Life Insurance Question

[ziggy29]

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?

Given that there is about 2% in embedded annual fees in a VA, I'd care because I was turning a potential 8% into 6%. Yes, maybe the 6% is all I "need" but that extra 2% could make life better or give me more to leave to my heirs.

 

[brewer12345]

Here you go, sport, a better product: VWELX: Basic Chart for VANGUARD WELLINGTON INCOME FUND - Yahoo! Finance

Considering that the vast majority of your customers are highly unlikely to understand the nuts and bolts of what you are selling them, how meaningful do you think your credit risk discussion is?

 

[Delawaredave5]

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.
.

Art - which product did you buy ?

I looked briefly at some of the above products you mention - they just all "smell bad". It's the same "smell" I got years ago looking at Whole and Universal Life sales literature - the literature all looked too good to be true and I knew the insurance company would make boatloads of money off me - just didn't know where/how.

I bought term life insurance and invested the difference.

Same with VA's -the literature is very complex, looks too good to be true, and they are making boatloads of money off people. Smells bad.

I'll stay with my 60/40 balanced, low fee, diversified, heavily indexed portfolio any day.

And I still remain unconvinced VA's are right for anyone - except someone who needs a "financial straight-jacket" so they don't hurt themselves (even in this case a VG or Fido target retirement fund or Wellington would be a better choice).

Here's a link to one you reference - nice of them to cap the fees at 2.54% annually !!

https://www.allianzlife.com/content/public/Literature/Documents/ALT-141.PDF

 

[ziggy29]

I'll stay with my 60/40 balanced, low fee, diversified, indexed portfolio any day. And I still remain unconvinced these are right for anyone - except someone who needs a "financial straight-jacket" so they don't hurt themselves (even in this case a VG or Fido target retirement fund would be a better choice).

Heck, for someone fairly risk-averse, parking all of it in something like Wellesley and/or Wellington would be far superior. Yes, there is no real "guaranteed income" component, but for those who structure their portfolios properly, that's overrated.

 

[FinanceDude]

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.

Ok, then you are like 99.999% of all Americans, other than age..........

 

[FinanceDude]

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.

They're called EIA's, and you need to stay away from them.........

 

[brewer12345]

They're called EIA's, and you need to stay away from them.........

Wooo-eee, I didn't even raise that kettle of stinking fish with my sparring partner. If VA's are a terrible deal, EIAs are like paying for an extra IRS audit.

 

[FinanceDude]

Here you go, sport, a better product: VWELX: Basic Chart for VANGUARD WELLINGTON INCOME FUND - Yahoo! Finance

Considering that the vast majority of your customers are highly unlikely to understand the nuts and bolts of what you are selling them, how meaningful do you think your credit risk discussion is?

Well, to be fair,most Americans couldn't understand Wellington either..........

 

[FinanceDude]

Heck, for someone fairly risk-averse, parking all of it in something like Wellesley and/or Wellington would be far superior. Yes, there is no real "guaranteed income" component, but for those who structure their portfolios properly, that's overrated.

I wonder how this would all turn out if we truly had a 10 year bear market. Most likely, everyone would have to tighten their belts, and the insurance companies would have large losses for a lot of years.........

 

[Art G]

Given that there is about 2% in embedded annual fees in a VA, I'd care because I was turning a potential 8% into 6%. Yes, maybe the 6% is all I "need" but that extra 2% could make life better or give me more to leave to my heirs.

This is a flaw in your thinking. The 6% they are able to pay you, may very well be coming from someone else who didn't live as long as you. I guess if you can self insure yourself you've got it licked!
Out of curiousity though, do you have auto insurance? How about fire and theft? Do you feel ripped off if you don't get robbed and aren't able to use that insurance?
I have a $2mm term life insurance policy that I hope never to use. Should I feel ripped off at the end of 20 years?

 

[Art G]

Here you go, sport, a better product: VWELX: Basic Chart for VANGUARD WELLINGTON INCOME FUND - Yahoo! Finance

Considering that the vast majority of your customers are highly unlikely to understand the nuts and bolts of what you are selling them, how meaningful do you think your credit risk discussion is?

Very good. So you're only down a little over 6% since the beginning of the year. Sure glad I saved that extra 2% though!

