Immediate Annuities

[REWahoo]

Good response clifp, an excellent summary of why many of us shy away from annuities.

(FWIW, I'm not sure Rob will see it since his post was from back in April and he hasn't been on the forum for the past 6 weeks.)

[brewer12345]

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Originally Posted by clifp Now I don't know much about TIAA-CREF other than it is one of the largest mutual insurance companies around and it specializes in teachers. I also know that teacher's 403Bs are notorious for having some of the highest expenses. But I don't know if there is a cause and effect. So yes annuities have a bad reputation on this forum. In particular, EIAs and Variable annuities are almost always considered to be a bad investment. Immediate annuities are generally ok especially if you go out and shop for them like you would a big ticket item like a car rather than buy them from a salesman. Still there are risks associated with buying any annuity which are generally glossed over by the salesman. 1. It is expensive to change your mind. The surrender penalties are typical several times the cost of withdrawing money early from a CD. 2. Inflation can severely reduce the value of your annuity payment. 3. Insurance companies can and do go broke (e.g. AIG). The good news is that for the most part if your insurance company goes broke you will still get paid. The bad news is state insurance funds that protect your annuity are only sufficient to pay for a few failures a year from medium size firms if a megafirm collapses like AIG, or TIAA-CREF there isn't enough money to pay all the policy holders without government intervention.

A few objections to what is a reasonable main argument:

- SPIAs are one of the simplest financial products in existence. Assuming you are using your brain when you buy one, its not real hard to tell who is giving you a better deal (hint: its the one with the higher monthly payment). The only tricky bit is making sure you are not taking too much carrier risk. Fortunately, sticking to large, highly rated mutuals is a safe bet.

- TIAA's VAs aren't as cheap as VG funds, but they are pretty cheap. Never a bad choice in 403B plans.

- While inflation risk is definately a big risk, laying off longevity risk is a non-trivial reduction in risk.

[clifp]

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Originally Posted by brewer12345 A few objections to what is a reasonable main argument: - SPIAs are one of the simplest financial products in existence. Assuming you are using your brain when you buy one, its not real hard to tell who is giving you a better deal (hint: its the one with the higher monthly payment). The only tricky bit is making sure you are not taking too much carrier risk. Fortunately, sticking to large, highly rated mutuals is a safe bet. - TIAA's VAs aren't as cheap as VG funds, but they are pretty cheap. Never a bad choice in 403B plans. - While inflation risk is definately a big risk, laying off longevity risk is a non-trivial reduction in risk.

Good points.

I really was unsure about TIAA-CREF, it sounds like they are one of the "good" insurance companies. The few times I've looked at teacher 403B I've be disgusted by the performance and fees, but I think they were offered by a division of Amerprise so no surprise there.

[M Paquette]

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Originally Posted by easysurfer That's exactly what I was thinking about. If the deposits are on autopay, I wonder how many payments would be done before the insurance company would know the person had died.

Deposits stop pretty quickly, within a month of death based on my experience. Withdrawals, on the other hand...

The deposits on my mother's account stopped before I had identified the annuity company and sent out notifications. I had notified Social Security and the pension provider within a couple days of her death. I suspect there's some sort of back-channel service that businesses use.

Withdrawals, on the other hand, don't seem to use such a service. It took about 5 months to get supplemental health insurance deductions from her checking account to stop. My dad had been 12 years dead, and the insurer was still hitting the account for 4 dollars a month for an Accidental Death and Dismemberment Policy. (Repeated mailings of certified letters with a chain of evidence and a formal complaint through the Office of the Comptroller of the Currency got them to stop. A retired obsessive-compulsive with fiduciary authority, a database, and a spreadsheet is probably an insurance company or bank's worst nightmare.)

Curious, innit?

[jdw_fire]

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Originally Posted by clifp The issues that many of us have with annuity is not with the concept but with the products and the way they are sold and marketing. Most annuities in this country are sold rather than being bought. Generally, an insurance salesman, or financial "helper", invites you for a free financial consulting. At the end of that session, you are told that your best option is to purchase an annuity. More often than not this annuity isn't a straightforward SPIA, but some fancy product with a name like Variable Annuity, or Equity Indexed annuity. The salesman who sells you that product collects a hefty commission in the range of 5-8% plus additional money each year. The insurance company takes another 2-3% each year via a bewildering assortment of account fees, expense ratios, morbidity fee etc. You are left with 200+ page document which explains your annuity in deliberately hard legalese. Time passes and for whatever reason you need the money, you than find out that the only way to get your money is to pay a hefty surrender fee. It has been my experience from reading financial forums and helping friends and relatives that more often than not folks who have bought annuities end up cashing out of their annuities and losing a good chunk of money. So yes annuities have a bad reputation on this forum. In particular, EIAs and Variable annuities are almost always considered to be a bad investment. Immediate annuities are generally ok especially if you go out and shop for them like you would a big ticket item like a car rather than buy them from a salesman.

