Fixed index annuities

[jzajzz]

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.

Again ..I don't sell annuities so I may be wrong on this but I believe the insurance agent has to fill out a form that shows how many assets Susie has, The insurance company could reject if the annuity is too large of a portion of her asset. Again I may be wrong on this

The insurance agent has the incentive to sell more annuities. But like every business in America .. there is the disincentive of being too aggressive. When I go to Best Buy to buy a Kitchen Aid appliance .. and the salesperson tries to sell me a Thermador package, I'll take everything he says about Kitchen Aid with a grain of salt. In my opinion ..it's good to know what the incentive is. Unlike an advisor who tells you they don't have a conflict of interest... yet while you're trying to figure out if your withdrawal should be 3 or 4% . they take an extra 1%. This is what they call a fiduciary.. lol.. and of course they will tell you that it's better to keep the money in the market than pay down your house.. but they don't have a conflict of interest . They def don't want you to buy annuities.. because that lowers their "fee" ...which works just like a commission. But they are "fiduciaries"

 

[capjak]

Again ..I don't sell annuities so I may be wrong on this but I believe the insurance agent has to fill out a form that shows how many assets Susie has, The insurance company could reject if the annuity is too large of a portion of her asset. Again I may be wrong on this

I have looked at buying different annuities (MYGA/SPIA/FIA) and the ones I have looked at have a form that you sign that states this is less than 50% of your liquid assets and that you have emergency funds.

 

[brewer12345]

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.

Gee, dissemble much? I forgot, insurance agent.

Your suggestion that buying an annuity from a shop like Vanguard is the same as buying an FIA or ridered up VA from a sleazy insurance agent is laughably misleading. Let's call the average VA expense ratio through the sleaze factory at 3.5% annually. What is it through Vanguard? Varies, but the balanced fund option weighs in at .52% all-in expenses. The 3% difference is pretty huge, almost a full SWR on one's assets in fact.

 

[aja8888]

Again ..I don't sell annuities so I may be wrong on this but I believe the insurance agent has to fill out a form that shows how many assets Susie has,

If you don't sell annuities, why are you spending so much time here touting their virtues?? Shouldn't you be pushing costly whole life insurance instead?

 

[brewer12345]

If you don't sell annuities, why are you spending so much time here touting their virtues?? Shouldn't you be pushing costly whole life insurance instead?

To people with short life expectancies, no less.

 

[Ready]

My general observation about commissions is that they are inversely proportional to the value of the product or service being sold. So the lousier the product, the bigger the commission required to close the sale.

You don't see Apple paying commissions on every iPhone they sell, because the value proposition is very clear. There is no need for a salesperson there.

You don't see Bank of America paying commissions for their 2% CDs. Those products are what they are, and people understand how they work and what they are getting themselves into.

You don't see Tesla paying big commissions to car sales people to sell their Model 3. And they have 500,000 back orders from people who want their car.

You don't see commissions being paid on index funds, because they sell themselves to the right audience.

It's not that all annuities are bad products. The ones you can buy from Vanguard are simple products that serve their purpose. Their main drawback currently is that they just don't pay much because the interest rates environment is so low.

I think you will find it difficult to identify a "great" product that is well understood and highly regarded, and still pays a large commission.

So you have to ask yourself, why do insurance companies pay 6-10% commissions on fixed index annuities?

 

[OldShooter]

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.

The First Law of Holes: When you're in a hole, stop digging.

@jzajzz, you really undermine your credibility when you post this sort of thing. It's the same as saying: "All grocery stores offer equal value because they all try to make profits." Complete nonsense.

But, ... if you want to keep digging, I'll ask: These "impaired risk life insurance" policies that you sell, are they strictly term insurance? If not, if you call them investments, are you licensed (Series 7, 65, or 66) to sell investments? Are you legally a fiduciary?

 

[mickeyd]

Originally Posted by aln1117 So just to be clear on a FIA . What is and how is income rider set?

