Fixed index annuities

[jzajzz]

You obviously are a bit clueless on this. Legally, only licensed life, accident and health insurance companies can issue annuities.... annuities are a subset of life insurance since they need to have elements of mortality risk to qualify as annuities for tax purposes... yes, even your plain vanilla fixed rate SPDA that looks like a CD has mortality risk because of annuitization options in the contract that rarely get utilized... that is what makes the inside build-up tax deferred.

TIAA is a huge, very well known insurance company that sells a wide variety of insurance and annuity products.

Vanguard is an investment company and is an agent when it sells annuities.... the fixed annuities that Vanguard sells through a relationship with Hueler Investment Services are issued by insurance companies like AIG, Integrity, Symetra, Lincoln and Mutual of Omaha... the variable annuity that Vanguard sells is issued by Transamerica and administed by Vanguard (much like Vanguard administers 401ks).

You're right.. I don't know much about Vanguard and TIAA annuities and how they are issued. My point is that an investment focus company have to be looked at closely on what their objectives are. Also in your example, Vanguard using an agency to sell their annuities proves my point that the marketing has to be paid to somebody .. in that case Vanguard and Hueler are sharing it. Your job as someone seeking a benefit is compared the Vanguard annuity vs anything else in the open market .... which one offers you the benefit you're looking for.

 

[capjak]

no one should buy any annuity product without delaying social security first or no matter what you buy you shot yourself in the foot .

for what it costs to delay and lay out the money from yourself while waiting you cannot buy any commercially available annuity that gives you so much for so little

Agree that delaying SS is usually the best alternative before an income stream. Sometimes the annuity can be used as income so that SS can be delayed (i.e. guarantee expenses (floor income)) till 70 years of age.

 

[Ready]

Ready, I don't think he is lying to me I just think he's looking out for he's best interest and not mine. Your statement about the down market does not match what I've read about the Fixed Index annuities but I may be wrong. Also where are there cd making 2-3% now.

Let me clarify, as I think what I said was confusing. The way most fixed index annuities work is they track an index, like S&P 500, on a monthly basis. So if in January, the index goes up 100bps, you get 25% of the upside, or 25 bps.

But if in February, the market goes down 100bps, you absorb 100bps of the losses, so you are now at -75.

Then in March, it goes up 100bps again. You get 25 bps, so now you are at -50.

In this scenario, the market is up 100 bps over three months, but you are at -50 because of the way they calculate the benefits. This goes on until the end of the year, and if the final end of year number is positive, you get the benefit. But all it takes is a few bad months within the year to wipe out the gains, and you're left with nothing beyond whatever guaranteed minimum they may be offering.

Now if the end of year number is negative, you don't lose money. You still get the minimum, which may be something like 1%. My point was that the year could be solidly positive for equity investors, but because there were a few bad months, they wiped out any gains the annuity may receive.

It's a crazy way to calculate benefits, but most people don't take the time to fully understand it, and it does allow the salesperson to state that you will receive "some of the market up side with none of the downside". The statement is true, but if you take the time to understand the formulas, you will realize there is very little chance of seeing any significant upside, even if the market is doing really well.

 

[capjak]

Let me clarify, as I think what I said was confusing. The way most fixed index annuities work is they track an index, like S&P 500, on a monthly basis. So if in January, the index goes up 100bps, you get 25% of the upside, or 25 bps.
.

This is true if you choose month to month crediting, however there is also year to year point to point and sometimes every 2 years.

Unfortunately FIA have been sold as "Market" annuities when they are just there to compete with lazy cash (Money Market, CDs etc...).

If someone is looking for market returns and is ok with the Risk than they should invest in stocks not buy an insurance product like a FIA.

 

[aln1117]

Ready and others thanks for the explanations. Ready your last post really give me a good insight and eye opening.

 

[mathjak107]

Agree that delaying SS is usually the best alternative before an income stream. Sometimes the annuity can be used as income so that SS can be delayed (i.e. guarantee expenses (floor income)) till 70 years of age.

those short term annuities are really not true annuity products with mortality credits and market links .they are more like cd's from an insurer instead of a bank . some like myga's have some different perks .

 

[jzajzz]

Let me clarify, as I think what I said was confusing. The way most fixed index annuities work is they track an index, like S&P 500, on a monthly basis. So if in January, the index goes up 100bps, you get 25% of the upside, or 25 bps.

But if in February, the market goes down 100bps, you absorb 100bps of the losses, so you are now at -75.

Then in March, it goes up 100bps again. You get 25 bps, so now you are at -50.

