The VA Story

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Ashland's picture
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Recently I have been selling a lot of VA's. My customers are all between 60 and 73, and they all have the need to take income from the accounts in the very near future. I've been using the AXA product - 6% GMIB & a GDB that gives the beneficiary at least the original principal back if the annuitant dies before 85.

When I talk about these w/ other reps in my firm I find that some just love them because it allows us to get clients into investments that will give them the best chance to have income for life(& a higher equity position) & some that hate them because the contracts have a 2.25 - 2.5% cost before portfolio management costs. The argument here is that there's no way for us to grow the money, and that we won't keep up with inflation.

I find truth on both sides. Love your comments.

Thanks!

anonymous's picture
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Uhoh.  Do you realize that the 6% GMIB really is the equivalent of a around 3%?  Do you also realize that the GMIB is useless for someone who needs the money in a very short time period?
I like these types of annuities... when they are used appropriately.  Unfortunately, this is often not the case.  The % of the GMIB should NEVER be mentioned to the client because it is VERY misleading. 

bankrep1's picture
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Ashland, there are better VA's out there then the AXA product.

Bamzor's picture
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Do they know they must annuitize to get that amount? Linclon will let you get to principle after starting the annuitization. But I am certain they are skrewd with AXA. Be honest did you tell them they would have to annuitize and the implications of annuitizing?
 This is when CSI Miami's Horatio Caine says, "This is a Crime Scene".

silouette's picture
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Let us spend one day as deliberately as nature, and not be thrown off the track by every nutshell and mosquito's wing that falls on the rails. - Henry David Thoreau
HDT also believes in simplicity, simplicity, simplicity. Not a dirty book.

troll's picture
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anonymous wrote:
Uhoh.  Do you realize that the 6% GMIB really is the equivalent of a around 3%?  Do you also realize that the GMIB is useless for someone who needs the money in a very short time period?
I like these types of annuities... when they are used appropriately.  Unfortunately, this is often not the case.  The % of the GMIB should NEVER be mentioned to the client because it is VERY misleading. 

Do YOU realize that the GMIB is a worst case scenario and not the strategy? It's much better than losing half your money in the market.  

silouette's picture
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Do YOU realize that the GMIB is a worst case scenario and not the strategy? It's much better than losing half your money in the market.  
It is a tired insurance debate. Look at a decent balanced fund, like Dodge and Cox. Stocks, which are just ownership, are not going away. Bonds and lending will be around as long as folks have to wake up and go to work. Annuity contracts will always be around too - just be careful about how many mouths you have to feed when you sign on the dotted line.
Think about it - immediate annuitization is 90% of what is important when it comes time to take a gamble with an insurance company. Potentially longer term benefits are basically sucked out by the actuaries ( who don't work for cheap).

troll's picture
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silouette wrote:
Do YOU realize that the GMIB is a worst case scenario and not the strategy? It's much better than losing half your money in the market.  
It is a tired insurance debate. Look at a decent balanced fund, like Dodge and Cox. Stocks, which are just ownership, are not going away. Bonds and lending will be around as long as folks have to wake up and go to work. Annuity contracts will always be around too - just be careful about how many mouths you have to feed when you sign on the dotted line.
Think about it - immediate annuitization is 90% of what is important when it comes time to take a gamble with an insurance company. Potentially longer term benefits are basically sucked out by the actuaries ( who don't work for cheap).

Mutual funds are mutual funds and VA's are VA's. You sound stupid comparing two things that do different things. VA's are great if you want what a VA does. MF's are great if you want what MF's do. I like what VA's do and I like to sell them. I sell them to people who like what VA's do, also. Pretty neat, eh?

babbling looney's picture
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silouette wrote:
Do YOU realize that the GMIB is a worst case scenario and not the strategy? It's much better than losing half your money in the market.  
It is a tired insurance debate. Look at a decent balanced fund, like Dodge and Cox. Stocks, which are just ownership, are not going away. Bonds and lending will be around as long as folks have to wake up and go to work. Annuity contracts will always be around too - just be careful about how many mouths you have to feed when you sign on the dotted line.
Think about it - immediate annuitization is 90% of what is important when it comes time to take a gamble with an insurance company. Potentially longer term benefits are basically sucked out by the actuaries ( who don't work for cheap).