FIA is a way for the agent to receive more commission (get his mitts on more of your $).

 

[ERD50]

....

Here's an example .. Susie is 57 .. ...
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)

"No matter what happens in the market", but not "whatever happens with inflation". But that sort of gets an asterisk, while the "guaranteed income" gets the headline.

If she puts half her portfolio into the annuity, the other half might not be enough to protect against inflation. And if the half goes to an inflation adjusted annuity, she might not get enough to cover her expenses.

How about some actual example numbers? BTW, I'm not anti-annuity, I will keep considering them for a portion of my portfolio to diversify my risk, but rates now seem too low to be attractive at all.

-ERD50

 

[ncbill]

"No matter what happens in the market", but not "whatever happens with inflation". But that sort of gets an asterisk, while the "guaranteed income" gets the headline.

If she puts half her portfolio into the annuity, the other half might not be enough to protect against inflation.

No kidding, see the old, pre-WWII ads from insurance companies for annuities showing the elderly retiring happily...on $200/month.

 

[jzajzz]

"No matter what happens in the market", but not "whatever happens with inflation". But that sort of gets an asterisk, while the "guaranteed income" gets the headline.

If she puts half her portfolio into the annuity, the other half might not be enough to protect against inflation. And if the half goes to an inflation adjusted annuity, she might not get enough to cover her expenses.

How about some actual example numbers? BTW, I'm not anti-annuity, I will keep considering them for a portion of my portfolio to diversify my risk, but rates now seem too low to be attractive at all.

-ERD50

The annuity's strong suit is the stream of income that's guaranteed so that's the headline of the annuity .. I said "The return she gets from the market would also be a hedge against inflation" .. that's the headline for her market return.

You don't have to put half of your cash into an annuity.. That all depends on the individual. Keep in mind that you already have an annuity that's better known as Social security. The annuity you purchase is in addition to that (depending on when you take it out)

The amount you purchase is dictated by your expenses.. your predictable expenses. Unexpected healthcare expenses are an example of something that you cannot really plan for with an annuity. That's why you have the emergency fund. And you might want to withdraw from the stock returns to replenish the fund.


As far as numbers.. I don't want to go to in depth but let's say you did half and half. How much returns do you expect from your stocks? Most people like to say 6-7% nowadays .. Rates are down with bonds annuities etc.. and expected rate in the market is down. Inflation is also down. We haven't seen the 4% you've seen in the booming economy. If half of your money is 7%.. inflation has to be somewhere around 3.5% for it to make sense.

Lastly, ERD I'm not here to convince anyone to buy an annuity. I would rather people take away what I said earlier about financial tools being what they are.. and your job is to learn the strengths and weaknesses to all of them and know which one to use depending on what your needs are.

Anytime someone says to me ..this is the greatest of all financial tools . they clearly have an agenda, I run away.. it's the same for anyone who tells me this tool is the worst.. they also have an agenda.

 

[jzajzz]

The First Law of Holes: When you're in a hole, stop digging.

@jzajzz, you really undermine your credibility when you post this sort of thing. It's the same as saying: "All grocery stores offer equal value because they all try to make profits." Complete nonsense.

But, ... if you want to keep digging, I'll ask: These "impaired risk life insurance" policies that you sell, are they strictly term insurance? If not, if you call them investments, are you licensed (Series 7, 65, or 66) to sell investments? Are you legally a fiduciary?

What are you talking about? What does impaired risk life insurance have to do with investments?? I'm not licensed to sell investments nor do I want to be but it's an easy license to obtain.

 

[jzajzz]

Gee, dissemble much? I forgot, insurance agent.

Your suggestion that buying an annuity from a shop like Vanguard is the same as buying an FIA or ridered up VA from a sleazy insurance agent is laughably misleading. Let's call the average VA expense ratio through the sleaze factory at 3.5% annually. What is it through Vanguard? Varies, but the balanced fund option weighs in at .52% all-in expenses. The 3% difference is pretty huge, almost a full SWR on one's assets in fact.

