, maybe when I sell my whole life policy, well that's another story.

I looked at Brewers thread pretty carefully. It was well done and I appreciated the effort he put into it. Not to nitpick but I think the insurance companies can offer a better overall (after fees) deal than what he presented. I think it has to do with the insurance companies ability to take a much longer term view and possibly their ability to hedge without using expensive options. I might be wrong so don't quote me...haven't gotten to the bottom of that. At least, those of us already owning annuities and locked into some of the fees might find it to be a better deal.

 

[brewer12345]

I looked at Brewers thread pretty carefully. It was well done and I appreciated the effort he put into it. Not to nitpick but I think the insurance companies can offer a better overall (after fees) deal than what he presented. I think it has to do with the insurance companies ability to take a much longer term view and possibly their ability to hedge without using expensive options. I might be wrong so don't quote me...haven't gotten to the bottom of that. At least, those of us already owning annuities and locked into some of the fees might find it to be a better deal.

What I wrote up was ow to replicate an equity indexed annuitym which is an extremely fee-laden species of fixed annuity. If you wanted to run the replication the way an insurer would (basically tack some options on top of a medium duration corporate bond fund), you could easily beat the snot out of the product they push, have greater liquidity and more transparency. It wasn't meant to be a replication fora VA hung with secondary guarantees. I could probably come up with a reasonable replication for the asset part, but it would be way more complicated than a retail investor would want to bother with.

 

[saluki9]

It wasn't meant to be a replication fora VA hung with secondary guarantees. I could probably come up with a reasonable replication for the asset part, but it would be way more complicated than a retail investor would want to bother with.

If you figure it out let me know. I've tried to come up with a reasonable replication (at a reasonable cost) and have not had much luck.

 

[saluki9]

I think most folks that put their money in hedge have more $ than sense and if they lose a few bucks so be it.

If that makes you feel better you can keep believing it. Just don't assume that it has anything to do with the truth. Most of the money going into hedge funds and private equity comes from very well staffed pensions funds, endowments, and other institutional investors.

 

[brewer12345]

If you figure it out let me know. I've tried to come up with a reasonable replication (at a reasonable cost) and have not had much luck.

Problem is that the contracts are extremely complicated, so modelling isn't that easy even to go replicate it.

 

[brewer12345]

If that makes you feel better you can keep believing it. Just don't assume that it has anything to do with the truth. Most of the money going into hedge funds and private equity comes from very well staffed pensions funds, endowments, and other institutional investors.

From what I have seen, the bulk of institutions are as dumb as retail investors, getting in at the top and panicking and selling at the bottom.

 

[RockOn]

What I wrote up was ow to replicate an equity indexed annuitym which is an extremely fee-laden species of fixed annuity. If you wanted to run the replication the way an insurer would (basically tack some options on top of a medium duration corporate bond fund), you could easily beat the snot out of the product they push, have greater liquidity and more transparency. It wasn't meant to be a replication fora VA hung with secondary guarantees. I could probably come up with a reasonable replication for the asset part, but it would be way more complicated than a retail investor would want to bother with.

Thanks, I understand. I appreciate your thread on that option. I know it was not meant to show what I am looking at which is really secondary guarantees. Since I already own them and already have some of the fees locked in, it's really a different animal than what you were trying to do which was showing that there were ways to get guarantees without buying into annuities.
I said it was a nitpick.

 

[73ss454]

I know that Pension funds, and others invest in hedge funds. What I meant is that not many individuals invest in hedge funds on their own. Maybe via a broker who puts them in or they just have a ton of money and can take the risk.

I would think that average folks living off their assets aren't putting money into hedge funds IMHO.

 

[saluki9]

I just find this so intriguing. I don't know how old you are so it's hard to tell you what you can get, however, IF you could get a 7% guarantee, would you even care what your expenses were?

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.

 

[saluki9]

Problem is that the contracts are extremely complicated, so modelling isn't that easy even to go replicate it.

