Life Insurance Question

[ziggy29]

Most fee-based planners in the Midwest where I am avoid options like the plague.

They associate "options" with "unacceptable risk." And for individual investors, they usually are. But used prudently -- and when you understand them -- there's nothing particularly "risky" about writing covered calls for income and buying protective puts for "insuring" your current equity position.

Yes, they have downsides if the market behaves in a certain way (and the covered calls limit your upside potential), but in both cases you have understandable and limited downside risk.

 

[FinanceDude]

Where's Moshe when we need him...Moshe,Moshe

 

[FinanceDude]

They associate "options" with "unacceptable risk." And for individual investors, they usually are. But used prudently -- and when you understand them -- there's nothing particularly "risky" about writing covered calls for income and buying protective puts for "insuring" your current equity position.

Yes, they have downsides if the market behaves in a certain way, but in both cases you have understandable and limited downside risk.

You must not interact with CFP's on a regular basis like I do.........they are looking at insurance and estate matters, not using options. Granted, options are a risk management mechanism, but a CFP feels better suggesting a SPIA or whole life product than option strategies...........

 

[brewer12345]

They associate "options" with "unacceptable risk." And for individual investors, they usually are. But used prudently -- and when you understand them -- there's nothing particularly "risky" about writing covered calls for income and buying protective puts for "insuring" your current equity position.

Yes, they have downsides if the market behaves in a certain way, but in both cases you have understandable and limited downside risk.

From the advisor's point of view, I would guess that introducing options potentially opens the door to liability/litigation issues. Even if you tell the client that this 1% of the port will most likely go to zero and it would be fine if it did, people have a tendency to get upset over that sort of thing.

 

[FinanceDude]

From the advisor's point of view, I would guess that introducing options potentially opens the door to liability/litigation issues. Even if you tell the client that this 1% of the port will most likely go to zero and it would be fine if it did, people have a tendency to get upset over that sort of thing.

Absoulutely 100% correct on that.

 

[Art G]

Jumping Jeezus on a pogo stick, did they kidnap you and keep you at VA sales boot camp for a year? Great, every market environment is perfect for VAs (especially for the salesmen). I think the product sucks, so give it a rest.

Oh yeah, and why would a risk averse person willingly piss away 2% of their equity account? Its called "insurance." Since it doesn't involve a huge commission to a blood-sucker, that must be a confusing concept.

LOLOL!! Wait, I gotta sit down a minute. Did you just say a 2% insurance fee (via a put) was the reason not to pay 2% extra for an annuity
And I never said the product was right in all situations. I just said that in comparison to your 2% "insurance" via a put it was better.

 

[Art G]

If the market goes up 25% in a year, I'm still up 21.25% if I spent 3% on put options that expire worthless. How much cash value would a VA gain in this scenario, after all the caps and fees are taken out?

Probably the same, or perhaps a tad more. If a mutual fund costs you 1% per year, and the annuity costs you 3%, it's pretty much the same. However, it has been shown that VA mutual funds tend to outperform regular mutual funds because they don't need to hold as much cash for liquidation purposes in an up market. Good question.

 

[brewer12345]

However, it has been shown that VA mutual funds tend to outperform regular mutual funds because they don't need to hold as much cash for liquidation purposes in an up market. Good question.

Oh that is rich. What pure, unadulterated bull-puckey. Who else remembers VA money market funds breaking the buck in the 1% fed funds period because their fees were so high they overwhelmed the measly interest the assets earned?

Anyone remember all those cases of market timing that were done in VAs and VULs because the frequent trading was tax sheltered and in many cases the insurer was complicit?

Ever compared the expense ratios of these bloated pieces of overpriced excrement to a Vanguard fund?

Give it a rest, annuity salesperson. You are bordering on solicitation/spamming.

 

[FinanceDude]

Ever compared the expense ratios of these bloated pieces of overpriced excrement to a Vanguard fund?