You're talking about VA's ... Vanguard does investment management for cheap.. they're really good at it. So if they decide to manage investments for a variable annuity .. I'm sure they can do a better job than an insurance company. Also I might be wrong but if a VA has 3.5% .. that's more than just management , it might include the rider fees as well.

and at the end of the day .. I'm for "Comparing the numbers" if your benefit is better with Vanguard ..go with it.. It's good for competition, it will force the other companies to come with a better product.

As far as FIA's ..there are not management fees so this does not apply.

 

[OldShooter]

What are you talking about? What does impaired risk life insurance have to do with investments?? I'm not licensed to sell investments nor do I want to be but it's an easy license to obtain.

Sorry if I was not clear. If what you sell is anything but term insurance, then AFIK it has an investment component. If so, then a fiduciary MUST evaluate that investment option against other investment options available to the client. QED, if you are not licensed to sell investments then you are not a fiduciary. Makes sense?

 

[brewer12345]

You're talking about VA's ... Vanguard does investment management for cheap.. they're really good at it. So if they decide to manage investments for a variable annuity .. I'm sure they can do a better job than an insurance company. Also I might be wrong but if a VA has 3.5% .. that's more than just management , it might include the rider fees as well.

and at the end of the day .. I'm for "Comparing the numbers" if your benefit is better with Vanguard ..go with it.. It's good for competition, it will force the other companies to come with a better product.

As far as FIA's ..there are not management fees so this does not apply.

Laughable nonsense. Why didn't I offer a fee comparison for fias? Simple, they are not transparent at all. There is no way to compare them because they are intentionally opaque. This benefits the insurers.and the retail fertilizer salesmen who hawk them.

Bonus for those of you playing at home: these policies are not backed by equities and even junk bonds struggle to yield 6 percent. Where do the insurers get the vaunted 7 percent that our salesperson touts? Simple, they don't. They give you your principal back a bit at a time and pretend it is a return.

 

[CardsFan]

You don't see Apple paying commissions on every iPhone they sell, because the value proposition is very clear. There is no need for a salesperson there.

I will stay out of the details in the FIA discussion, since I don't know enough to be helpful, BUT, are you serious that the iPhone value proposition is very clear? Just like the FIA, it is INCREDIBLE MARKETING!!!

 

[Ready]

I will stay out of the details in the FIA discussion, since I don't know enough to be helpful, BUT, are you serious that the iPhone value proposition is very clear? Just like the FIA, it is INCREDIBLE MARKETING!!!

Well, my point was that great products sell themselves. Everything else requires a commissioned salesperson.

 

[jzajzz]

Laughable nonsense. Why didn't I offer a fee comparison for fias? Simple, they are not transparent at all. There is no way to compare them because they are intentionally opaque. This benefits the insurers.and the retail fertilizer salesmen who hawk them.

Bonus for those of you playing at home: these policies are not backed by equities and even junk bonds struggle to yield 6 percent. Where do the insurers get the vaunted 7 percent that our salesperson touts? Simple, they don't. They give you your principal back a bit at a time and pretend it is a return.

Dead People. That's an insurance company makes money. An annuity is the opposite of a life insurance company. They guarantee money for as long as you live.. It's a numbers game. The more people die early, the more they make money.
If you hear of a 7% guarantee, it's the income portion. Meaning if you surrender and you die.. you don't get that 7% increase it's only if you annuitize.

There is no fee in an FIA because it's a fixed product kind of like a MYGA. If an insurance company makes 4% .. they guarantee you 3%. They make money on the margin , not on a fee.

 

[jzajzz]

Sorry if I was not clear. If what you sell is anything but term insurance, then AFIK it has an investment component. If so, then a fiduciary MUST evaluate that investment option against other investment options available to the client. QED, if you are not licensed to sell investments then you are not a fiduciary. Makes sense?