It may be a tired argument to you, but not to the client who bought that annuity with the 6% guaranteed growth.  When the term is up and the actual contract market value is down or not up even as much as the 6% guarantee, they are going to want to kiss your feet because they can annuitize if they want to and have a decent income stream.   They won't care that they could have hypothetically earned a few points more by being in mutual funds.  That doesn't mean squat....hypothetically.
I just had a client who has a VA contract that reached the end of its surrender period.   NOTE: I didn't sell them this contract.  When I became agent of record in 2003 the contract was negative by over 30% from the start.  Down by about 42,000.  Since then it has recovered.  We moved the money out of the annuity now that the contract is up (1035 to fixed annuity to keep deferring the gains because the contract had already been 1035 transferred before)  They made practically no money in 8 years.  If the contract had come with a guarantee of an annual 6% compounding GMIB, they would have been better off by far. 
You can't make a direct comparison to mutual funds and VAs.  The peace of mind that the benefits buy and the costs of the benefits is worth it to some people.

silouette's picture
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I agree - it seems these contracts will become more important to the boomers, and should become more competitive and appropriate under certain cirmcumstances. Part of being an open-minded professional and a good leader is to help clients make the right decision.
That is partly why I remain a registered representative and insurance licensed. If you can't offer these products as boomers age and the products evolve to transfer risk and serve the need of boomers, you can't be objective.
Thanks for bringing up the point and the specific example. Obviously you have a big tool kit and take each case individually, as can be seen in the great list of questions for the annuity owner that you posted recently.
Peace of mind for some is # one, and that is at first a financial planning consideration, products are always second.

silouette's picture
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Bobby, I may sound stupid, but I have been in this game a long time. There have been plenty of abuses with annuity contracts, and you are free to discover for yourself and your clients what works for most people over a long period of time.
Part of your job as a registered representative, CFP, experienced investor, and so on - is to bring perspective and education to bear on on financial planning problems, not just sell what you like, or what your clients think they like after you spend a little time with them.
A great joy over time is to see how it all fits together, the beauty of simplicity and the basic idea of stocks, bonds, cash, real estate, certificates - much of the beauty and efficiency gets obscured by the time frames and needs of everyone but the client.
That doesn't mean that annuities are not appropriate sometimes, fact is, they are way overused, and you have to pay your dues, or at least be stable with your business, I would say, before you gain a qualified perspective.
 

troll's picture
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silouette wrote:
Bobby, I may sound stupid, but I have been in this game a long time. There have been plenty of abuses with annuity contracts, and you are free to discover for yourself and your clients what works for most people over a long period of time.
Part of your job as a registered representative, CFP, experienced investor, and so on - is to bring perspective and education to bear on on financial planning problems, not just sell what you like, or what your clients think they like after you spend a little time with them.
A great joy over time is to see how it all fits together, the beauty of simplicity and the basic idea of stocks, bonds, cash, real estate, certificates - much of the beauty and efficiency gets obscured by the time frames and needs of everyone but the client.
That doesn't mean that annuities are not appropriate sometimes, fact is, they are way overused, and you have to pay your dues, or at least be stable with your business, I would say, before you gain a qualified perspective.
 

You've got me confused with someone who likes to do financial planning. I"m sure it's noble work, but I don't want to take the cut in pay.

silouette's picture
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In college, my Korean religious studies professor said,
" After big sumptuous Sunday meal, all have eaten the big chicken dinner and strawberry shortcake, and had a lot of laughs, and everyone sits around and feels full and happy, and then, slowly, shi**y feeling start to creep in. This is the beginning of religious studies."
If you ever start to feel like a used car salesman, that will be your potential foundation for building a professional financial planning career in this industry.
 

troll's picture
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silouette wrote:
In college, my Korean religious studies professor said,
" After big sumptuous Sunday meal, all have eaten the big chicken dinner and strawberry shortcake, and had a lot of laughs, and everyone sits around and feels full and happy, and then, slowly, shi**y feeling start to creep in. This is the beginning of religious studies."
If you ever start to feel like a used car salesman, that will be your potential foundation for building a professional financial planning career in this industry.
 

In my college, a Business professor told me to figure out what people want to buy and sell it to them.

silouette's picture
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Take both ideas and you have the world in a grain of sand.
I have been unwrapping your type of financial sales for many, many years. Once educated, they almost never choose to go back to your type of "planning".
I admire you for being focused and motivated. Just watch for that little voice in your head, that says, " Maybe I should be doing something different for this person. " It's okay to make real planners look good, too.

ManagedMoney's picture
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Bobby Hull wrote:Mutual funds are mutual funds and VA's are VA's. You sound stupid comparing two things that do different things. VA's are great if you want what a VA does. MF's are great if you want what MF's do. I like what VA's do and I like to sell them. I sell them to people who like what VA's do, also. Pretty neat, eh? Help me out here.  1.) What does a VA do that you like? (besides give you high commissions)  2.) What does a VA do that your clients like?

anonymous's picture
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Managed, since you didn't ask the question of me, I'll still answer it.
I actually don't like the commission on the VA's that I sell.  From a commission standpoint, I'd much rather have my clients in an account that is paying me 1% annually.  Also, almost all of my variable annuity business is qualified money because I don't like the tax treatment of non-qualified annuities.
The thing that I like (and my clients like) about the VA is simply that their money can be invested 100% aggressively in equities and they can't lose money provided that they are willing to leave their money in the account for a specific period of time.  Despite the additional fees involved (typically 2.25% including m&e, guarantees, and fund expenses), my VA clients have done better than my other clients.  The only reason is that the VA clients have been able to invest in a way that is greater than their risk tolerance.
 