In this scenario, the market is up 100 bps over three months, but you are at -50 because of the way they calculate the benefits. This goes on until the end of the year, and if the final end of year number is positive, you get the benefit. But all it takes is a few bad months within the year to wipe out the gains, and you're left with nothing beyond whatever guaranteed minimum they may be offering.

Now if the end of year number is negative, you don't lose money. You still get the minimum, which may be something like 1%. My point was that the year could be solidly positive for equity investors, but because there were a few bad months, they wiped out any gains the annuity may receive.

It's a crazy way to calculate benefits, but most people don't take the time to fully understand it, and it does allow the salesperson to state that you will receive "some of the market up side with none of the downside". The statement is true, but if you take the time to understand the formulas, you will realize there is very little chance of seeing any significant upside, even if the market is doing really well.

It depends on the option you chose. The most common is the annual poitn to point. But again the reason people buy annuities is not because of the credit but the lifetime income riders which work like a a deferred income annuity. The index side of it in this scenario gives byou a little bit ...so the talk of market upside is really not that important unless you plan on surrendering..which probably means you should not have bought it in the 1st place

 

[brewer12345]

It depends on the option you chose. The most common is the annual poitn to point. But again the reason people buy annuities is not because of the credit but the lifetime income riders which work like a a deferred income annuity. The index side of it in this scenario gives byou a little bit ...so the talk of market upside is really not that important unless you plan on surrendering..which probably means you should not have bought it in the 1st place

Let's not beat around the bush. Nobody buys this product for its sterling intrinsic economics. 90+% of the buyers do not understand the contract they get when the product is issued. The reason people buy these things is that they are sold on the "sizzle" rather than the "steak" by insurance agents like yourself who are after fat commissions, would not know what fiduciary meant if one jumped up and bit them in the hind quarters, and don't much care what happens to the client in the long run so long as the commission is paid.

 

[jzajzz]

Let's not beat around the bush. Nobody buys this product for its sterling intrinsic economics. 90+% of the buyers do not understand the contract they get when the product is issued. The reason people buy these things is that they are sold on the "sizzle" rather than the "steak" by insurance agents like yourself who are after fat commissions, would not know what fiduciary meant if one jumped up and bit them in the hind quarters, and don't much care what happens to the client in the long run so long as the commission is paid.

I agree with you that many people don't understand the nuances. I think the insurance industry lacks education for the agents and the consumers...

..but explain to me how an unsophisticated, uneducated insurance agent is getting some of the very few people who were actually smart enough to save to the point they can retire to commit 10's and 100's of thousand dollars to the products they offer. are these pre-retirees and new retirees that dumb. Not to mention , everyone and their mothers are telling these people and they're still buying the product.

Before '08 VA's were the hot product they had high income rider. Everyone was happy , Agents and advisors were getting paid, FINRA were gettting their membership dues but then the crash happened. INsurance companies realize their guaranteed riders were way too high so much so some were offering to buy back the annuities. Many people Started buying FIA's instead because the riders had much better guarantees. FINRA wasn't happy because agents don't need a securities license to sell FIA because they are a fixed product. This is where it all started. The fiduciary rule has nothing to do with anyone really looking out for the consumer. You should own your finances.. learn the product, learn the benefits , learn the downsides. Every financial product is a tool .. There's a case to be made for each tool. There is always a tradeoff... whether it's stocks, bonds, annuities, insurance, Real estate etc.. Lifetime annuities are here for guaranteed income stream. that's it. Yes there are MYGa's and FIA (w/ no rider) that can be used as a CD alternative but most FIA's gets sold with income rider.

FYI .. I don't sell annuities.

 

[aln1117]

So just to be clear on a FIA . What is and how is income rider set?

 

[brewer12345]

So just to be clear on a FIA . What is and how is income rider set?

Trust me, don't bother going down this rabbit hole. There are a bunch of different flavors, but they all boil down to the same thing: you put in a lump sum, the insurance company gives your money back to you over time, the product runs out of money, and you end up with nothing.

 

[brewer12345]

I agree with you that many people don't understand the nuances. I think the insurance industry lacks education for the agents and the consumers...

..but explain to me how an unsophisticated, uneducated insurance agent is getting some of the very few people who were actually smart enough to save to the point they can retire to commit 10's and 100's of thousand dollars to the products they offer. are these pre-retirees and new retirees that dumb. Not to mention , everyone and their mothers are telling these people and they're still buying the product.