That's not how it works. You got a few things mixed up.

I can explain but I'm not sure if you're serious or if you're just busting balls.

 

[brewer12345]

There is no fee in an FIA because it's a fixed product kind of like a MYGA. If an insurance company makes 4% .. they guarantee you 3%. They make money on the margin , not on a fee.

Of course there are fees, commissions, expenses, premium taxes, CEO jet surcharge, etc. You just cannot see it because these policies are opaque to the buyer.

As for the dead people thing, I have never seen these products be age rated like a spia or a life insurance policy. That either means massive risk of insurer insolvency, or the margins are so fat that the client is being held down and screwed in elephantine size.

 

[jzajzz]

Of course there are fees, commissions, expenses, premium taxes, CEO jet surcharge, etc. You just cannot see it because these policies are opaque to the buyer.

As for the dead people thing, I have never seen these products be age rated like a spia or a life insurance policy. That either means massive risk of insurer insolvency, or the margins are so fat that the client is being held down and screwed in elephantine size.

There is a cost to the insurer.. but not a fee .. and there is a surrender charge (or fee if you will) if you surrender after the 30 day grace period. ..This is where the agent commission can hurt you.. Like I said before, the agent commission is simply marketing costs for the insurer. If they don't have the agents, they would have to pay to market their products. The insurance company is here to make money, if there was a cheaper way to do it, they would cut out the middle men.

but before the surrender period. The longer the surrender charge, typically the better the income benefit.. but there are products that have long surrender period and not that great of a benefit from what I've been told.

They are age rated.. .the longer you wait the annuitization .. the higher your guaranteed income. a 7 year FIA income rider for a 55 year old will be lower than the same product for a 65 year old..

THis brings me back to my 1st post in this thread. THere is confusion between FIA and and FIA w/ income rider. one is a CD alternative .. the other is more like a Deferred income annuity. My point in my 1st post was to say the product is popular because of the riders.. cause most FIA 's get sold with the income riders. While people sell MYGA's as CD alternative over FIAs

 

[capjak]

There is a cost to the insurer.. but not a fee .. and there is a surrender charge (or fee if you will) if you surrender after the 30 day grace period. ..This is where the agent commission can hurt you.. Like I said before, the agent commission is simply marketing costs for the insurer. If they don't have the agents, they would have to pay to market their products. The insurance company is here to make money, if there was a cheaper way to do it, they would cut out the middle men.

but before the surrender period. The longer the surrender charge, typically the better the income benefit.. but there are products that have long surrender period and not that great of a benefit from what I've been told.

They are age rated.. .the longer you wait the annuitization .. the higher your guaranteed income. a 7 year FIA income rider for a 55 year old will be lower than the same product for a 65 year old..

THis brings me back to my 1st post in this thread. THere is confusion between FIA and and FIA w/ income rider. one is a CD alternative .. the other is more like a Deferred income annuity. My point in my 1st post was to say the product is popular because of the riders.. cause most FIA 's get sold with the income riders. While people sell MYGA's as CD alternative over FIAs

Correct.

Unfortunately some of the FIA gun slingers try to sale them as Stock Market products. They are really alternatives or adjuncts to the CD/MM/Bond in your Asset Allocation (the low risk part). Instead of a CD plus stocks you would have FIA plus Stocks or FIA/CD plus stocks etc..

Several salespeople however are upfront and do sale them as CD alternatives (not the ones and the free chicken dinners)

The income riders are sometimes not great. If you are going to go this route, I think it would be just as good and maybe better to do the FIA for 7 years than go out and purchase the most competitive SPIA with the $$ from the 7 year FIA for the income.

These are insurance. You buy them for the insurance (not outliving your money in the case of income riders & SPIAs DIAs, Principle Protection for a FIA as a replacement/adjunct to a CD.

