Fixed index annuities

[Jerry1]

Note to OP - two things:

1) Take the advice of the people in this thread and take time to learn before you buy. As you can see just from this discussion, the financial instrument you're looking into is complicated.

2) Your friend may and probably is still your friend. If a friend sells you a car and makes a commission, that's not something I would say is out of bounds. Also, and more important, your friend may be trying to sell you something he really believes in. As you can see from this conversation, there are at least a couple ways to look at annuities. Your friend can be of good heart and just be wrong. That doesn't make him a bad person.

I dealt with a very good guy and actually bought a small annuity from him. I always tell my friends that want to learn craps to come with me and put some money down and you'll see how the game is played. In that regard, I put $40K into something I knew little about. Time passes and I learned a few things. First, the person I dealt with was and is sincere but I have no illusions as he pulls up in his BMW that he's not making money. However, in his sincerity, he was correct in understanding that I did want a product that reduced or eliminated risk of loss. There may have been other ways to get it, but he achieved that goal. He sold me something from a very well rated very large and conservative company and I'm comfortable that goal was met. Second, while it is true that the balance of the annuity (or cash value) goes up based on an index, something else very interesting happens. The longer you wait to take the money, the larger the monthly annuity will be (this is where the life expectancy factor comes in). In my last statement, the balance only went up about 1.25 percent (fees took half the income) but the monthly payout went up 6.6 percent. Accordingly, I think a couple things - it is fair to compare this to a CD more so than an investment (stock/bond fund) and it's to be considered within the totality of your overall asset allocation. On the upside, I may have guaranteed that I can buy beer when I turn 80

Either way, live, learn and be careful.

 

[Independent]

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.

I typed too fast, I meant "Vanguard indexed mutual funds".
Sorry for the confusion.

Can you name the insurance company and the product?
Give a link to your source for the numbers?

 

[jzajzz]

I typed too fast, I meant "Vanguard indexed mutual funds".
Sorry for the confusion.

Can you name the insurance company and the product?
Give a link to your source for the numbers?

Well Vanguard index funds are a different animal... Those are market products.. subject to the volatility you're trying to protect ypurself from. Most people who hate annuities will tell you to put that in Bond funds. Bond funds are not guarabtees however. Yields are low and you jave a major interest rate risk if interest goes up. So are you willing to bet that you're going to beat out 4.80 percent in a. Bond fund. If so..then you can move that portion to bonds and use a spia in 10years.

The carrier I use was Penn Mutual. There might be better or worse products out there .for both the SPIa or fia

 

[jzajzz]

I dont have a link. The software is only accessible to insurance agents

 

[capjak]

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.

I just ran the SPDA for a 57 year old Male taking 99,000 at age 67. The quoted Cost would be $931,944 from United of Omaha Life and $985,600 from New York Life (no cash refund). The cost with a full refund of premium $1,088,000 if you die early (67+11 years=78).

So comparable to FIA example and of course if rates go up buying a SPIA vs this SPDA when the person actually turns 67 in 2027 could be cheaper

Insurance Company Cashflow​

Rate​

*Taxable​

Portion (mo)​

7​

Quote​

Valid Until​

A.M Best​

Ratings​

S & P​

 

[jzajzz]

I just ran the SPDA for a 57 year old Male taking 99,000 at age 67. The quoted Cost would be $931,944 from United of Omaha Life and $985,600 from New York Life (no cash refund). The cost with a full refund of premium $1,088,000 if you die early (67+11 years=78).

So comparable to FIA example and of course if rates go up buying a SPIA vs this SPDA when the person actually turns 67 in 2027 could be cheaper

Insurance Company Cashflow​

Rate​

*Taxable​

Portion (mo)​

7​

Quote​

Valid Until​

A.M Best​

Ratings​

S & P​

That is exactly what an FIA should be compared to. Not stocks ..not index funds..not an SPIA A defferred income annuity.. i was told that the best DIA shoukd beat out the income of the best FIA ..but the FIA should have better surrender and liquidity options than the DIA. But again if you plan properly take as much invomr as you can get. Thats just my opinion

 

[Ready]

It would be helpful if you could post a link to the specific FIA you are referring to so that we could see the exact terms and conditions of the product, as well as understand how it calculates the returns it claims to offer, and whether the insurance company has the right to change the terms without notice.

