Life Insurance Question

[innova]

I actually don't see where my situation makes that much difference

I agree.

Fee's really don't matter as long as my goal is met.

Fees always matter. You get exactly what you DON'T pay for. Nothing about an annuity contract changes this basic fact.

 

[RockOn]

Fees always matter. You get exactly what you DON'T pay for. Nothing about an annuity contract changes this basic fact.

I agree but if there is a "great product" out there that pays a great return with low risk, I'm interested. At 7-8% guaranteed net, I don't care if they are charging 3% fees on top of that. I suppose it will be a long wait.

 

[innova]

I would agree - if it were possible.

Consider that the insurance company needs to make money on the spread somehow. What investment can they invest in that will give them a high percentage chance of beating 7-8% by enough after their costs to generate a profit? If that product existed, why not just invest in that yourself?

Do you see what I'm getting at I simply don't believe it is possible to make those types of promises and remain solvent. Of course, I'm open minded enough to listen.. just seems WAY too good to be true.

 

[RockOn]

I would agree - if it were possible.

Consider that the insurance company needs to make money on the spread somehow. What investment can they invest in that will give them a high percentage chance of beating 7-8% by enough after their costs to generate a profit? If that product existed, why not just invest in that yourself?

Do you see what I'm getting at I simply don't believe it is possible to make those types of promises and remain solvent. Of course, I'm open minded enough to listen.. just seems WAY too good to be true.

I have heard there are product out there with that type of return. I suppose if they took most of the long term upside in the stock markets above 7-8% and capped my return, they might be able to offer higher returns. I haven't read the fine print though. There are likely some significant catches.

 

[Delawaredave5]

Not without knowing more about your situation. The product that matches your needs is directly dependent on your personal goals.

I'm interested also in seeing an example of an "attractive VA product" - you pick the situation and the product.

The only situation I see these as valuable is to "prevent someone from doing something really stupid". Friend has a FIL who is clueless financially, does not understand risk, and paranoid of advisors (maybe rightly so....). He's trying to get a portion of FIL assets into VA to "prevent him from hurting himself".

Seems clear that these VA's are very profitable products for insurance companies - so either:

1. They are so much smarter and successful than the average investor that they can offer attractive returns and still make great profits, or

2. The mechanics of the policies are cleverly crafted to make you think you are getting market returns with reduced risk - but you are not - and they are making money off the difference.

Call me an ignorant skeptic, but I think #2 applies.

 

[Art G]

How about age 53 married, 1 kid in college and 1 about to go which has been taken care of, nearly retired, still working to provide a safety factor, I need about a 2.5 to 3% SWR to make things work. At a 3% SWR I expect to fully fund my retirement and allow for my assets to build at approximately the inflation rate for my estate. Conservative.

I actually don't see where my situation makes that much difference, I just want the highest rate of return possible with the lowest risk. I place a much higher value on low risk vs high returns. Fee's really don't matter as long as my goal is met.

Not entirely the type of questions that need answering.
The more important questions are such as
1)What percentage of your portfolio did you want to commit to this product?
2)At what age do you want to start drawing out the income from this product?
3)Are you more concerned with providing lifetime income for you and your spouse, or are you more concerned about leaving money to your heirs?
4)How much income do you feel you'll need to earn to live comfortably in retirement?
There's some off the top of my head.
If, as you say, being conservative and wealth preservation is more important to you than maximizing your returns, then annuities are in all likelihood perfect for you. JMO

 

[Art G]

I'm interested also in seeing an example of an "attractive VA product" - you pick the situation and the product.

The only situation I see these as valuable is to "prevent someone from doing something really stupid". Friend has a FIL who is clueless financially, does not understand risk, and paranoid of advisors (maybe rightly so....). He's trying to get a portion of FIL assets into VA to "prevent him from hurting himself".

Seems clear that these VA's are very profitable products for insurance companies - so either:

1. They are so much smarter and successful than the average investor that they can offer attractive returns and still make great profits, or

2. The mechanics of the policies are cleverly crafted to make you think you are getting market returns with reduced risk - but you are not - and they are making money off the difference.

Call me an ignorant skeptic, but I think #2 applies.

