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Old 12-13-2018, 01:22 PM   #41
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I'll defer to others with more expertise, like @pb4uski who IIRC used to be in the business but I will comment on one important point. You ask:

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... - If the cash surrender value net of surrender charges is about what she put into this, do you think she'd be better off just cashing this out now? ...
This is an example of what is called the "sunk cost fallacy." Sunk costs are costs already incurred that are not recoverable. They should be ignored when making decisions on future actions because they do not and cannot affect the future. Whether the initial cost was $10K, $300K, or $1M, it doesn't matter. Your task is simply to look at the prospective numbers for each option that exists and to pick the best one. More here: https://en.wikipedia.org/wiki/Sunk_cost
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Old 12-13-2018, 01:27 PM   #42
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I've completed my analysis including her 2018 statement. Her IRR is 3.39% annually, better than a CD or money market, but significantly worse than the underlying investments. ...

I also did an analysis to figure out where she would be if she had just invested in an S&P 500 index fund or ETF. Even assuming average S&P 500 ETF fees of 0.44%, and a conservative 2% for dividend income, her stash would be worth $452K now. Her annuity's "guaranteed value" is $195K less, "accumulated value" is $128K less and even her "enhanced value" which includes the bonus is $48K less than it would be from just investing in S&P 500. ....

I can't see any reason why she should stay in this vehicle, even with a surrender charge her beneficiary would be way better off if this cash were invested in the market. I like the idea of asking her son for input and suggesting the two of them decide, and get professional advice if they so desire.

Anything else I'm missing? Thanks again to all who took time to respond!
Is the 3.39% IRR using the cash surrender value as the terminal value or the accumulated value (before surrender charge)? If the 3.39% is based on the CSV, then what is the IRR with the accumulated value as the terminal value?

Have you figured out what the floor is for this annuity? Usually it was 3% interest on 90% of the initial deposit (adjusted for withdrawals of course).

Given that your friend is risk averse and as I understand it would not be comfortable investing in stocks.... I'm not sure if comparing the performance of this contract to having invested in the S&P 500 is useful at all.
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Old 12-13-2018, 11:32 PM   #43
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Is the 3.39% IRR using the cash surrender value as the terminal value or the accumulated value (before surrender charge)? If the 3.39% is based on the CSV, then what is the IRR with the accumulated value as the terminal value?



Have you figured out what the floor is for this annuity? Usually it was 3% interest on 90% of the initial deposit (adjusted for withdrawals of course).



Given that your friend is risk averse and as I understand it would not be comfortable investing in stocks.... I'm not sure if comparing the performance of this contract to having invested in the S&P 500 is useful at all.


The IRR is based on the accumulated value. The floor is something I’m not quite sure of. Her statements show a guaranteed contract value but I’m not clear on how it’s calculated. That is something I can inquire about when we see her agent.

The reasons I’ve compared performance to the S&P 500 is that that is the investment she’s been choosing, along with NASDAQ, each year as her underlying investments, so I’m trying to show her what her account value would have been if she had simply invested in the S&P outside the annuity. Also, since she says this is long-term money for her son to inherit, she may feel more comfortable taking more risk with this once someone shows her the performance of this instrument vs the market and how much she is potentially leaving on the table.

I’m having a hard time understanding how this particular annuity is protecting her from risk when monthly double digit market declines count against her accumulated value, but the following monthly double digit increases only benefit her to a small extent because of the cap on credit for appreciation. I understand that the annuity company needs to make their profit, but the way I’m seeing it, if she had just invested in the S&P 500 outside of the annuity and still taken out the same withdrawals, she’d be $128K better off. Her accumulated value is only $2K more than when she started. Doesn’t really feel like an equitable arrangement. I’m certainly no expert in this area, but the more I’ve examined the detail of the numbers, the bigger ripoff it seems to be.

Maybe I am just not understanding and appropriately valuing the downside protection provided. I definitely need to ask about the specifics of that. Perhaps an illustration of how this would have performed in 2008-2010 would help me see it in a more positive light?
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Old 12-14-2018, 12:19 AM   #44
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I think the bombshell question is to ask why the agent put your friend in the product that has unlimited losses but caps out with 2% gains......then shut up

I would prep your friend that you are looking for a good answer when you ask this and she should stay quiet as well

There may be an uncomfortable pause
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Old 12-14-2018, 05:36 AM   #45
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.... Maybe I am just not understanding and appropriately valuing the downside protection provided. I definitely need to ask about the specifics of that. Perhaps an illustration of how this would have performed in 2008-2010 would help me see it in a more positive light?
Yes, understanding the downside protection is key.