 

[jzajzz]

There is no link .. Best I can do is post a file .. Not sure if that's even possible on the forum

 

[samclem]

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.

The inflation rider increases the annual payout at a fixed rate, not tied to actual inflation? And the increases stop at age 87 (in this case)? If a person is paying the high expenses for an annuity to get "guaranteed income for life" and then paying even more for the real thing (guaranteed for life that maintains its purchasing power), it would seem that the product still falls short of the claims.

 

[Independent]

That is exactly what an FIA should be compared to. Not stocks ..not index funds..not an SPIA A defferred income annuity.. i was told that the best DIA shoukd beat out the income of the best FIA ..but the FIA should have better surrender and liquidity options than the DIA. But again if you plan properly take as much invomr as you can get. Thats just my opinion

So, why buy the complex FIA when the simple deferred income annuity does the job?

The DIA can be bought with or without surrender values. Or, if you want lots of liquidity, just invest the money and defer to age 67. I got a premium of $1,441,309 for a simple SPIA starting at age 67 providing $8,250/month (through "Income Solutions", which Vanguard uses). Or, split your money and buy some DIA today and keep the rest with the thought of buying an SPIA in the future.

The FIA has some partial liquidity. I don't know how much because I haven't seen the product. It's possible but unlikely the buyer wants exactly the amount of liquidity that this particular FIA provides

I'll admit that this particular combination of age and deferral period is more competitive than I expected. It's possible this product was designed primarily as a DIA, with the FIA part as just a little sizzle. It's also possible the profit derives from the people who decide they don't want to annuitize. However, without reading the contract and crunching numbers, I don't know.

As you can guess, I have a concern that the "Bold print giveth, but the fine print taketh away".

 

[aln1117]

So with all the new info from you kind folks I've decided against the FIA idea for now. Possibly when I finally retire I will look into options for producing income. But for now I will try to change my AA to protect by portfolio until I get into retirement.

That brings me to my next question. (May need to start a new thread).
Would it be time to start moving some funds more into govt bond or similar to help when the correction does happen.

 

[capjak]

So, why buy the complex FIA when the simple deferred income annuity does the job?

The DIA can be bought with or without surrender values. Or, if you want lots of liquidity, just invest the money and defer to age 67. I got a premium of $1,441,309 for a simple SPIA starting at age 67 providing $8,250/month (through "Income Solutions", which Vanguard uses). Or, split your money and buy some DIA today and keep the rest with the thought of buying an SPIA in the future.


".

If you defer payment for 7 years based on a 57 year old collecting $8250 in 7 years (2027) the cost is reduced from 1.6 Million (immediate annuity) to 974,000. Which is less expensive than buying a 7 year FIA and than collecting in 2027 the income rider $8250 per the example.
For liquidity the FIAs typically allow 10% of the the accumulated value (approximately $100,000 per year for a 1,000,000 premium) to be taken each year without any costs/surrender charges. Some SPDAs allow for 6 months advance (once or twice during the payout period) 8250x6=$49,500

 

[brewer12345]

That brings me to my next question. (May need to start a new thread).
Would it be time to start moving some funds more into govt bond or similar to help when the correction does happen.

The world of fixed income is a hard place to be these days. Absolute yields are low across the board and credit spreads for every kind of credit-risky bond are at the low end of the historical range. Since you don't get paid a lot for extended duration or increased credit risk, I think it is wise to not get too far out the credit or maturity curve. So the obvious places to hang out seem to me to be CDs (shop around and you can get a decent rate and a modest surrender penalty) and shorter term (5 years and under) high quality bonds. I am personally rather uncomfortable with mortgage-backed securities these days due to the huge extension risk and high negative convexity they sport, so I think the best places to look are high grade corporates and government bonds. I like the fixed term basket bond funds (I own IBDL) that roll down the maturity curve and turn into cash at the end of their terms. These offer a bit of yield, minimal credit risk, and high liquidity. You can buy them easily in a brokerage account.