I think you left off #3....The insurance companies recognize the needs in the future for baby boomers to have lifetime income and are madly competing for your investment dollars. Before considering a variable annuity with lifetime income, be sure and check out the quality of the insurance company and what percentage of their overall business is VA business.
Personally, I think corporate insurance boards are currently squeezing actuaries to offer benefits that may be borderline overly generous. Paying out a death benefit is a one time offer and people aren't all dying at the same time. However, with people living longer and more people searching out income, they may put future stress on the insurance company themselves (and this is very important to be aware of).
At one time, there were some incredible insurance products offering tax shelter and solid growth. These products have gone away. It is possible the current annuity benefits may also be cut back after further review.
BTW, these insurance companies do have the right to raise their expenses in the future somewhat. I do think this also should be considered.
Again, JMO

 

[brewer12345]

RockOn, he also forgot two salient questions:

1) Do you enjoy needlessly enriching annuity salesmen?
2) Do you regularly walk around in public with your underpants on your head?

 

[ziggy29]

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.

 

[Art G]

RockOn, he also forgot two salient questions:

1) Do you enjoy needlessly enriching annuity salesmen?
2) Do you regularly walk around in public with your underpants on your head?

How silly. Should I complain about how much the chef at my favorite restaurant is earning when I can just as easily cook a steak at home? Should I complain about the salary of the bank president who is paying me a low rate on my C.D.? I could go on, but you get the point.
Bottom line, if I am concerned about the swings in the market and whether or not I will have enough income to last my lifetime, and someone guarantees me they will provide it, why should I care if he's making a living?
Hey Brewer, are you getting paid for what you do? How do you feel about online trading fees?

 

[brewer12345]

How silly. Should I complain about how much the chef at my favorite restaurant is earning when I can just as easily cook a steak at home? Should I complain about the salary of the bank president who is paying me a low rate on my C.D.? I could go on, but you get the point.
Bottom line, if I am concerned about the swings in the market and whether or not I will have enough income to last my lifetime, and someone guarantees me they will provide it, why should I care if he's making a living?
Hey Brewer, are you getting paid for what you do? How do you feel about online trading fees?

In the capital markets, TANSTAAFL. That means whatever you pay someone comes out of your hide, not the market's. There is no magic that the insurer can summon up, and the structure of the VA market means that the principal beneficiary of what comes out of the investor's hide is the annuity salesman. So, yes, you should care how much your [-]crack dealer[/-] annuity salesman gets paid.

Yes, I get paid for what I do, FWIW, I consider hedge fund fee structures to be absurdly expensive and would cnsequently never pay them myself.

 

[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.

Well, the single premium annuity will never get you a raise. Nor will the bond ladder. Nor is the dividend stocks going to get you much, and could cut their dividend in the future. If you buy AAA bonds you'll give up yield, and if you don't you'll face market risk (in fact, as we're seeing today, even AAA bonds are facing market risk).
Do you not think you're paying fees for all those items as well?
BTW, I have gone this route in the past, much of it worked great, but I started during a high interest rate environment, which is quite different than what we see today. But I do like the way you're thinking.

 

[Art G]

In the capital markets, TANSTAAFL. That means whatever you pay someone comes out of your hide, not the market's. There is no magic that the insurer can summon up, and the structure of the VA market means that the principal beneficiary of what comes out of the investor's hide is the annuity salesman. So, yes, you should care how much your [-]crack dealer[/-] annuity salesman gets paid.

Yes, I get paid for what I do, FWIW, I consider hedge fund fee structures to be absurdly expensive and would cnsequently never pay them myself.

Actually, the living benefit will one day turn out to be the rue of all annuity salesmen. If the income rises and the principal amount disappears. Not only will the saleman be getting paid nothing, but the product will be impossible to move.
Insurance companies don't win out over everyone. If I buy an insurance product and die the day after the contract is written without even making one premium payment, my heirs will see a great windfall. The reason there are actuaries is that there is a need to measure out where the insurance company breaks even. They come out way ahead with some people and lose to others. It is entirely possible lifetime income will be a product they take it in the shorts with.

 

[ziggy29]

The reason there are actuaries is that there is a need to measure out where the insurance company breaks even. They come out way ahead with some people and lose to others. It is entirely possible lifetime income will be a product they take it in the shorts with.

Sure. If I'm 65, very healthy and all my parents and grandparents lived into their 90s, it could be a losing bet for the insurers. But the thing is, there is the opposite of "adverse selection" that goes on with annuities -- those who do have longevity in their genes and are very healthy are more likely to see an annuity as an attractive product (and waiting until age 70 to take Social Security, for example).

So in reality, actuaries can't look at typical lifespan, but typical lifespan of the type of person likely to buy an annuity. That typical person isn't a 60-year-old diabetic who is 50 pounds overweight, had no parents or grandparents live past 70 and who had cancer a few years ago. For this individual, an annuity is the ultimate sucker bet.