Back in the 90s, these products typically had non-forfeiture values based on 90% of premium accrued at 3% per annum, adjusted for withdrawals. The 90% broadly reflects the premium received net of acquisition costs (arguably 10% of premium might be generous on the acquisition costs). The 3% may be lower these days, perhaps 2%. So $100 would have a floor of $120 after 10 years [($100*90%)*(1+3%)^10]... or a floor IRR of 1.92%.

The nature of the guarantee was that at worst you would get your money back and a little something.... and at best you would get credits commensurate with the performance of the underlying index subject to caps and participation percentages. The caps and participation percentages were how the carrier managed their profit... and 200 bps of margin was a typical profit target.

If she is comfortable assuming equity risk then she would probably be better off with a conservative equity fund... like a value fund.
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Old 12-16-2018, 06:14 PM   #46
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..... The reasons I’ve compared performance to the S&P 500 is that that is the investment she’s been choosing, along with NASDAQ, each year as her underlying investments, so I’m trying to show her what her account value would have been if she had simply invested in the S&P outside the annuity. Also, since she says this is long-term money for her son to inherit, she may feel more comfortable taking more risk with this once someone shows her the performance of this instrument vs the market and how much she is potentially leaving on the table.....
I think you are doing your friend a disservice in focusing on the market performance in the last 5 years. That performance is not normal and likely will not continue in the future. At the most, you could point out the average market performance, but to say she "lost" thousands of dollars really has little to do with the future and is setting her up for possible pain in a future down market. I would concentrate on the monthly full losses and limited monthly gains.
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Old 12-16-2018, 06:55 PM   #47
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Looking forward to your update after meeting with the annuity salesperson. I believe you know a lot more about this product than the seller and they will be unable to answer any of your questions without consulting home office.
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Old 12-17-2018, 11:04 AM   #48
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Looking forward to your update after meeting with the annuity salesperson. I believe you know a lot more about this product than the seller and they will be unable to answer any of your questions without consulting home office.


Could be true. I met with the annuity owner Friday and showed her the double digit differences in her return vs the underlying investments return. The S&P 500 and NASDAQ have made money each of the last five years, while her account has lost money three of the last five due to the capping of returns. She hadn’t understood the capping that her annuity has.

We agreed on a list of questions to cover during her appointment. One of the most important questions is to better understand the downside protection. If her account loses value even while the market/underlying investments perform well, I wonder what happens when the market crashes?

Our appointment is this week. Should be interesting.
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Old 12-17-2018, 11:36 AM   #49
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Just out of curiosity, who is the issuing insurer?
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Old 12-17-2018, 11:37 AM   #50
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I think the bombshell question is to ask why the agent put your friend in the product that has unlimited losses but caps out with 2% gains......then shut up

I would prep your friend that you are looking for a good answer when you ask this and she should stay quiet as well

There may be an uncomfortable pause
I really doubt that the annuity gives no consideration in exchange for the 2% gains cap. The consideration may not be a good value, but I doubt that the answer will be something simple like "by assigning you all the losses and limiting your gains to 2% we make more money." Scuba needs to research a little deeper to determine what the consideration is that her friend will receive in return for the 2% gains cap so it can be discussed at the meeting and is not a total surprise.

Of course, if in fact Scuba's friend was told there was some of downside protection and there is none of any sort, then we have a serious legal issue which will likely require professional help to resolve.
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Old 12-19-2018, 01:00 AM   #51
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Just out of curiosity, who is the issuing insurer?


Allianz
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Old 12-19-2018, 01:02 AM   #52
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I really doubt that the annuity gives no consideration in exchange for the 2% gains cap. The consideration may not be a good value, but I doubt that the answer will be something simple like "by assigning you all the losses and limiting your gains to 2% we make more money." Scuba needs to research a little deeper to determine what the consideration is that her friend will receive in return for the 2% gains cap so it can be discussed at the meeting and is not a total surprise.