the problem with your description is that it is not describing SPIAs which is the type of annuity that is actually very helpful to a retiree putting together a successful decumulation plan for his/her assets

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Originally Posted by clifp Still there are risks associated with buying any annuity which are generally glossed over by the salesman. 1. It is expensive to change your mind. The surrender penalties are typical several times the cost of withdrawing money early from a CD. 2. Inflation can severely reduce the value of your annuity payment. 3. Insurance companies can and do go broke (e.g. AIG). The good news is that for the most part if your insurance company goes broke you will still get paid. The bad news is state insurance funds that protect your annuity are only sufficient to pay for a few failures a year from medium size firms if a megafirm collapses like AIG, or TIAA-CREF there isn't enough money to pay all the policy holders without government intervention.

1. with an SPIA you dont change your mind, you are buying a pension look alike
2. get an COLAed SPIA and then it keeps up with CPI
3. every thing i have heard states that NO ONE who had an insurance policy with AIG lost any money. what went "broke" with AIG was totally different company

SPIAs are different animals then other annuities, they are more akin to pensions and it is very easy to see what you are buying. the fees dont matter since you are buying an income stream, if it is good enough look for another company or wait till interest rates are higher

[clifp]

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Originally Posted by jdw_fire the problem with your description is that it is not describing SPIAs which is the type of annuity that is actually very helpful to a retiree putting together a successful decumulation plan for his/her assets

Actually I think I was pretty careful to say SPIA=immediate annuities are ok.

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1. with an SPIA you dont change your mind, you are buying a pension look alike 2. get an COLAed SPIA and then it keeps up with CPI 3. every thing i have heard states that NO ONE who had an insurance policy with AIG lost any money. what went "broke" with AIG was totally different company

Generally you do have an option to redeem a SPIA although at a big penalties.

The rates of SPIAs are bad enough, what are the rates you can get for SPIA with a COLA?

Yes no AIG policy holders have lost money, but the parent received 180 billion in Federal bailout money. Lets imagine the AIG parent didn't get bailout.

AIG Financial Products (the problem unit) provided insurance policy on Mortgage Back Securities (typically by writing Credit Default Swaps CDSs) packaged and sold by investment banks. One of the main customers for mortgage backed securities was life insurance companies subsidiaries like AIG (California, Hawaii etc). Now what happens if these mortgage back securities start defaulting? AIG financial products can't make good on the insurance policies, which in turn affects the AIG insurance subsidiaries cash flow and assets. (Actually it would have effect lots of financial instutitions)

As an interesting exercise go find your states insurance commissioners report, scan through the billions of dollars worth of insurance company liabilities and note the small amount of capital. For example AIG Hawaii has 2.5 million in capital and $130 million in liabilities. Then look at the total insurance companies liabilities vs the state insurance fund. Note that most state only guarantee 100K on an SPIA per insurance company and 300K per person. Then tell me with a straight face that you are highly confident if we have a couple more years like 2008, and Uncle Sam chose not to intervene to bail out the financial institutions, that every person with an insurance contract will get paid fully.

When you buy an SPIA, the insurance company doesn't take your money, and stick in a mattress and each month give you a check. Rather they invest the money in assets: stocks, bonds, real estate etc, not much different than what an individual investor does. These assets can. as clearly demonstrated last year, drop quickly and dramatically. If assets of a number of insurance large firms exceeds the liabilities, there isn't much money set aside to pay the policy holders. This would be a largely a state problem not a federal one and states don't have a fed or treasury department to magically create money. I suspect that plenty of citizens would revolt about paying more taxes to make sure that you collect fully on your SPIA.

Now to be fair insurance companies are supposed to be run in financially prudent manner. They are supposed to make sure there is significantly more assets than liabilities. The are even regulated by folks to make sure they don't take excessive risks. Most importantly the scary scenario I outlined has not happened, yet. Still my confidence, that financial institutions are always being run in prudent fashion, that regulators are always highly competent, and rigorously look for financial shenanigans, or that states never borrow from special purpose funds, has been a just a wee bit shaken over the last 12 months.