Before '08 VA's were the hot product they had high income rider. Everyone was happy , Agents and advisors were getting paid, FINRA were gettting their membership dues but then the crash happened. INsurance companies realize their guaranteed riders were way too high so much so some were offering to buy back the annuities. Many people Started buying FIA's instead because the riders had much better guarantees. FINRA wasn't happy because agents don't need a securities license to sell FIA because they are a fixed product. This is where it all started. The fiduciary rule has nothing to do with anyone really looking out for the consumer. You should own your finances.. learn the product, learn the benefits , learn the downsides. Every financial product is a tool .. There's a case to be made for each tool. There is always a tradeoff... whether it's stocks, bonds, annuities, insurance, Real estate etc.. Lifetime annuities are here for guaranteed income stream. that's it. Yes there are MYGa's and FIA (w/ no rider) that can be used as a CD alternative but most FIA's gets sold with income rider.

FYI .. I don't sell annuities.

Actually, it is the [-]muppets[/-] customers who are unsophisticated, often getting rooked with their meager life savings. The agents understand pretty well what they are selling (especially the commission schedule.

Since you brought it up, what exactly do you sell?

 

[jzajzz]

Actually, it is the [-]muppets[/-] customers who are unsophisticated, often getting rooked with their meager life savings. The agents understand pretty well what they are selling (especially the commission schedule.

Since you brought it up, what exactly do you sell?

You brought up what I sell .. but I sell life insurance. more specifically .. impaired risk life insurance.


I don't care how dumb you are .. you just don't give away 10's and 100k like that... especially when the "dumb ones' are probably the one who didn't save for retirement. As a saver, you're the exception , not the rule

 

[GravitySucks]

OK, but try not to change it more than once, at least not in the direction of big swings. Just map out what happens if you go from 80/20 to 60/40 after a downswing, then back to 80/20 after an upswing, and back down to 60/40 after a downswing. Classic "buy high, sell low" recipe.

Absolutely.
I rode it out till it recovered the loss + a bit more, than moved to 70/30.
Next drop and I was less worried but still not sleeping well. Rode it out and moved to 60/40. Next drop I slept like a baby.
These were pretty small percentage drops, still wondering how happy I'll be at 60/40 when we get a 30% correction.

 

[brewer12345]

You brought up what I sell .. but I sell life insurance. more specifically .. impaired risk life insurance.


I don't care how dumb you are .. you just don't give away 10's and 100k like that... especially when the "dumb ones' are probably the one who didn't save for retirement. As a saver, you're the exception , not the rule

Been a while since I saw the study, but IIRC the average annuity buyer had something like 75 to 150k in savings. Draw what conclusions you like.

 

[jzajzz]

So just to be clear on a FIA . What is and how is income rider set?

you give a lump sum to the insurance company today.. many will have a rider that guarantees a certain amount depending on when you take it out .. so if you start withdrawing year 5 .. for the rest of your life time. The income you get will be less if you start withdrawing year 7. The insurance company guarantees you that they will pay it for the rest of your lifetime. The way they come up with that number varies from product to product but this is what I call the "noise".. at the end of the day .. What is the benefit for YOU? coompare it to alternatives ..and see if it makes sense for YOU.

Therefore It is important to make sure you pick a company that has strong financials. These companies have third party ratings but you should dive deeper in the financials and see if the company makes money every year and if they have a healthy "surplus"

 

[jzajzz]

Been a while since I saw the study, but IIRC the average annuity buyer had something like 75 to 150k in savings. Draw what conclusions you like.

This does not tell much ...
1- What type of annuities are we talking.. the statement is not specific to income annuities (SPIA, DIA, or FIA w/ income riders) .. these are different than MYGA's or FIA's with no riders. I know a lot of medicare agents for example sell MYGA's to their clients who would most likely be in that 75-150k.. how much? I don't know...
2. what is the average annuity case from those same folks.

 

[brewer12345]

This does not tell much ...
1- What type of annuities are we talking.. the statement is not specific to income annuities (SPIA, DIA, or FIA w/ income riders) .. these are different than MYGA's or FIA's with no riders. I know a lot of medicare agents for example sell MYGA's to their clients who would most likely be in that 75-150k.. how much? I don't know...
2. what is the average annuity case from those same folks.

Average annuity was the bulk of their savings, IIRC. This was for all forms of general account annuity, stuff other than VAs. We are not talking about sophisticated buyers. That is why they are dumb enough to buy this crap.

 

[samclem]

..but explain to me how an unsophisticated, uneducated insurance agent is getting some of the very few people who were actually smart enough to save to the point they can retire to commit 10's and 100's of thousand dollars to the products they offer.

Neither high intelligence nor sophistication are traits that accomplished savers need to have. Rather, they need some discipline, willingness to delay gratification, and the willingness to envision and prepare financially for their needs decades in the future. These same traits can, unfortunately, make these savers juicy marks for annuity salesmen. As you probably know, a primary tactic is sell the "prudence" and safety of these products ("an income you can't outlive" blah, blah, blah. Inflation? Fuggeddaboudit--that won't happen again).