 

[jzajzz]

The inflation rider increases the annual payout at a fixed rate, not tied to actual inflation? And the increases stop at age 87 (in this case)? If a person is paying the high expenses for an annuity to get "guaranteed income for life" and then paying even more for the real thing (guaranteed for life that maintains its purchasing power), it would seem that the product still falls short of the claims.

Great question .. I actually didn't pay attention to this when I illustrated the 85k + for the inflation option. I've seen illustrations where you can add a fixed percentage though I never tried it. I went back to look at this one ..this is an actual inflation protection rider. The good news is it keeps up with inflation based on the CPI-U index. but it has a cap of 6%. The bad news is it keeps up with inflation based on the CPI-U index..it illustrated a hypothetical of the most recent 40 years or so. So your actual income in 10 years might differ based on the inflation rates of your time. Since we are in a low interest environment compared to 30 + years ago, the income would reflect that. I would not expect an 85k in 10 years.

As far as costs of the annuity goes, it's an annuity .. it's not an investments. Too many times people want to apply one set of rules to the other. With an FIA w/ income rider. There is no cost to the annuity if you end up annuitizing. The charges come if you surrender early, and there is also a charge for the rider to the account value but not the income value. If you think of it as an insurance product, it makes the most sense. People who die early, get the surrender amount. People who decide to surrender early, get the surrender amount. People who make out are the people who end up annuitizing and living longer. If you die early, you did not make out too well. That's how insurance works. The people who actually end up getting in a car accidents make out for car insurance, since the safe drivers are the ones paying for the car repairs and hospital bills.

 

[jzajzz]

So, why buy the complex FIA when the simple deferred income annuity does the job?

The DIA can be bought with or without surrender values. Or, if you want lots of liquidity, just invest the money and defer to age 67. I got a premium of $1,441,309 for a simple SPIA starting at age 67 providing $8,250/month (through "Income Solutions", which Vanguard uses). Or, split your money and buy some DIA today and keep the rest with the thought of buying an SPIA in the future.

The FIA has some partial liquidity. I don't know how much because I haven't seen the product. It's possible but unlikely the buyer wants exactly the amount of liquidity that this particular FIA provides

I'll admit that this particular combination of age and deferral period is more competitive than I expected. It's possible this product was designed primarily as a DIA, with the FIA part as just a little sizzle. It's also possible the profit derives from the people who decide they don't want to annuitize. However, without reading the contract and crunching numbers, I don't know.

As you can guess, I have a concern that the "Bold print giveth, but the fine print taketh away".

I think you should look at the benefits of both and make a decision. It never hurts to. I think the better you plan, the more you should lean toward the product with the higher income but less liquidity. The problem is most people haven't planned as well they should.

For myself, I would plan on having my liquidity elsewhere but it also depends on how much I'm gaining. If the best DIA is that NY Life annuity .. I rather pay the 1mil because it's not that much of a gap. I would have more flexibility in the FIA in case something unforeseen happens.


but it never hurts to just lay the numbers down and compare.

 

[Independent]

I think you should look at the benefits of both and make a decision. It never hurts to. I think the better you plan, the more you should lean toward the product with the higher income but less liquidity. The problem is most people haven't planned as well they should.

For myself, I would plan on having my liquidity elsewhere but it also depends on how much I'm gaining. If the best DIA is that NY Life annuity .. I rather pay the 1mil because it's not that much of a gap. I would have more flexibility in the FIA in case something unforeseen happens.


but it never hurts to just lay the numbers down and compare.

I agree with that.

My problem is that the insurance company won't give me the numbers. In this case, "the numbers" include rules calculating numbers. As a buyer, I don't have access to your illustration software (unlike, for example, a car where every company provides a "build your own" site). I can't go to a website and download a sample contract.

The secrecy makes me suspicious.

 

[jzajzz]

I agree with that.

My problem is that the insurance company won't give me the numbers. In this case, "the numbers" include rules calculating numbers. As a buyer, I don't have access to your illustration software (unlike, for example, a car where every company provides a "build your own" site). I can't go to a website and download a sample contract.

The secrecy makes me suspicious.

I know you guys hate commissions but that's the beauty of it.. You have insurance agents who work for free until they get the sale, put them to work. Unlike most of their customers, you're on top of your finances, you can ask the right questions and test their knowledge. You can chose the one that's honest and knowledgeable.