As Brewer says. SPIA provide a significant decrease in longevity risk. This is very good thing, and not easily accomplished by other assets types. But as in ALL investments SPIA are not risk free and just because we haven't had people lose money in SPIA recently in this country doesn't mean it can't happen in the future.

[brewer12345]

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Originally Posted by clifp Good points. I really was unsure about TIAA-CREF, it sounds like they are one of the "good" insurance companies. The few times I've looked at teacher 403B I've be disgusted by the performance and fees, but I think they were offered by a division of Amerprise so no surprise there.

That is who my life insurance policies are with. Iwould not hesitate to buy a SPIA from them.

[jdw_fire]

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Originally Posted by clifp Actually I think I was pretty careful to say SPIA=immediate annuities are ok.

yes you did but you spent alot of words talking about the downside of annuities which could be implied as applying to SPIAs

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Originally Posted by clifp Generally you do have an option to redeem a SPIA although at a big penalties.

but if you are buying an SPIA for income it is unlikely you will be cashing it in.

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Originally Posted by clifp The rates of SPIAs are bad enough, what are the rates you can get for SPIA with a COLA?

if it doesnt make financial sense, dont buy it.

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Originally Posted by clifp As Brewer says. SPIA provide a significant decrease in longevity risk. This is very good thing, and not easily accomplished by other assets types. But as in ALL investments SPIA are not risk free and just because we haven't had people lose money in SPIA recently in this country doesn't mean it can't happen in the future.

the most probable risk with SPIAs is you dont get as big of a return as you MIGHT in the stock market, but unlike SPIAs recently people HAVE lost money investing in stocks. and i wouldnt be surprised if people lose money investing in stocks in the future before anyone loses money on an SPIA.

[youbet]

I hope all those interested in an SPIA make sure that the SPIA they are considering pays at least as well as the "equivalent annunity" you receive when you postpone SS.

I have two friends who are taking SS at 62 but also looking at SPIA's. They just don't get it that at today's annunity rates, they'd be better off delaying SS and living off the money they'd hand over to the insurance co for the SPIA until they're 66.

In my own case, I'm starting SS at 62. But, I'm not considering an annuity now. If I do consider an annuity later, I'll compare the insurance co rates with what I could recieve by paying the SS back and restarting SS at 66.

Edit: when comparing the value of buying additional SS by delaying to the value of an annunity, be sure to use the rates a cola'd annunity is paying.

[jdw_fire]

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Originally Posted by youbet I hope all those interested in an SPIA make sure that the SPIA they are considering pays at least as well as the "equivalent annunity" you receive when you postpone SS. I have two friends who are taking SS at 62 but also looking at SPIA's. They just don't get it that at today's annunity rates, they'd be better off delaying SS and living off the money they'd hand over to the insurance co for the SPIA until they're 66. In my own case, I'm starting SS at 62. But, I'm not considering an annuity now. If I do consider an annuity later, I'll compare the insurance co rates with what I could recieve by paying the SS back and restarting SS at 66. Edit: when comparing the value of buying additional SS by delaying to the value of an annunity, be sure to use the rates a cola'd annunity is paying.

i second your hope. delaying SS is a great annuity, especially considering todays interest rates

[clifp]

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Originally Posted by jdw_fire yes you did but you spent alot of words talking about the downside of annuities which could be implied as applying to SPIAs

Ok let me more concise. When you a purchase an SPIA (or any annuity) what you really are doing is buying a senior bond with a maturity equal to the rest of your life, from a single company. The bond is very illiquid, but safer than a typical corporate bond. Still the company you loaned money to could go out of business leaving your financial future in trouble if you aren't diversified.

Lots of folks who wouldn't be caught dead buying an individual corporate bond, are perfectly comfortable handing over 1/2 or more of their life saving to purchase an annuity from an insurance company. If people understand what they are doing and say that's cool XYZ insurance company will never go out of business my money is safe, than fine. My believe is very few including Rob do understand this.

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the most probable risk with SPIAs is you dont get as big of a return as you MIGHT in the stock market, but unlike SPIAs recently people HAVE lost money investing in stocks. and i wouldnt be surprised if people lose money investing in stocks in the future before anyone loses money on an SPIA.