I tried to build a model for us to use internally to explain to some other investment professionals how they would hedge these risks. My head nearly exploded before I gave up.

 

[RockOn]

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.

Can you briefly describe the type of restrictions on benefits that you are talking about? (Non-Cola'd? things like that?)

 

[saluki9]

Can you briefly describe the type of restrictions on benefits that you are talking about? (Non-Cola'd? things like that?)

1. The 7%, 8, 9% guarantee is limited in (depending on the company) to 2-3 times the net premium deposits. This alone limits their usefullness to people in their late 50's to early 60's.

2. Often times the living benefits have significant age limitations which also limit their usefullness.

 

[RockOn]

1. The 7%, 8, 9% guarantee is limited in (depending on the company) to 2-3 times the net premium deposits. This alone limits their usefullness to people in their late 50's to early 60's.

2. Often times the living benefits have significant age limitations which also limit their usefullness.

1) So you are saying the guarantee has a cap that could be hit if started too soon. Correct?
2) Age limitations, I haven't come across that, I'm not sure what you mean, guaranteed growth has to stop at a specific age?

 

[saluki9]

1) So you are saying the guarantee has a cap that could be hit if started too soon. Correct?
2) Age limitations, I haven't come across that, I'm not sure what you mean, guaranteed growth has to stop at a specific age?

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.

 

[RockOn]

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.

Thanks for the clarification.

 

[2B]

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.

 

[mathjak107]

seems to me you need to put alot of dough in the index fund to get much of an effect. i like the idea of using call options. the method brewer posted gives you a 55% participation rate in the gains of the s&p but with a cap of 10%. or about a 30% participation rate with no cap on the gains. depends how you set it up. plus a 1% guaranteed return on your cd and a little dough left over too. all with but a fraction of the money in the index fund calls

 

[brewer12345]

I tried to build a model for us to use internally to explain to some other investment professionals how they would hedge these risks. My head nearly exploded before I gave up.

Heh, now you know why there were insurer meltdowns the last time the markets cratered. Its also why the remaining players get pressured to both hedge these exposures AND hold a lot of capital against them.

 

[Art G]

What I wrote up was ow to replicate an equity indexed annuitym which is an extremely fee-laden species of fixed annuity. If you wanted to run the replication the way an insurer would (basically tack some options on top of a medium duration corporate bond fund), you could easily beat the snot out of the product they push, have greater liquidity and more transparency. It wasn't meant to be a replication fora VA hung with secondary guarantees. I could probably come up with a reasonable replication for the asset part, but it would be way more complicated than a retail investor would want to bother with.

Now, if you could come up with a way to replicate a V.A., I'd be incredibly interested! I think the problem you'd have is that an insurance company can spread it's risk amongst thousands of individuals, some living longer than others, and this is what has made insurance products feasible. My concern is how these companies are going to afford to pay living benefits if people start living too long. I think actuaries are getting squeezed to make numbers work, but then again, perhaps they just plan to raise the fees in the future as well.

 

[Art G]

That's a fair comment. What about the high fee poor performing Mutual Funds, they are being sold to a lot of unsuspecting people are they not?

Again, I'm not defending anuitities. But I have some VA's for about 18 years, I have done ok.

What about the crooked CEO's that are hedging their companies assets or issuing unauthorized stock? I'd say there's great risk in any investment. It depends on how much you trust the system. In my opinion, large hedge funds are doing more to screw up your investments than anything any insurance product ever could.

 

[Art G]

I know that Pension funds, and others invest in hedge funds. What I meant is that not many individuals invest in hedge funds on their own. Maybe via a broker who puts them in or they just have a ton of money and can take the risk.

I would think that average folks living off their assets aren't putting money into hedge funds IMHO.

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.

 

[brewer12345]

My concern is how these companies are going to afford to pay living benefits if people start living too long.

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.