 

[jzajzz]

Average annuity was the bulk of their savings, IIRC. This was for all forms of general account annuity, stuff other than VAs. We are not talking about sophisticated buyers. That is why they are dumb enough to buy this crap.

avg annuity was the bulk of their savings.. sounds like a MYGA customer to be not a customer buying FIA w/ income rider. which is the bulk of FIAs out there'

it's not a savings play.. a MYGA is .. it's more of an income play.

 

[jzajzz]

Neither high intelligence nor sophistication are traits that accomplished savers need to have. Rather, they need some discipline, willingness to delay gratification, and the willingness to envision and prepare financially for their needs decades in the future. These same traits can, unfortunately, make these savers juicy marks for annuity salesmen. As you probably know, a primary tactic is sell the "prudence" and safety of these products ("an income you can't outlive" blah, blah, blah. Inflation? Fuggeddaboudit--that won't happen again).

This brings be back to what I say about financial tools.. People love to have arguments about what is good and what is bad... It's not an either or scenario. What annuities does best is provide you with guaranteed income.. stocks gave you the higher potential return.. Bank savings account gives you liquidity and security.

You can use all these tools to better serve you if you know what they do best and where they're not the best fit.

Here's an example .. Susie is 57 .. She has done well in her retirement account The market has been great to her since '08 and she knows she's on track to retire at 67.. but she doesn't want a massive correction to alter her plans...
Susie knows come retirment time, she will have a set of expenses that she will need to plan for.. Susie would like to secure a guaranteed income stream for her expenses knowing that no matter what happens with the market, at least her expenses are covered.
She has made sure that her emergency fund is well funded. Then She decides to take out an income annuity to cover those expenses. She realizes that to maximize her potential return she can put her funds in the market knowing that if there is a correction ... she's covered. She can also be more aggressive since she has a guaranteed income stream coming in. If the market goes up, 28% one year , she doesn't feel hamstrung that she has to take 4% ... She can be a little more daring. The return she gets from the market would also be a hedge against inflation.

(she could also go with an annuity with an inflation rider but the initial guarantee would be smaller. There is always a tradeoff)

3 different financial tools working together in harmony.

 

[brewer12345]

This brings be back to what I say about financial tools.. People love to have arguments about what is good and what is bad... It's not an either or scenario. What annuities does best is provide you with guaranteed income.. stocks gave you the higher potential return.. Bank savings account gives you liquidity and security.

You can use all these tools to better serve you if you know what they do best and where they're not the best fit.

Here's an example .. Susie is 57 .. She has done well in her retirement account The market has been great to her since '08 and she knows she's on track to retire at 67.. but she doesn't want a massive correction to alter her plans...
Susie knows come retirment time, she will have a set of expenses that she will need to plan for.. Susie would like to secure a guaranteed income stream for her expenses knowing that no matter what happens with the market, at least her expenses are covered.
She has made sure that her emergency fund is well funded. Then She decides to take out an income annuity to cover those expenses. She realizes that to maximize her potential return she can put her funds in the market knowing that if there is a correction ... she's covered. She can also be more aggressive since she has a guaranteed income stream coming in. If the market goes up, 28% one year , she doesn't feel hamstrung that she has to take 4% ... She can be a little more daring. The return she gets from the market would also be a hedge against inflation.

(she could also go with an annuity with an inflation rider but the initial guarantee would be smaller. There is always a tradeoff)

3 different financial tools working together in harmony.

As long as it enriches an insurance agent it is all good, eh?

 

[samclem]

You can use all these tools to better serve you if you know what they do best and where they're not the best fit.

Yep, the customer would >sure< have to know in advance. If Susie is counting on the insurance salesman to discourage her from annuitizing every cent she's got, then she may be in for a shock.

 

[UpAnchor]

What annuities does best is provide you with guaranteed income...

no one should buy any annuity product without delaying social security first or no matter what you buy you shot yourself in the foot .



for what it costs to delay and lay out the money from yourself while waiting you cannot buy any commercially available annuity that gives you so much for so little

I think this is a big enough deal that I'd be tempted to use it for part of my "smell test" as recommended earlier. "Um, what if I were to just delay my social security for the larger inflation-adjusted monthly income? Might I be as well, or even better off?" The FA's answer would likely be revealing.

 

[jzajzz]

As long as it enriches an insurance agent it is all good, eh?

Susie has choices. She can go to a Captive agent who offers proprietary insurance products like NY life agents.. she can go to an independent insurance agent who will have a bunch of companies at his disposal but not all. He won't be able to sell NY life for example. Or as someone pointed out earlier .. she can go to the Vanguard insurance agency. At the end of the day, they're all evil because they're all get paid commissions.