troll's picture
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ManagedMoney wrote: Bobby Hull wrote:
Mutual funds are mutual funds and VA's are VA's. You sound stupid comparing two things that do different things. VA's are great if you want what a VA does. MF's are great if you want what MF's do. I like what VA's do and I like to sell them. I sell them to people who like what VA's do, also. Pretty neat, eh?
Help me out here.  1.) What does a VA do that you like? (besides give you high commissions)  2.) What does a VA do that your clients like?
Why would a guy named "managed money" want to know about VA's?

troll's picture
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I'm sorry but you people who keep saying "You have to annuitize the AXA to get the 6%" are wrong.
The way the contract works is that you have essentially two towers of capital, the front one is your your investment account, and the back one is your insurance policy. Giggles we'll say that the two towers start off at one million dollars each. 
Your front one will do what it is going to do based on what the market and the fees do to it. For sake of the discussion, let's say that it does net 0%.
It's now 12 years on....
Tower one is still worth 1MM, tower two has a theoretical value of 2MM.
Mr. Jones says. I'm 65years old, I want income NOW! FA says, OK, here is a 6% income stream from your annuity contract, $120,000.
"120M, Wait, I gave you 1MM and it did squat, 6% is 60,000!"
"Yes, but the insurance side grew by 6% per year and in 12 years it doubled."
The 120M is coming from the initial 1MM in the investment side (which means that there is no tax on the money because it's all principal) which has now dropped from 1MM to 880M.
Mr Client can keep taking this 120M for 8 years. Let's continue to assume that the investment does net 0%. At the end of 8 years, the investment account is worth 40M and so poor mr client has to annuitize the contract. He's now 72, lets assume they're giving him 0% on the annuitized portion. They assume that he has about 15 years till dirt nap. He'll get about $133,333/year for the rest of his life. If he lives past 87 he has a total return on his million dollars of more that 3,000,000 in benefits.
Point is, he doesn't HAVE to annuitize until his initial investment has crapsed out.
Maybe that's good maybe that's bad, maybe there's better maybe there's not (and maybe I'm wrong, won't be the first time). But From what I have been able to determine from the contract this is how it works and so the knee jerk "you gotta annutitze" is PO wrong.
BTW I think that John Hancock is coming out with a 6% product in NY soon too, and JH has a AAA to go along with it. That's worth looking at. 
 

troll's picture
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Whomitmayconcer wrote:
I'm sorry but you people who keep saying "You have to annuitize the AXA to get the 6%" are wrong.
The way the contract works is that you have essentially two towers of capital, the front one is your your investment account, and the back one is your insurance policy. Giggles we'll say that the two towers start off at one million dollars each. 
Your front one will do what it is going to do based on what the market and the fees do to it. For sake of the discussion, let's say that it does net 0%.
It's now 12 years on....
Tower one is still worth 1MM, tower two has a theoretical value of 2MM.
Mr. Jones says. I'm 65years old, I want income NOW! FA says, OK, here is a 6% income stream from your annuity contract, $120,000.
"120M, Wait, I gave you 1MM and it did squat, 6% is 60,000!"
"Yes, but the insurance side grew by 6% per year and in 12 years it doubled."
The 120M is coming from the initial 1MM in the investment side (which means that there is no tax on the money because it's all principal) which has now dropped from 1MM to 880M.
Mr Client can keep taking this 120M for 8 years. Let's continue to assume that the investment does net 0%. At the end of 8 years, the investment account is worth 40M and so poor mr client has to annuitize the contract. He's now 72, lets assume they're giving him 0% on the annuitized portion. They assume that he has about 15 years till dirt nap. He'll get about $133,333/year for the rest of his life. If he lives past 87 he has a total return on his million dollars of more that 3,000,000 in benefits.
Point is, he doesn't HAVE to annuitize until his initial investment has crapsed out.
Maybe that's good maybe that's bad, maybe there's better maybe there's not (and maybe I'm wrong, won't be the first time). But From what I have been able to determine from the contract this is how it works and so the knee jerk "you gotta annutitze" is PO wrong.
BTW I think that John Hancock is coming out with a 6% product in NY soon too, and JH has a AAA to go along with it. That's worth looking at. 
 

Can't you do that if you lose money in mutual funds or managed money?

anonymous's picture
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I'm sorry but you people who keep saying "You have to annuitize the AXA to get the 6%" are wrong.
Whomitmayconcer, go back to the original post.  You'll see that he's talking about a GMIB and not a GMWB.  The contract will have to be annuitized to get the 6% and the 6% isn't legit since they use lower annuitization factors.
I must admit that my knowledge is not where it should be when it comes to GMWB riders.  Please explain how money can be taken out of the contract without paying taxes unless it is truly two separate contracts.  In your example, the investment grew from $1,000,000 to $2,000,000, the first $1,000,000 taken out would all be taxed as income.  Please help me to fill in my knowledge gap.  (The question is sincere and not sarcastic.)