Why are we comparing mutual funds to VA's anyway??

 

[Art G]

Oh that is rich. What pure, unadulterated bull-puckey. Who else remembers VA money market funds breaking the buck in the 1% fed funds period because their fees were so high they overwhelmed the measly interest the assets earned?

Anyone remember all those cases of market timing that were done in VAs and VULs because the frequent trading was tax sheltered and in many cases the insurer was complicit?

Ever compared the expense ratios of these bloated pieces of overpriced excrement to a Vanguard fund?

Give it a rest, annuity salesperson. You are bordering on solicitation/spamming.

That's ridiculous. First off I was asked to explain the benefits of the product by a few posters here, and secondly, you are the one making silly claims and attacking a product when I'm trying to offer comparisons.
So, your proof of returns is limited to only money market funds? And you want to be taken seriously? Who is buying a VA to invest in their money market? Yes, I confess, if you are looking for a money market, the VA is probably not for you.
Again, I can't believe that you of all people can dare to slam a product. What is more a drag on the investment world than hedge funds? And to state that you must be accredited in order to invest in it is bull. The entire market is being dragged down because of the manipulation of certain incredibly large hedge funds. And I'm sure you're aware of this.

 

[ziggy29]

Why are we comparing mutual funds to VA's anyway??

Good question. I come back to a comment I remember reading by the late huckster Charles J. Givens, something to the effect of: "Investing and insurance, both important parts of a sound overall financial plan, have little in common and one should not be used to accomplish the other."

Even a stopped clock is right twice a day.

 

[brewer12345]

Why are we comparing mutual funds to VA's anyway??

Ask the A student from the VA sales trainer's class.

For me personally, it looks like a quite appropriate comparison. We are talking about how to maximize your lifetime utility given a certain amount of assets at the time of retirement. All instruments should be on the table, a la Prof. Milevsky's work.

 

[RockOn]

Boy, I missed out. Had to take 15 minutes to catch up. I'm not a fan of VA's, mostly because of the fees. To do it over I would not go that route. I looked for tax deferral, at any cost, when I bought them 20 years ago. I have actually done ok, mostly by some "lucky" moves. I do have a significant amount in these. I could liquidate, take a huge tax hit, and a 10% penalty, but I'm trying to make the best of it. After 59.5 my current plan is to draw these down before I touch anything else.

With that in mind, I am looking for options. I know the fees are high, but if there is a way to either get a decent secure return, limit stock market risk, or lock in a high payout, I have to check it out.

So to those in favor, what should I be looking at? For those against, which seems to be everyone, what would you do in my case?

 

[saluki9]

From the advisor's point of view, I would guess that introducing options potentially opens the door to liability/litigation issues. Even if you tell the client that this 1% of the port will most likely go to zero and it would be fine if it did, people have a tendency to get upset over that sort of thing.

Worse than that, options are specifically exlcuded from many of the E&O policies sold to advisors.

Go figure with all the crap that's considered allowable.

 

[Art G]

Boy, I missed out. Had to take 15 minutes to catch up. I'm not a fan of VA's, mostly because of the fees. To do it over I would not go that route. I looked for tax deferral, at any cost, when I bought them 20 years ago. I have actually done ok, mostly by some "lucky" moves. I do have a significant amount in these. I could liquidate, take a huge tax hit, and a 10% penalty, but I'm trying to make the best of it. After 59.5 my current plan is to draw these down before I touch anything else.

With that in mind, I am looking for options. I know the fees are high, but if there is a way to either get a decent secure return, limit stock market risk, or lock in a high payout, I have to check it out.

So to those in favor, what should I be looking at? For those against, which seems to be everyone, what would you do in my case?

You can do what is known as a 1035 exchange and lock in any of your gains, move it up to a much better product, and pay no taxes for doing so.
Both Scott Burns and Moishe Milevsky have recently done an about face and recognized the values of living benefits in VA's. The old products didn't offer it. JMO

 

[REWahoo]

Both Scott Burns and Moishe Milevsky have recently done an about face and recognized the values of living benefits in VA's.