[rant]
Now if you go to a "fee only" which the vast majority of the time is an FA who charges you somewhere around 1% of your portfolio to tell you about annuity products that he has no knowledge about because he doesn't get paid on it so he has no incentive to learn it. In fact every dollar that you take out to put into an annuity (or a house or anything else) is more money out of his pocket. Yet he tells you "i'm a fiduciary and have no conflict of interest". Don't get me wrong , there's a place for each compensation model but a 1% fee, while you're in retirment and trying to figure out if you should take 3 or 4% ... doesn't sound like a good deal to me [/rant]

 

[Ready]

I find financial advisers who charge for their services as a percentage of assets under management to be just as distasteful as commissioned financial sales people.

The only proper way to utilize the services of a financial adviser is to pay them hourly for the time they spend on your account. Anything else opens the door to conflict of interest and having them take advantage of you.

 

[braumeister]

if you plan properly take as much invomr as you can get. Thats just my opinion

How does invomr compare to covfefe?

 

[jzajzz]

How does invomr compare to covfefe?

ugh.. lol ..

I was typing on my phone.

 

[jzajzz]

I find financial advisers who charge for their services as a percentage of assets under management to be just as distasteful as commissioned financial sales people.

The only proper way to utilize the services of a financial adviser is to pay them hourly for the time they spend on your account. Anything else opens the door to conflict of interest and having them take advantage of you.

I think there's a place for most if not all compensation models.. As long as you're aware. You should be fine.

There is ALWAYS a conflict of interest in any business transactions. Take the hourly model for example:.. What is the incentive for the FA to work on being more efficient with his processes. The more experienced FA who use their knowledge and don't have to research as many questions are getting paid less than the ones who have to research questions and then have to charge you for the time they spent researching a problem and coming up with a solution.

I work with plumbers and they have the same dilemma. The more experienced plumbers work more efficiently because of their knowledge, they spend less time diagnosing a problem. You end up paying more for worse service because you don't know any better.

 

[brewer12345]

I work with plumbers and they have the same dilemma. The more experienced plumbers work more efficiently because of their knowledge, they spend less time diagnosing a problem. You end up paying more for worse service because you don't know any better.

A silly comparison when we are talking about churn and burn commissioned salescritters. I also love the false equivalency displayed by suggesting that the hourly financial planner is as compromised as the commissioned slimeball.

 

[jzajzz]

A silly comparison when we are talking about churn and burn commissioned salescritters. I also love the false equivalency displayed by suggesting that the hourly financial planner is as compromised as the commissioned slimeball.

CHurning and burning is something you can easily point out. If you know someone is on commission, and is moving money around from funds to funds .. it's something you can stop in its tracks. Whereas you don't know exactly what someone is doing to charge you for hours of work. You don't know what the research entails.

THat's not to say hourly is bad .. but my point is there are always conflict of interests in any business transactions , we as customers have to be responsible for ourselves. I

Someone who has a ton of assets and the charge per hour is nothing to him could benefit greatly from an hourly advisor. Find what's best for you , and go with it.

 

[Independent]

I know you guys hate commissions but that's the beauty of it.. You have insurance agents who work for free until they get the sale, put them to work. Unlike most of their customers, you're on top of your finances, you can ask the right questions and test their knowledge. You can chose the one that's honest and knowledgeable.

I wasn't complaining about commissions, I was complaining about secrecy.

It's like a car company saying you can't test drive a car, and you can't price it. Ordinary ignorant consumers shouldn't waste their valuable time learning stuff like that. Just talk to the salesman, explain your needs, and he'll put you in the car that's best for you.

 

[Ready]

I think there's a place for most if not all compensation models.. As long as you're aware. You should be fine.

There is ALWAYS a conflict of interest in any business transactions. Take the hourly model for example:.. What is the incentive for the FA to work on being more efficient with his processes.

As with any service provider that you hire, you are still responsible for doing your homework to qualify the person you are thinking about hiring. But a responsible financial advisor who charges hourly will certainly give you an estimate of the number of hours they plan to spend once they understand what you are asking them for. The potential for conflict of interest here is quite minimal compared to commissioned salespeople or PAUM FAs.