 

[Art G]

Wooo-eee, I didn't even raise that kettle of stinking fish with my sparring partner. If VA's are a terrible deal, EIAs are like paying for an extra IRS audit.

No reason I can see to do an equity indexed annuity.
BTW, I sure wish people would cut back with all the abbreviations. My brain hurts from trying to figure out what the heck they are referring to.

 

[Art G]

Art - which product did you buy ?

I looked briefly at some of the above products you mention - they just all "smell bad". It's the same "smell" I got years ago looking at Whole and Universal Life sales literature - the literature all looked too good to be true and I knew the insurance company would make boatloads of money off me - just didn't know where/how.

I bought term life insurance and invested the difference.

Same with VA's -the literature is very complex, looks too good to be true, and they are making boatloads of money off people. Smells bad.

I'll stay with my 60/40 balanced, low fee, diversified, heavily indexed portfolio any day.

And I still remain unconvinced VA's are right for anyone - except someone who needs a "financial straight-jacket" so they don't hurt themselves (even in this case a VG or Fido target retirement fund or Wellington would be a better choice).

Here's a link to one you reference - nice of them to cap the fees at 2.54% annually !!

https://www.allianzlife.com/content/public/Literature/Documents/ALT-141.PDF

Here's your bottom line. If you reach 78 years old and realize you've outlived your income, what do you do then? A VA is an insurance product. It protects you with income you can't outlive. Now, if that smells like day old fish to you, then by all means stay away. However, there are tons of investments that seem risky at the time that turn out to be just that, and plenty that fulfill your needs. Personally, I'm kicking myself doubly hard for not buying BSC last week when I KNEW it was too cheap. Of course, they could have just as easily gone bankrupt.
If you have faith in the market that it will continue on its long term trend up forever and there is no bad time to be in the market, then you're on the right track. However, if you are in or close to retirement and fear you may one day run out of money, then check out the current products before they may realize they screwed up (in my opinion).

 

[ziggy29]

Very good. So you're only down a little over 6% since the beginning of the year. Sure glad I saved that extra 2% though!

The bottom line, then, is that these products are selling "security" and "preservation of principal" along with an insurance/tax deferral component. There is a place for that in the portfolios of risk-averse people. It's just that with a VA, the price for that security is far too high (IMO, of course).

And of course, it works both ways: People who locked their money in "safe" stuff in 2003-06 didn't do so well compared to those who took prudent long-term risks. And historically they don't.

But wow, 2-3% per year is an awful lot to pay someone to manage risk with a mediocre combination on investment and insurance.

 

[brewer12345]

But wow, 2-3% per year is an awful lot to pay someone to manage risk with a mediocre combination on investment and insurance.

If I were a nervous nellie and wanted to spend 2 to 3% a year to protect myself, I would spend that much every year in put options on equity indexes.

 

[Art G]

The bottom line, then, is that these products are selling "security" and "preservation of principal" along with an insurance/tax deferral component. There is a place for that in the portfolios of risk-averse people. It's just that with a VA, the price for that security is far too high (IMO, of course).

And of course, it works both ways: People who locked their money in "safe" stuff in 2003-06 didn't do so well compared to those who took prudent long-term risks. And historically they don't.

But wow, 2-3% per year is an awful lot to pay someone to manage risk with a mediocre combination on investment and insurance.

No, but you're getting closer. For 2-3% you're getting a GUARANTEE OF INCOME FOR AS LONG AS YOU LIVE...don't know how to make it clearer. Oh yeah, you're also getting a guaranteed growth rate of 5 to 7%, no matter what the market does, if you haven't started withdrawal yet. So, it's not a preservation of capital, it's a guarantee of capital growth towards income AND tax deferral.
Consider this, I know of someone who put $320k into a VA about a year ago. The portfolio value is around $307k currently, but the VA guaranteed value is at $348k because of the quarterly ratchets. Now this is a real life situation. If this person needs to start drawing income now, would they want 5% of $307k or $348k?

 

[FinanceDude]

If I were a nervous nellie and wanted to spend 2 to 3% a year to protect myself, I would spend that much every year in put options on equity indexes.

And it would work....however, do you think that average American is going to do that??

