Variable annuity

Submitted by Brad Thibodaux on Tue, 2008-07-08 12:46

I’m being advised to take the money in my profit sharing retirement and put it into a variable annuity. This product has a provision that guarantees up to 10% payout for the rest of my life or my wife’s life regardless of what the stock market does. What are the positive and negatives of this idea?



Submitted by Alan Spross on Tue, 2008-07-08 19:38

If this is an equity indexed annuity, better read the fine print. The key is in the “up to” indication. That’s the maximum in case the market soars. What will you get if the market just limps along or produces modest returns, which is much more likely? What are the expenses? What commission is the sales agent getting to get you to agree to tie up your funds with surrender charges for several years? These commissions have to negatively affect your potential gains at some point in the insurance company calculation of your annual earnings.

Those are the negatives. If you really want an annuity product, why not check into Vanguard or other low cost annuities, where much of your potential earnings are not diverted into commissions. Many of the larger firms also provide you with general advice and guidance at no cost. But to really know what is best in your case would require a detailed financial, life style and estate planning analysis. Perhaps you should talk to another planner if you need alot of assistance or to one of the above firms if you want to have more control of your investment options. In any event, do not commit to anything unless you thoroughly understand the implications. Many of these annuities have numerous options and are really difficult to understand.



Submitted by Al Fry on Tue, 2008-07-08 20:46

Also, if you desire to leave any part of your IRA to your children, be sure to look at the death benefits in any annuity.



Submitted by Brad Thibodaux on Tue, 2008-07-08 21:20

I’m talking to 3 different advisors.
1. Put retirement into a Pacific life Variable annuity. This would not be an equity indexed annuity. Guaranteed income for life as long as me or my wife is alive. Guarantees 10% of original amount regardless of stock market. Has a death benefit also.
2. Put retirement into a John Hancock Variable annuity. This would not be an equity indexed annuity. Guaranteed income for life as long as me or my wife is alive. Guaranrtees 8% of original amount regardless of what stock market does. Has a death benefit also.
3. Put retirement into an equity indexed annuity with Allianz. Guaranteed income for life as long as either me or my wife is alive. Guarantees a fixed amount for life as long as me or my wife is alive. Has a death benefit also.
What are the pros and cons of either. Allianz has a cap on how much my investment will earn. However, whatever is earned, my principle or interest earned in any given year, is safe. The first two plans have the possibility of more earnings if the market goes up, but, could possibly risk my principle and my earnings if the market goes down.The Allianz plan seems to be safer.



Submitted by Alan Spross on Tue, 2008-07-08 22:28

A few years back I back tested an Allianz EIA with various market (S&P or whatever index they used) scenarios and came to the conclusion that you would need an extended bull run like we had in the late 90s in order to realize much more than you would get in a fixed annuity.

The insurers have plenty of computing power to use in pricing their product for all sorts of scenarios using their version of Monte Carlo analysis. Of course they factor in all the index futures contracts they must buy to protect themselves against certain outcomes. They also must buy reinsurance for the death benefit exposure which is more costly now after the reinsurers got butchered after the dot com bust and a few policy holders passed at a bad time for both them and the insurer.

It is true that the downside protection is real. It’s the equity upside that very few people will actually see. Yet hearing the features listed, they sound very compelling until you actually do the back testing. That said, there are many people who will do better in one of these products than they will managing their own investments and making emotional or irrational decisions.

While not a big deal, the account value of these products for RMD purposes when you hit 70.5 must consider the value of all the fringe benefits above a certain de minimus amount, and therefore could be more than the cash value as the account at year end. The insurer must provide you with that amount and/or the RMD requirement for the contract.



Submitted by J. Eric Persun on Wed, 2008-07-09 00:29

There are a couple of things to consider, your age now, your time frame to retirement and the surrender period of the annuity. If you are not planning on holding the annuity for longer than the Surrender period or you are required to to take RMD’s before then, you would be better served by putting into a Fixed product or a GLI product if are planning immediate withdrawls. Look at New York Life.



Submitted by Al Fry on Wed, 2008-07-09 00:51

You should re-ask your advisors to verify what these pay. The numbers quoted to not agree with what is available in the market today. And most that guarantee an income stream, have no guarantee of principle as a death benefit.



Submitted by Bruce Steiner on Wed, 2008-07-09 17:22

An annuity is a form of insurance. The idea is not that you’ll come out ahead. Rather, it’s that you’re paying the insurance company to take a risk off your shoulders.

For example, if there’s a 1% chance that something will go wrong that will cost $100,000, I might be willing to pay $1,500 to insure against it, if I can afford the $1,500 premium, but not the $100,000 loss if it were to occur.

Or, if I have $500,000 (or some other amount), and I’m trying to decide how much I can spend each year without running out of money, if I live longer than I expected, or if I spend too much, or if my investments do worse than I thought, I might run out of money. But if I spend too little, to try to preserve my money, but I die sooner than I expected, or if my investments do better than I expected, then I didn’t get to enjoy all my money. I can hedge against these risks by buying an annuity to guarantee how much money I’ll get each year. There are lots of ways the annuity can be structured. It can vary depending on the stock market. It can provide benefits to others after my death. But when all is said and done, ignoring the tax advantages and disadvantages (if it’s not in a retirement plan or IRA), you’re paying the insurance company to take a risk off your shoulders. The insurance company has to price it so that they’ll cover their expenses, have a reserve in case the markets go up or down more than they expected, and perhaps make a little profit as well.



Submitted by Alan Spross on Wed, 2008-07-09 19:19

A recent article on EIAs:

http://www.marketwatch.com/News/Story/Story.aspx?guid=be90ab2cabe240e695…



Submitted by J. Eric Persun on Wed, 2008-07-09 20:54

[quote=”[email protected]“]A recent article on EIAs:

http://www.marketwatch.com/News/Story/Story.aspx?guid=be90ab2cabe240e695…

I’ve not seen an EIA that could be considered appropriate for any investor compared to other choices that are superior in every sense in the annuity world. Not to mention that most EIA’s can be offered by non-registered reps, pay very high commisions and have extremely long surrender periods.



Submitted by BruceM on Fri, 2008-07-11 05:39

And be mindful….

the insurers just love to use marketing words like ‘guarantee’, and’safety’ and ‘protection’, but what exactly do these mean?

The insurer offering the variable annuity may ‘guarantee’ a minimum 1% return…but this ‘guarantee’ is only as good as the insurer making it. If the doomsters turn out to be right, and we were to go into a multi year recession, such that the insurer depleted their prospective reserves, some, as has happened in the past, could go into default, and you could lose your entire investment.

Many state health and life guaranty funds may offer insurance for annuity products, but in Oregon and Washington, they cover only $100,000 of fixed annuity loses, and nothing for variable products. Did the sales rep fully explain this to you?

This is a low risk, but so is the risk that the markets will have negative returns for successive years….which as previously mentioned is what you are paying the mortality expense for in the annuity product.

With all other limitations and expenses applied, is this ‘guarantee’ worth the cost?

BruceM



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