Of course, if in fact Scuba's friend was told there was some of downside protection and there is none of any sort, then we have a serious legal issue which will likely require professional help to resolve.


I agree, as I said I don’t understand the downside protection and certainly the annuity owner doesn’t. Will know more after the appointment.
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Old 12-19-2018, 07:32 AM   #53
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Allianz
IIRC they were in some legal trouble and there was a consent decree, relating to annuity sales. You might want to do a little research.
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Old 12-19-2018, 08:57 AM   #54
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IIRC they were in some legal trouble and there was a consent decree, relating to annuity sales. You might want to do a little research.


Ok thanks
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Old 12-19-2018, 09:25 AM   #55
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Ok thanks


Apparently Allianz has been challenged in 43 states, including CA, with class action lawsuits for deceptive marketing of the annuities. I will mention this to my friend although she may not want to join the class. She should at least know about this. Thanks.
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Old 12-19-2018, 07:00 PM   #56
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Update - I went to the appointment with my friend and her annuity advisor today. I was pleasantly surprised by two things - the advisor was very knowledgeable about how the product worked and answered all of my questions, and she is a fiduciary financial advisor who also handles other types of investment accounts. This made me feel a bit better. She claims her fees for selling my friend this product are 0.65%/year, while she charges 1%/year for asset management if my friend had instead just hired her to manage a portfolio.

I had mentioned before that I didn't really understand the downside protection seeing the negative returns but the limited positive upside. However, what I did not understand until today is that although her annual statements show negative returns in percentage terms, in actuality her account dollar value was not reduced for the negative returns; instead she just earned zero while the market actually gained, in some cases significantly. I also got a better understanding of the guaranteed minimum value - it is 85% of her principal less withdrawals, so her maximum loss is 15%.

The fact remains that there is a pretty low cap on returns so it is very possible she will earn somewhere between zero and 4% over time on this investment. That has definitely been the case the last 5 years - her IRR is 3.39% while the market returns have been MUCH higher. Personally, this annuity would not be something I'd consider. However for a person with relatively low risk tolerance and an age of 74, I suppose there are worse options out there. She is sourcing her RMD's from this account, so part of the reason she is risk-averse within this account is that she doesn't want to have to withdraw from a declining account.

Bottom line, she decided to stick with it for another year and see how it goes. The annuity rep recommended continuing with the "monthly sum" method. In good years, her capped return under this method will significantly exceed the annual method. In bad years, she won't make much either way.

Thanks again to all on this forum who helped me better understand this type of "investment." I still think my friend would be better off in a balanced fund or a mix of two ETF's (stock/fixed income); however the volatility would be greater and only she can decide if she is willing to have more volatility to get greater returns.

One comment my friend made to me that many on this forum can probably relate to is that she feels she has everything she needs and so taking more risk to make more money isn't really necessary fo her. Very different than my attitude - with inflation and other uncertainties, I'd rather take more risk for a better long-term outcome - but then again, I'm 16 years younger and have higher risk tolerance, obviously.
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Old 12-19-2018, 08:10 PM   #57
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One comment my friend made to me that many on this forum can probably relate to is that she feels she has everything she needs and so taking more risk to make more money isn't really necessary fo her. Very different than my attitude - with inflation and other uncertainties, I'd rather take more risk for a better long-term outcome - but then again, I'm 16 years younger and have higher risk tolerance, obviously.
I have heard this sentiment several times from a friend. Between their pensions and SS, they have more income than they spend. They have some investments (401k, IRA, inherited after tax account) that they likely will never need, but are there "just in case". His preference is to just preserve value. While I might disagree, I can understand.
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Old 12-19-2018, 08:19 PM   #58
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Nice job helping your friend. Glad I was wrong about the FA not being knowledgeable about the product.
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Old 12-20-2018, 07:34 AM   #59
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Update - She claims her fees for selling my friend this product are 0.65%/year, while she charges 1%/year for asset management if my friend had instead just hired her to manage a portfolio.
Those may be her annual fees once the annuity is in place. Did she also disclose how much she was paid at the inception of the annuity which is usually a percentage of the principal deposit?
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Old 12-21-2018, 02:36 AM   #60
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Those may be her annual fees once the annuity is in place. Did she also disclose how much she was paid at the inception of the annuity which is usually a percentage of the principal deposit?


She said it was 0.65% at time of purchase, and also annually.
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