 

[Art G]

Sure. If I'm 65, very healthy and all my parents and grandparents lived into their 90s, it could be a losing bet for the insurers. But the thing is, there is the opposite of "adverse selection" that goes on with annuities -- those who do have longevity in their genes and are very healthy are more likely to see an annuity as an attractive product (and waiting until age 70 to take Social Security, for example).

So in reality, actuaries can't look at typical lifespan, but typical lifespan of the type of person likely to buy an annuity. That typical person isn't a 60-year-old diabetic who is 50 pounds overweight, had no parents or grandparents live past 70 and who had cancer a few years ago. For this individual, an annuity is the ultimate sucker bet.

Ziggy! Ahhhhh, but this is the key to the new products! You don't have to annuitize anymore to get that income. So, if that obese diabetic were to die, then the remaining balance or death benefit will pass on to his heirs. In some cases, that death benefit is much higher than the current value (I've seen this on many, many occasions). In fact, there is that famous Suzie Orman video of her stating there are no benefits to VA's, then 10 seconds later eating her words when a widow explains the death benefit is much higher than the current value.
I really think the VA is the most misunderstood and unaccepted product ever, and if for no reason than that there are people on TV saying so.

 

[brewer12345]

Ziggy! Ahhhhh, but this is the key to the new products! You don't have to annuitize anymore to get that income. So, if that obese diabetic were to die, then the remaining balance or death benefit will pass on to his heirs. In some cases, that death benefit is much higher than the current value (I've seen this on many, many occasions). In fact, there is that famous Suzie Orman video of her stating there are no benefits to VA's, then 10 seconds later eating her words when a widow explains the death benefit is much higher than the current value.
I really think the VA is the most misunderstood and unaccepted product ever, and if for no reason than that there are people on TV saying so.

Good boy! Sell that sizzle!

(Never mind that the actual steak is on the small side and full of gristle.)

 

[Art G]

Good boy! Sell that sizzle!

(Never mind that the actual steak is on the small side and full of gristle.)

Sheesh, this from a guy involved with hedge funds! Probably the most questionable investment product ever designed short of the multi market short term money market fund.
You work in a product you'd never buy for yourself and then knock others, NOT BECAUSE THEY DON'T WORK, but because someone is getting paid.
You strike me as highly hypocritical.

 

[brewer12345]

Sheesh, this from a guy involved with hedge funds! Probably the most questionable investment product ever designed short of the multi market short term money market fund.
You work in a product you'd never buy for yourself and then knock others, NOT BECAUSE THEY DON'T WORK, but because someone is getting paid.
You strike me as highly hypocritical.

I spent years following the life insurance industry and had insider status (i.e. access to material non-public information) at dozens of companies, including some of the largest manufacturers and distributors of the products in the world. DON'T lecture me on how wonderful they are for consumers.

There is a significant difference between the average investor in hedge funds and the average purchaser of annuities: the typical hedge fund investor is a HNW individual, institution, sovereign fund, fund of funds, etc. that employs CFAs, CPAs, etc. that have years/decades of exerience managing money and doing due diligence of investment managers. The typical buyer of annuities is a retail schmoe who doesn't know a stock from a bond and couldn't hope to understand the mechanics of the product they are buying even with night classes in remedial finance. Guess who I feel more protective of?

 

[Delawaredave5]

Sheesh, this from a guy involved with hedge funds! Probably the most questionable investment product ever designed short of the multi market short term money market fund.
You work in a product you'd never buy for yourself and then knock others, NOT BECAUSE THEY DON'T WORK, but because someone is getting paid.
You strike me as highly hypocritical.

Art - how about giving us a specific VA product you like ?

Vague statements like "VAs have come a long way", "I'm a proponent of VAs", and ".. the ones today offer some outstanding advantages..." are not educating us nor advancing this thread.

Calling someone hypocritical isn't advancing this thread either....

Look forward to specifics please. Thanks.

 

[Art G]

I spent years following the life insurance industry and had insider status (i.e. access to material non-public information) at dozens of companies, including some of the largest manufacturers and distributors of the products in the world. DON'T lecture me on how wonderful they are for consumers.

There is a significant difference between the average investor in hedge funds and the average purchaser of annuities: the typical hedge fund investor is a HNW individual, institution, sovereign fund, fund of funds, etc. that employs CFAs, CPAs, etc. that have years/decades of exerience managing money and doing due diligence of investment managers. The typical buyer of annuities is a retail schmoe who doesn't know a stock from a bond and couldn't hope to understand the mechanics of the product they are buying even with night classes in remedial finance. Guess who I feel more protective of?