ManagedMoney's picture
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Bobby Hull wrote:ManagedMoney wrote: Bobby Hull wrote:
Mutual funds are mutual funds and VA's are VA's. You sound stupid comparing two things that do different things. VA's are great if you want what a VA does. MF's are great if you want what MF's do. I like what VA's do and I like to sell them. I sell them to people who like what VA's do, also. Pretty neat, eh?
Help me out here.  1.) What does a VA do that you like? (besides give you high commissions)  2.) What does a VA do that your clients like?
Why would a guy named "managed money" want to know about VA's? Apparently, the simple questions were too hard for you to answer.

troll's picture
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Bobby Hull wrote:silouette wrote:
Bobby, I may sound stupid, but I have been in this game a long time. There have been plenty of abuses with annuity contracts, and you are free to discover for yourself and your clients what works for most people over a long period of time.
Part of your job as a registered representative, CFP, experienced investor, and so on - is to bring perspective and education to bear on on financial planning problems, not just sell what you like, or what your clients think they like after you spend a little time with them.
A great joy over time is to see how it all fits together, the beauty of simplicity and the basic idea of stocks, bonds, cash, real estate, certificates - much of the beauty and efficiency gets obscured by the time frames and needs of everyone but the client.
That doesn't mean that annuities are not appropriate sometimes, fact is, they are way overused, and you have to pay your dues, or at least be stable with your business, I would say, before you gain a qualified perspective.
 

You've got me confused with someone who likes to do financial planning. I"m sure it's noble work, but I don't want to take the cut in pay. I suppose that honest work like that would be a cut in pay compared to slogging the EIA with the highest commish to blue hairs, right?

troll's picture
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joedabrkr wrote: Bobby Hull wrote:silouette wrote:
Bobby, I may sound stupid, but I have been in this game a long time. There have been plenty of abuses with annuity contracts, and you are free to discover for yourself and your clients what works for most people over a long period of time.
Part of your job as a registered representative, CFP, experienced investor, and so on - is to bring perspective and education to bear on on financial planning problems, not just sell what you like, or what your clients think they like after you spend a little time with them.
A great joy over time is to see how it all fits together, the beauty of simplicity and the basic idea of stocks, bonds, cash, real estate, certificates - much of the beauty and efficiency gets obscured by the time frames and needs of everyone but the client.
That doesn't mean that annuities are not appropriate sometimes, fact is, they are way overused, and you have to pay your dues, or at least be stable with your business, I would say, before you gain a qualified perspective.
 

You've got me confused with someone who likes to do financial planning. I"m sure it's noble work, but I don't want to take the cut in pay.
I suppose that honest work like that would be a cut in pay compared to slogging the EIA with the highest commish to blue hairs, right?
The only EIA I sell is a 5 year surrender with a 5% commish, but thanks for trying to take a swipe and ending looking stupid. It seemed so natural for you.

troll's picture
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Anon,
The second "tower" is really just an insurance policy. In essence AXA buys a term policy on the life of the first tower (maybe they buy it on the annuitant, I guess they could, based on the idea that they'll get their money back some day when the guy dies, which he eventually will)
The only "real money" the guy has is the money in the investment account (the first tower). AXA hopes that that account will grow faster than the second tower so that your client will cash out of the first tower and the second one is a moot point.
Since the first tower is only the guy's own money in the example (he put in a Mil and it stayed at a mil) the money he's taking out is his own principal. He's able to take it out at a 12% rate because the second tower is still "growing" at a 6% pace on the 2MM. (if the guy took only 60M the second tower would still grow.I'm not 100% sure, but the second tower might also represent the death benefit, I think it can outside of NYS).

troll's picture
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All of these guarantees are fun to talk about, but do any of you guys make your clients a lot of money in the VA's? The VA I've been using has significantly outperformed the S&P over the last 4 1/2 years that I've been using it. The guarantees are a very small part of what I discuss with people.

anonymous's picture
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Bobby,
It has been the guarantees that have allowed my clients to make a lot of money.  Clients with guarantees invest more aggressively than clients who don't have guarantees.
 

troll's picture
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anonymous wrote:
Bobby,
It has been the guarantees that have allowed my clients to make a lot of money.  Clients with guarantees invest more aggressively than clients who don't have guarantees.
 