Well I am happy your crystal ball is able to confidently predict what will happen in the next 30 to 50 years. Mine has been shattered. Relying on the future to be pretty much like the past, coupled with out right dismissing improbable events (housing prices across the country will drop) has caused catastrophic damage to our economy.


A few people (Running Man in particular) were on the board a year or two warning about possible dangers with leverage and the housing market. I dismissed his warning as being too alarmist, to my great expense. I am doing the same thing about annuities, and government bonds defaults. I recognize that neither insurance companies going out of business in large numbers, nor Uncle Sam defaulting bonds or hyperinflating the debts, is a particularly likely event. But it is NOT the rantings of tin foil brigade member.

[W2R]

Many here seem to be so envious of others who have corporate pensions. The company providing the pension could go belly-up, but pensions are guaranteed by the federal government.

An insurance company providing a pension-like SPIA annuity could also go belly-up, but if the annuity is under $100K then the state guarantees it.

So is the comparison of corporate pensions vs pension-like annuities reduced to the reliability of state governments versus the federal government? I admit my ignorance, and also admit that I wouldn't want to risk having a state in financial disarray, like California, guaranteeing my pension.

[Rich_by_the_Bay]

Clifp, I think your insights and cautions are well stated.

There are strategies to mitigate some of the down side you mention (e.g. buy several smaller contracts from different carriers, dollar-cost-average in by purchasing over a a few years, keep acct accounts underneath your states' guarantee amounts, skip COLA but buy add-on contracts every few years to keep up, etc.), but even at best I see SPIAs as a unique type of asset which may or may have a limited place in some people's AA.

I have not purchased a SPIA, but will consider it as I would any other asset type as my circumstances warrant.

[ziggy29]

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Originally Posted by Want2retire So is the comparison of corporate pensions vs pension-like annuities reduced to the reliability of state governments versus the federal government? I admit my ignorance, and also admit that I wouldn't want to risk having a state in financial disarray, like California, guaranteeing my pension.

Could be that and also the amount that is insured.

Looking at the PBGC's coverage limits at various ages, it seems they will insure an income stream with a present cash value of $500,000 or more. Many state limits are much lower; in Texas the limit is $100,000.

Of course, the flip side is that the $100K limit here is per policy, so if someone took an SPIA with five different insurers for $100K each, in theory they would have $500K of coverage as well.

Still, while a state could "go down" without taking the feds with them, I don't think the reverse is true.

[brewer12345]

A clarification on "guarantees" of insurance products: they are not guaranteed by the states. Instead, easch state has a guarantee fund that all insurers doing business in that state pay into and it has limited funds. AFAIK, if the fund is exhausted, the state does not ante up.

[kaneohe]

I appreciated the spirited, yet still civilized, nature of the debate so that you could actually learn something. Much prettier than angry mobs throwing stones as sometimes happens on these types of topics.

[easysurfer]

I know the thought an insurance company going belly up and not being able to pay
SPIA contracts were on the minds of many with the AIG mess. But Is there a place where we can check past statistics when that has happened?

For example, over the past 20 years how many insurance companies have not been able to make their SPIA payout obligations? Where can we find data to that? Or is that tally not even kept?

It would be nice if consumers had a default rate to work with so they can decide for themselves how safe/unsafe a SPIA is.

[brewer12345]

Only one I know of that actually stiffed policyholders is Executive Life. Doesn't mean the future will resemble the past.

[easysurfer]

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Originally Posted by brewer12345 Only one I know of that actually stiffed policyholders is Executive Life. Doesn't mean the future will resemble the past.

Good point. But I'd be more likely to put my money in a SPIA knowing that in the past, say only 1 out of 1000 companies defaulted instead of 1 out of 100.

[Rob]

I always hesitate to voice my opinion here, because the majority of you simply don't like annuities of any kind. I appreciate the candor, but it leaves me a little unsettled. I've gone on another website where university professors around the US exchange ideas about TIAA-CREF, and the TIAA annuity is their pension in retirement for many of them, because it gives them the retirement income for life.

As a teacher, I trust this particular financial institution. If TIAA or TIAA-CREF defaulted on its payments, I firmly believe, as one other contributor to this website wrote to me a long time ago, we'll all be "eating squirrels under bridges".

I have a sizable amount of money also in stocks and moneymarket as a back up, along with a good bank account enough for a year in case we do start eating squirrels. The fact of the matter is, I need a pension, and TIAA-CREF provides that. There are too many bright people who also believe in this organization, including the current Fed chairman, and therefore, I'm happy to have an annuity through them.

Cheers.