As I said, VA's have come a long way. What you did years ago is moot now.

 

[brewer12345]

As I said, VA's have come a long way. What you did years ago is moot now.

Right. The industry's 350BP expense ratios have gone down to 100BP, right? Agent commissions have declined 90%, right? Products have been simplified so that consumers can understand them and the life companies are strictly enforcing agent fiduciary responsibility to their customers, right?

Sure...

 

[Art G]

Art - how about giving us a specific VA product you like ?

Vague statements like "VAs have come a long way", "I'm a proponent of VAs", and ".. the ones today offer some outstanding advantages..." are not educating us nor advancing this thread.

Calling someone hypocritical isn't advancing this thread either....

Look forward to specifics please. Thanks.

dave, I was waiting for Rockon to respond before following up, but just a light sampling....
Allianz currently will pay you either 4,5,6, or 7% income for life depending on your age (you get step ups as you get older). There is a quarterly lock of value if you're not taking income yet, meaning in December, your value locked for income purposes and this downturn didn't affect you, except to possibly get you another raise. Now, say you are taking income already, if we're down 10% this year, but up 10% next year, you'll get a 10% raise in income for life moving forward. In an up and down market, you can get some major raises without your portfolio growing at all. The downside in my opinion, you will in all likelihood, be getting such a high rate of return that you burn through the value of the portfolio and thus leave nothing for heirs.
On the other hand, if you want to earn 6 1/2% income, but also leave all the money you put in to your heirs, there is a different product. AXA has an interesting product, the downside is you may one day have to make a decision between stopping the income to leave the money for heirs, or else continue the income for life.
Right now, ING has a product that is also worth a look. Quarterly ratchets and if you don't start taking money for a while, they guarantee a double of the value for income after 10 years. They also have a decent death benefit feature with this.
Genworth has a 9% income for life if you're over 75, but there are some caveats that don't thrill me.
I could go on with a couple others, but you get the idea. It really depends on what age you need the money and what your goals are.
BTW, I hope in describing these products, I've done it competently. It's hard to not omit all features and fine print in a single post, so I certainly am not claiming that all info is included here. You'd need to seek out a professional of your choosing for more info. All JMO.

 

[Art G]

Right. The industry's 350BP expense ratios have gone down to 100BP, right? Agent commissions have declined 90%, right? Products have been simplified so that consumers can understand them and the life companies are strictly enforcing agent fiduciary responsibility to their customers, right?

Sure...

What part of "living benefits" are you not understanding?

Out of curiousity, when you buy a car, do you have a price or payment in mind when you go in that you are willing to pay, or do you just ask the salesman to sell it to you for nothing?
IF I determine that I need 6% income for life, and I can achieve it, why would I care if it's done through a corporate bond, VA, or lottery?
If your boss offers you a raise in income, do you thank him by saying, "sure, but how much are you making?"
If a product suits you, it suits you. If you think there is a better product out there, then by all means, tell me that other product guaranteeing 6% for life with a chance for growth and a raise?

 

[brewer12345]

What part of "living benefits" are you not understanding?

Out of curiousity, when you buy a car, do you have a price or payment in mind when you go in that you are willing to pay, or do you just ask the salesman to sell it to you for nothing?
IF I determine that I need 6% income for life, and I can achieve it, why would I care if it's done through a corporate bond, VA, or lottery?
If your boss offers you a raise in income, do you thank him by saying, "sure, but how much are you making?"
If a product suits you, it suits you. If you think there is a better product out there, then by all means, tell me that other product guaranteeing 6% for life with a chance for growth and a raise?

Sizzle, sizzle...

Do you disclose to your customers in any detail the credit exposure that the purchase of such a product would entail, most likely when the guarantee is of most value?

When you buy a car, do you walk in, smile and hand over a check when they offer you MSRP plus $10k with a 6 year car loan at 18%?

What part of hugely expensive, overly complicated piece of gobshite do you not understand?

 

[Art G]

Credit exposure? You mean like the quality of the insurance company? Absolutely I do.
I have no problem with that car salesman making a living. If I determine that $600 per month for 40 months is what I am looking for and I like the car, I will buy it. Now, if he wants to charge me $625 I will walk, but if he reaches my needs, why should I feel the right to drain him dry? Of course, if that dealership decides to sell the car at a loss because they want my service or finance business, then that's up to them as well.
You still have yet to show me a better product. I'm listening.