I'll buy that. Another thing that helps is that they only get quarterly statements and the don't have ticker symbols that they can watch every day. I never get calls from people worrying about their annuities.

troll's picture
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Yes, I do,(make money for my clients) and I am known to trade out of them (when it makes sense) too!

silouette's picture
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Since the first tower is only the guy's own money in the example (he put in a Mil and it stayed at a mil) the money he's taking out is his own principal. He's able to take it out at a 12% rate because the second tower is still "growing" at a 6% pace on the 2MM. (if the guy took only 60M the second tower would still grow.I'm not 100% sure, but the second tower might also represent the death benefit, I think it can outside of NYS).
Great, I'll take some McFries with that contract. Hope Ronald has a favorable record under the terms of the contract, underwise we'll  be eating humble pie in a cardboard sleeve. Maybe they'll sell us a salad to go along and make it healthy food. Let's see, for what I spent I could have had a nice piece of fresh halibut and fresh baked bread ...

troll's picture
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silouette wrote:
Since the first tower is only the guy's own money in the example (he put in a Mil and it stayed at a mil) the money he's taking out is his own principal. He's able to take it out at a 12% rate because the second tower is still "growing" at a 6% pace on the 2MM. (if the guy took only 60M the second tower would still grow.I'm not 100% sure, but the second tower might also represent the death benefit, I think it can outside of NYS).
Great, I'll take some McFries with that contract. Hope Ronald has a favorable record under the terms of the contract, underwise we'll  be eating humble pie in a cardboard sleeve. Maybe they'll sell us a salad to go along and make it healthy food. Let's see, for what I spent I could have had a nice piece of fresh halibut and fresh baked bread ...

Let me guess....your parents rejected you when you came out of the closet.

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 Don't tell anyone.

EDJ to RIA's picture
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Here's a recent excerpt from Bob Veres newsletter concerning VA's. I though it was interesting:
Honolulu-based advisor David Jacobs, in his periodic DavidsDiamonds review, offers some insights into the Guaranteed Minimum Income Benefit (GMIB) provisions in variable annuities contracts. These guarantee riders typically cost 50 to 60 basis points a year, and guarantee 5% annual growth of the income base no matter what the contract's underlying performance happens to be. But Jacobs points out that the 50-60 bp fee is assessed against the guaranteed income base, which means that the company's fee automatically goes up each year. If the market drops and the account value goes down, say, 30%, suddenly what was a .5% fee can be (depending on how long the raises have been going on) 70, 80 or 90 basis points.
Also, Jacobs points out, you only get the guarantee if you annuitize the contract. In most cases, he says, if you annuitize the contract under the GMIB rider, the company will give you a far more conservative annuitization rate than you would have gotten otherwise. How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.
If you move the numbers around a little bit you discover that the account would have to have declined by a total of 11% over ten years for the guarantee to have benefited the consumer. Otherwise, you were better off without the guarantee. Jacobs doesn't have to state the obvious, but I will: when has any reasonable equity portfolio ever declined by 11% over any ten-year period?
This is very interesting and detailed analysis. I bring it up because I think most members of the FPA would say that they would like to see this kind of evaluation in their peer-reviewed professional magazine--something that digs into the numbers in a sophisticated way, and talks to them, as professionals and adults, about the hard-dollar impacts of their choices and the numbers behind what's breathlessly touted in the marketing materials.
Instead, we have a cover story which includes a sidebar which explains GMIBs with a credulous marketing-material illustration showing that after 12 years, the annuity portfolio has lost 15% (!), but (ta da!) because of the GMIB rider, the consumer still has $179,585 to annuitize. The article contains no mention or analysis of the RATE that it will be annuitized. Meanwhile, the article goes back and forth, saying that some say that annuities are good, some are more cautious, never digging into the numbers or asking an actuary to estimate the actual costs and profit margins of these guarantees. Page after page forthrightly insulting the readership's intelligence by saying that you have to factor in peace of mind when selling annuities to clients--when, in fact, these expensive training wheels have become the primary selling point since the tax benefits were exposed to be nonexistent.

silouette's picture
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Well presented. Don't expect any big intellectual rebuttal from the annuity closers here.  For the thinkers and real planners, what more needs to be said?

AllREIT's picture
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silouette wrote:Well presented. Don't expect any big intellectual rebuttal from the annuity closers here.  For the thinkers and real planners, what more needs to be said?

It's so much simpler, any insurance product is a bet against a bunch of
actuaries who have worked out all the angles. The Insurance company
expects to win even after taking a 6% handicap from sales commisions.

An insurance contract is a zero sum game; and if you can't spot the sucker....