If you want market returns and are ok with the risk you should be in the market.

 

[jzajzz]

Correct.

Unfortunately some of the FIA gun slingers try to sale them as Stock Market products. They are really alternatives or adjuncts to the CD/MM/Bond in your Asset Allocation (the low risk part). Instead of a CD plus stocks you would have FIA plus Stocks or FIA/CD plus stocks etc..

Several salespeople however are upfront and do sale them as CD alternatives (not the ones and the free chicken dinners)

The income riders are sometimes not great. If you are going to go this route, I think it would be just as good and maybe better to do the FIA for 7 years than go out and purchase the most competitive SPIA with the $$ from the 7 year FIA for the income.

These are insurance. You buy them for the insurance (not outliving your money in the case of income riders & SPIAs DIAs, Principle Protection for a FIA as a replacement/adjunct to a CD.

If you want market returns and are ok with the risk you should be in the market.

I don't get the market alternative angle either. It's not what the product does best.. IMO it would be so much easier selling it as an income product.

As far as the FIA + SPIA strategy.. that depends on how the indexes do while you hold the lum[ sum .. but I still don't think it's a better option than the income riders but this is actually a good thing to run the numbers on. The deferred equivalent of an SPIA is a DIA deferred income annuity ..if I'm not mistaking, those have higher income/guarantees (life only option) than FIA income riders but the liquidity options are lacking. but if you know for sure you have all your ducks in a row, that might be the way to go.

 

[Independent]

I don't get the market alternative angle either. It's not what the product does best.. IMO it would be so much easier selling it as an income product.

As far as the FIA + SPIA strategy.. that depends on how the indexes do while you hold the lum[ sum .. but I still don't think it's a better option than the income riders but this is actually a good thing to run the numbers on. The deferred equivalent of an SPIA is a DIA deferred income annuity ..if I'm not mistaking, those have higher income/guarantees (life only option) than FIA income riders but the liquidity options are lacking. but if you know for sure you have all your ducks in a row, that might be the way to go.

I'm very skeptical of FIA with an income option because I believe the numbers will always favor SPIA plus some simple investment (like Vanguard indexed annuities).

I believe that because the simplicity of SPIAs and indexed mutual funds forces companies to squeeze expense/profit out of their products.
The complexity of FIA + income rider allows them to hide more expense/profit.

Maybe you've actually run numbers on a specific FIA that's available today, and found it beats SPIAs. If so, you could post the numbers here and baffle the critics.

 

[jzajzz]

I'm very skeptical of FIA with an income option because I believe the numbers will always favor SPIA plus some simple investment (like Vanguard indexed annuities).

I believe that because the simplicity of SPIAs and indexed mutual funds forces companies to squeeze expense/profit out of their products.
The complexity of FIA + income rider allows them to hide more expense/profit.

Maybe you've actually run numbers on a specific FIA that's available today, and found it beats SPIAs. If so, you could post the numbers here and baffle the critics.

So you rather put the lump sum in an index annuity and then use an SPIA to annuitize it. That means the agent gets paid twice, I don't think that would fly with people here.

Anyway here are the numbers I came up with. I used a carrier that has an FIA as well as an SPIA ..

Male age 57 .. annutizing his FIA at age 67 - initial deposit of $1milllion. guaranteed income of $99000/ year for the rest of his life.

So then I ran an SPIA for $99000 and the lump sum would have to be $1.6 million.

If my math is correct (and it might be wrong) . at age 57, you would need an alternative investment that gets you 4.80% over 10 years. Seeing that current cap rates are between 4-5% for index annuities. The FIA w/ income rider would win especially since it's a guarantee.

Keep in mind that this of course it's clearly for someone focused on income.. his liquidity bucket is in a different asset. Annuities are not great for liquidity.

By the way if you want an inflation rider the income would be 85k at 67 and go up to $154k at age 87 ( life expectancy i'm asusming) and stay flat from there on.