 

[FinanceDude]

Consider this, I know of someone who put $320k into a VA about a year ago. The portfolio value is around $307k currently, but the VA guaranteed value is at $348k because of the quarterly ratchets. Now this is a real life situation. If this person needs to start drawing income now, would they want 5% of $307k or $348k?

Folks on here wouldn't care, they would just tighten their budgets and wait it out.........

Many equity funds are down 5-10%, and I am confident there are as many folks taking a SWR over 4% as there are taking less than 4%.........

 

[brewer12345]

And it would work....however, do you think that average American is going to do that??

How hard is it? With a little coaching or the services of a fee-based planner, I bet it would be no problem. Definatley less expensive and more flexible than forking over for a hugely expensive and complicated insurance contract.

 

[Art G]

If I were a nervous nellie and wanted to spend 2 to 3% a year to protect myself, I would spend that much every year in put options on equity indexes.

Now that's very interesting. So, if the market were to go up, those options expire worthless, and that you're ok with Explain why.
Oh yeah, you've also lost that guaranteed growth rate. So you have $100k, invest $98k and use the other 2% for put options. The market stays flat and the next year you have $98k to invest.....Instead, you put that $100k into a VA and the market is flat, but you got a 7% annual step up in value to $107k. Did you really pay anything for that rider?
Let's be fair though, instead that market dropped 10%, so your investments are now worth $88,200, but the puts brought your value back up to about $98k. Wait, your VA has that guaranteed growth rate so it is still worth $107k.
Hold on, what about if the market is up 10% this year?? OK, so your investment is now worth $107,800 and that annuity is worth $108k or so (we're assuming that extra 2% cost of insurance).
Tell me again why VA's don't work.
BTW, I feel like you've pigeon holed me into some VA salesman. In fact, I do a lot more stock and bond trading than I do annuities.
It just so happens that I think this is the perfect environment for VA's.

 

[brewer12345]

Now that's very interesting. So, if the market were to go up, those options expire worthless, and that you're ok with Explain why.
Oh yeah, you've also lost that guaranteed growth rate. So you have $100k, invest $98k and use the other 2% for put options. The market stays flat and the next year you have $98k to invest.....Instead, you put that $100k into a VA and the market is flat, but you got a 7% annual step up in value to $107k. Did you really pay anything for that rider?
Let's be fair though, instead that market dropped 10%, so your investments are now worth $88,200, but the puts brought your value back up to about $98k. Wait, your VA has that guaranteed growth rate so it is still worth $107k.
Hold on, what about if the market is up 10% this year?? OK, so your investment is now worth $107,800 and that annuity is worth $108k or so (we're assuming that extra 2% cost of insurance).
Tell me again why VA's don't work.
BTW, I feel like you've pigeon holed me into some VA salesman. In fact, I do a lot more stock and bond trading than I do annuities.
It just so happens that I think this is the perfect environment for VA's.

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.

 

[ziggy29]

Now that's very interesting. So, if the market were to go up, those options expire worthless, and that you're ok with Explain why.

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?

 

[FinanceDude]

How hard is it? With a little coaching or the services of a fee-based planner, I bet it would be no problem. Definatley less expensive and more flexible than forking over for a hugely expensive and complicated insurance contract.

Most fee-based planners in the Midwest where I am avoid options like the plague. My business partner has built his managed account portfolio doing covered call writing for 20 years, so some are interested.

In all honesty, what is truly missing in this dialogue is what is actually happening in the real world.........

Most if not all on this board are DIY, which was learned through a WILLINGNESS to do so. Again and again,I repeat that this board is NOT a fair representation of the average American investor. The vast majority don't "get it", as far as investing go. Here's some recent things I ran across:

1)Folks not even investing into their 401K up to the MATCH, because they did what their co-workers are doing.

2)Not doing a Roth IRA because it's not "worth it".

3)Not having a budget but wondering how they spend $200,000 a year after-tax without a McMansion........

4)Cashing out a 401K, and THEN asking me if that's a problem (son of a good client of mine).......

On and on............you guys probably think it's funny and they deserve what they get, but somehow the humor escapes me............

 

[FinanceDude]

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?

Whatever asset allocation you picked..........

 

[FinanceDude]

Jumping Jeezus on a pogo stick, did they kidnap you and keep you at VA sales boot camp for a year?

Ok.......that was funny!!