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It's absolutely ridiculous for a "thinkers and planners" like yourself to get your information from an article instead of from a primary source. 
He's wrong about how the pricing of the GMIB works.  There may be one that works that way that he describes, but that is not the norm.  Most of them go by the contract value. 
He's also wrong about the negative 11%.   I've done the calculations and it usually works out that it makes sense to annuitize if the contract has averaged around 2.8% (give or take a few tenths based upon exact details) compound annual growth.
Do I expect any of my clients to ever use the guarantees inside of a VA?  No.  Do I use guarantees?  Yes. (Primarily GMAB because I do believe that the stated % in the GMIB is disingenuous.)  If someone thinks that piece of mind does not have a lot of value, then they probably haven't been in the business very long. 
I've said it many times that my VA clients have outperformed my mutual fund clients and it's because they are paying for a guarantee.  The value of the guarantee is two-fold. 
1)The VA client is able to invest more aggressively than his risk tolerance will allow.   In other words, we're able to do an unfair comparison.  This client, if invested in MFs, might be 30% stocks and 70% bonds, yet in the VA, they are 100% stocks.
2)Just about all of our clients are less aggressive than they think.  It's easy to be aggressive when the market is going up.  However, when the market goes down, our clients aggressiveness goes down with it.  Ex. Market goes down 30%.  Client portfolio drops from $200,000 to $140,000.  MF client, in many, many cases, is going to start investing much more conservatively.  Annuity client, with guarantee, will keep money invested aggressively. 
We too often focus on investment performance instead of investor performance.  The fees inside of a VA often hurt investment performance, but at the same time, help investor performance.
AllReit, The insurance company expects to win after paying the commission in the same way that the Mutual Fund company expects to win after paying the commission.  The commission gets paid from annual expenses taken from the client or an up-front sales charge deducted from the account.  On the other hand, if you are talking about the insurance company making money from living benefit riders, it is questionable.  
Are the insurance companies trying to make money on every contract that they sell?  Yes.  Are they trying to make money on the living benefit riders?  It doesn't appear to be the case.  The riders are really designed to attract additional money to the product.  It's the additional hundreds of millions of dollars in the product that makes additional money for the insurance company and not the riders.  There is a lot of concern in the industry that these riders (GMIB, GMAB, GMWB) may be underpriced.   Therefore, I'd be very careful to only use these riders with very strong insurance companies.
Variable annuities are not a big part of my practice, but they are definitely a valuable tool.   My primary use for them is qualified money when the guarantee allows the client to invest more aggressively and the money can be tied up for a period of time.  The total annual cost of the annuity that I use, including all fund expenses and bells and whistles, is about 2.3%.   

silouette's picture
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Variable annuities are not a big part of my practice, but they are definitely a valuable tool. 
No one could reasonably condemn them outright, or say they are never appropriate, since they can transfer the risk of outliving money.
It always seems to come down to the appropriateness of immediate annuitization, and whether money should be tied up until that (unlikely) event.
Underpricing is a great example, because either contract owners will be paying too much now, or too much later. How many of would make the commitment now, with our own money? Who would sell a product they would not want to own themselves? I can do better just owning municipal bonds at non qualified, along with handful of long term stocks holdings ( even funds) and don't need the tax protection at qualified. Why wouldn't that strategy be good enough for my clients? 
If they want to transfer risk, do immediate annuitization.
Has anyone found any solid research to convincingly argue otherwise ( leaving the occasional peace of mind case aside)? As advisors, we don't change client's risk tolerance, but we better be educating them instead of pandering to their fearful emotions .

troll's picture
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How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.
What exactly does that mean?
It means that he can buy an immediate annuity with a rate of 2.5 to 3%?
I went to the website and put this example in... 72yo male no spouse $1,000,000 and the nums came up $8272 for straight, no period certain. This means that they think your going to live for 10 years and their not giving you any interest on your money.
If you take life with 5 year certain the num goes to 7,998 which means you are giving up nearly half your money if you get hit by a beer truck on the way home from the meeting.
If you take L W/ 10yc you give away 10% of your money.
Take LW/15yc and you are guaranteed to get back 1.225MM from your mil.
Lw/20yc = 1.5MM!
Question being, where is he making the comparison? Off the 5 and 10 year? Can't be on the straight life because 2 times zero is still zero.
The twenty year number is a 4.3% number.
So if the AXA (for example) Annuity grew by nothing and paid you out by nothing versus annuitizing your portfolio which grew by the fees in the annuity (let's call them 3.5% non compounded) over the 12 year period and then annuitized as per the above.
(1,000,000 X 3.5%) x 12 + 1,000,000 = 1,420,000  
1,420,000 @ Lw/20yc = 8,844
(8,844 X 12) X 20 = $2,122,560
AXA
(1,000,000 X .000) X 12 + 1,000,000 = 1,000,000
Monthly Income = 10,000
Capital expires in 8.25 years
Annuity pays $8,333/month 240 months = 2,000,000
1,000,000 + 2,000,000 = 3,000,000
$3,000,000 - 2,122,560 = 877,440
I'm open, tell me where this is wrong!

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I can do better just owning municipal bonds at non qualified, along with handful of long term stocks holdings ( even funds) and don't need the tax protection at qualified. Why wouldn't that strategy be good enough for my clients? 
Let's keep this to qualified since that's what I sell for the vast majority of my annuities.   The purpose of these annuities has nothing to do with tax protection. 
The answer to why it is not good enough for your clients is because an all equity portfolio inside of a variable annuity should be expected to outperform a bond portfolio that is coupled with a handful of long term stock holdings.  I have been in business for over 10 years.  100% of my VA clients (who have owned a VA longer than 1 year) have lifetime returns of over 10% annually.  Many have been in the 13-15% range.  0% of my clients with mostly bond holdings have returns over 10%.
Again, what makes a VA good is how it impacts investor behavior.   I'm not sure that this can be measured, but it certainly should not be an underestimated factor.

anonymous's picture
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How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.
What exactly does that mean?