Don't know about Milevsky, but here's what Burns had to say about VA's in his last review of them. Not exactly a ringing endorsement:

Variable Annuity Watch, 2007

"For returns, they’re still not worth shooting."

"Bottom line: While traditional “death benefit” variable annuity contracts continue to be poor choices, some “living benefit” contracts may provide a level of financial security not available in a direct investment.

The hard part--- perhaps impossible part--- is knowing which contract offers that security."

 

[RockOn]

You can do what is known as a 1035 exchange and lock in any of your gains, move it up to a much better product, and pay no taxes for doing so.
Both Scott Burns and Moishe Milevsky have recently done an about face and recognized the values of living benefits in VA's. The old products didn't offer it. JMO

Values of living benefits. I'm not clear on what "living benefits" means, can you briefly tell me what they are and why they are valuable.

 

[Art G]

Values of living benefits. I'm not clear on what "living benefits" means, can you briefly tell me what they are and why they are valuable.

Sheesh! Just make note to brewer that you asked.
Living benefits refer to GMWB's (guaranteed minimum withdrawal benefit) and in essence, it's referring to "guaranteed" income for life. This means that even if the market takes a major downturn, or you live to 114, you are guaranteed (by the insurance company) to continue to get at least as much income per year as you are currently getting. If the market goes up, you may get a raise in your annual income. And if you die prematurely, your heirs get the remaining balance (and in some cases your entire initial contribution) back.
So, you don't have to annuitize any longer to get income for life. Plus you maintain control of the account throughout. In summation, if your mutual funds go to zero it's game over. If your VA goes to zero they continue to pay you for as long as you (and/or your wife) live.

 

[brewer12345]

"Medicine man speak with forked tongue."

Translation: As with all financial products that sound too good to be true, so is this one. There is always at least one catch and the [-]sleazebag[/-] agent will never tell you what it is. If you are even thinking of purchasing one of these complicated products, sepend some time figuring out what the catches are so that you can decide whether it is worth paying those huge expense ratios (and commissions).

 

[innova]

In summation, if your mutual funds go to zero it's game over.

Nobody old enough to consider buying annuities should be in this position anyway - IE, proper allocation per need, ability, and willingness to take risk.

 

[Art G]

Guaranteed income for life AND the ability to pass something to heirs?

How about taking a large sum of money, putting 1/3 of it in a low-cost plain-vanilla single-premium annuity (there are some), another 1/3 into high dividend stocks and the final 1/3 into a bond ladder?

Voila. Guaranteed income stream, opportunity for growth AND something to pass to your heirs.

I'm not touting this as an "ideal" portfolio, but merely showing that you can accomplish these goals without the high fees and sales commissions of a VUL product.

I was thinking about this post this morning, and my mother's account came to mind. Quite a few years ago I split up her account between preferred stocks and REITS, laddered corporate and muni bonds, and a couple of VA's and some common stock.
For quite a few years I was a genius. As interest rates dropped her portfolio grew, and I'm very happy to say that we sold off quite a few bonds when they were at a premium. However, as she has been taking out money to live on, and I've kept the other stuff that didn't increase in value (or totally tank), I now have a portfolio of REITS that many have become worthless, GM and Ford corp bonds that are waaaaaay down in value, and generally, this portfolio has gotten killed in the recent marketplace. Now being that she is in constant need of taking capital from the account, she has been very nervous about outliving her money. The truth is, there are very few guarantees out there, especially when you consider people are living longer.

 

[Art G]

Nobody old enough to consider buying annuities should be in this position anyway - IE, proper allocation per need, ability, and willingness to take risk.

Everyone is a genius until life actually happens. For people needing income, it's not so easy to diversify with growth.
See case of my mom above.

 

[bssc]

I locked this thread since we have reached the end of fruitful discussion.