anonymous's picture
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How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.
What exactly does that mean?
I hit "post reply" too soon.   Whom, unfortuately, I didn't quite understand your post, but I think that I can explain what he was talking about. 
The annuitization rates used inside of a VA utilizing a GMIB are B.S.  They either use lower annuitization rates or an age setback or a combination of the two.
I'll make his point with made-up #'s.   The client has $1,000,000.  Using Guardian's annuitiaation rates for the GMIB for his age, sex, and payment option, the insurance company will pay him $3500/month.  If he bought a SPIA with Gualdian, it would pay him $6,900.  If the client shopped the market to find the best payout, he would find company XYZ would pay him $7,000/month for the same thing.  
However, this comparison is very misleading.   Why?  If XYZ is paying $7,000, that is what the client will get.  It does not matter what the GMIB annuitization rates happen to be.  He'll shop the market to get the best rate.  What it really means is that the client is guaranteed to get no worse than $3500. 
Mathematically, it tends to work out that annuitizing the contract using GMIB only makes sense if the rate of return is under 3%.  The higher the GMIB guarantee (5%, 6%, 7%,etc), the lower the payout.  In reality, all GMIBs are about 3%.  In other words, a SPIA will  pay more if the contract earns higher than 3%.

silouette's picture
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That is a good question, maybe someone here knows.
To me, it is a time a value of money statement. Over time, you could invest the $$ outside an annuity contract and when you are ready for a pension, buy the stream of income.
In order to get the same income as what the annuity will provide, you can assume half the return rate on investments.
Interestingly, you don't half to take half the "risk" to get more than half the return if you invest outside of an annuity.
In other words, historically, a 60% stock portfolio could generate up to 10% return over a long period of time, but it takes 100% stocks to get 12 %. This may be the most underrated concept in the business, and I think sometimes it gets abused in terms of taking advantage of investors, in many ways, not just with advisors.
 

AllREIT's picture
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anonymous wrote:
AllReit, The insurance company expects to win after paying the
commission in the same way that the Mutual Fund company expects to win
after paying the commission.  The commission gets paid from annual
expenses taken from the client or an up-front sales charge deducted
from the account.Quote:

The MF company has no skin in the game, the insurance company is exposed to risk of loss from investments or longevity.
Quote:On the other hand, if you are talking about the insurance
company making money from living benefit riders, it is
questionable.  Are the insurance companies trying to make money on
every contract that they sell?  Yes.  Are they trying to make
money on the living benefit riders?  It doesn't appear to be the
case.

Please, the insurance companies are not naive. They expect to make money on every part of the contract.

Quote: There is a lot of concern in the industry that these riders
(GMIB, GMAB, GMWB) may be underpriced.   Therefore, I'd be
very careful to only use these riders with very strong insurance
companies.

Just between you and me, these riders are under priced. You'd better act now to lock in the advantage.

Again, an insurance contract is a zero sum game. If you can't spot the sucker...

silouette's picture
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The logic circles itself. If a "dumb sucker" gets peace of mind, and the advisor can sleep at night, so be it.
It just seems like that have to use a lot of trolling bait to subdue the sucker, aka:
However, this comparison is very misleading.   Why?  If XYZ is paying $7,000, that is what the client will get.  It does not matter what the GMIB annuitization rates happen to be.  He'll shop the market to get the best rate.  What it really means is that the client is guaranteed to get no worse than $3500. 
Mathematically, it tends to work out that annuitizing the contract using GMIB only makes sense if the rate of return is under 3%.  The higher the GMIB guarantee (5%, 6%, 7%,etc), the lower the payout.  In reality, all GMIBs are about 3%.  In other words, a SPIA will  pay more if the contract earns higher than 3%.
  

anonymous's picture
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Just between you and me, these riders are under priced. You'd better act now to lock in the advantage.
Again, an insurance contract is a zero sum game. If you can't spot the sucker...
You're making a mistake if you are going to assume that the insurance company is so very smart and always price things correctly.  I freely admit that I have no idea whether the living riders are appropriately priced, overpriced, or underpriced.  The pricing of riders is far from any expertise that I may possess.  However,  it is a fact that many insurance company insiders are afraid that the riders are underpriced.  In your words, the "sucker" in this instance might be the insurance company.  Why do you think that almost all of the contracts now require model portfolios?   
The logic circles itself. If a "dumb sucker" gets peace of mind, and the advisor can sleep at night, so be it.
It just seems like that have to use a lot of trolling bait to subdue the sucker, aka:
First of all, the "dumb suckers" are outperforming what they'd otherwise be doing.  Secondly, I actually agree with you when it comes to "trolling bait".  The product can sell based upon it's own merit and there is no reason for the game playing with annuitization rates.   (Well, there is reason, but it shouldn't be done: "Company A is guaranteeing 5%, but we're guaranteeing 7%")  The companies should simply make the GMIB 3% and use their regular annuitization tables.  The game playing is why I almost always use GMAB riders instead of GMIB riders.
  

silouette's picture
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Interesting. But I think what Allreit means by zero sum is, if any aspect of the product is under priced, or if there is any other adverse experience in the contract, wouldn't the insurance company just take out their expenses plus a little profit?
How can they be on the hook  in any way. And don't they just take out their $$$ as cash flow as time goes along.
In other words, what looks like a good deal now could "blow up" in terms of the fine print in the contract.
I don't know - not in any way a specialist or even a very good student of these contracts. My distaste comes from other insurance product experiences - like, ten years ago, saying, "you pay a level premium into this long term care contract. The premium can go up in the future, but we are choosing a quality company ..."
Terms like zero sum and sucker could be useful to just understand the basic premise of the game here.
Look at the flip side: you have a huge need for some type of annuitization for a lot of unprepared boomers. We all know the industry is wetting its pants in anticipation.
How come ... how come. They can't explain to me, an experienced CFP, in simple terms, how they do their magic. Is it because I stopped going to the cool aid edcation days and don't get the complicated message, or is it just that they don't have a product?
I admire your apparent success at researching and finding something, I will need some simple, hard facts before any money moves from simple investments.

silouette's picture
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Here is an annuity product idea.
I give you $100,000. In 20 years, you give me $100,000 plus 7% per year, compounded, at the end. I can annuitize or not.
If I am afraid of the market, why do I care about all of these fancy allocations, locking crap in, interest rates, and all the rest.
You go ahead and manage the separate account and make sure my money is diversified by investments, time frames, mortality payout obligations and all the rest.
Go ahead, focus on lowering your costs so you can keep the spread, and be ready to offer a competitive annuitization rate when the time comes.
I'll give you a surrender period, but if interest rates head up in the sky in the future ( the dems get elected and achieve a Jimmy Carter social justice with 18% interest rates to help Medicare and Social Security).
Otherwise, I am paying my (cheap) taxes now and keeping my money clean.
 

anonymous's picture
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Interesting. But I think what Allreit means by zero sum is, if any aspect of the product is under priced, or if there is any other adverse experience in the contract, wouldn't the insurance company just take out their expenses plus a little profit?
No.  The price is contractually guaranteed as are the annuitization payments.  Therefore, if poor investment returns (meaning that people would use the GMIB annuitization) gets coupled with increased longevity (meaning that payments last longer than expected), the insurance company has the possibility of taking a real financial bath.
In other words, what looks like a good deal now could "blow up" in terms of the fine print in the contract.
It could blow up, but not because of fine print.  Rather, it would blow up because the guarantee is only as good as the claims paying ability of the company.  It is important to buy guarantees from top rated companies who can pay the claims.
I will need some simple, hard facts before any money moves from simple investments.
It is for this reason that I use the GMAB rider because my clients can understand it easily.  "The GMAB is a one day guarantee.  Today is  March 27, 2007.   You are investing $250,000.  On March 27, 2017, if you have less than $250,000, the insurance company will make up the difference.  For example, if the value of your account on March 27, 2017 is $200,000, the insurance company will deposit another $50,000.  Adding this rider will lower your return by .35%/year, but it will allow us to invest the money more aggressively."  I also sometimes use a 20 year GMAB.  This guarantees that the money will double in 20 years.  Annuitization is not required with these riders.

anonymous's picture
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I give you $100,000. In 20 years, you give me $100,000 plus 7% per year, compounded, at the end. I can annuitize or not.
If someone has a product that guarantees a true 7% a year, run for the hills!  Paying the claims will bankrupt a company if the return isn't 7%.
If I am afraid of the market, why do I care about all of these fancy allocations, locking crap in, interest rates, and all the rest.
Clients aren't afraid of the market.  They are afraid of losing money.  The living benefits conquers this fear for them.
Go ahead, focus on lowering your costs so you can keep the spread, and be ready to offer a competitive annuitization rate when the time comes.
At 7%, there is no spread. 
Otherwise, I am paying my (cheap) taxes now and keeping my money clean.
If we were talking about non-qualified money, I'd agree with you.  My annuity business is almost exclusively qualified money.

troll's picture
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silouette wrote:
Here is an annuity product idea.
I give you $100,000. In 20 years, you give me $100,000 plus 7% per year, compounded, at the end. I can annuitize or not.
If I am afraid of the market, why do I care about all of these fancy allocations, locking crap in, interest rates, and all the rest.
You go ahead and manage the separate account and make sure my money is diversified by investments, time frames, mortality payout obligations and all the rest.
Go ahead, focus on lowering your costs so you can keep the spread, and be ready to offer a competitive annuitization rate when the time comes.
I'll give you a surrender period, but if interest rates head up in the sky in the future ( the dems get elected and achieve a Jimmy Carter social justice with 18% interest rates to help Medicare and Social Security).
Otherwise, I am paying my (cheap) taxes now and keeping my money clean.
 

You're only in the 15% tax bracket...it doesn't matter.

silouette's picture
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Yo, Bobby, want some cheese curls with dat annuity?

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