guarantee 100% in ten years

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scrim67's picture
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A client of mine mentioned they were solicted a product from Equitable that guarantees a 100% return in ten years no matter what happens in the market.
Is this possible?
thanks in advance for your feedback.
scrim

scrim67's picture
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I called EQ myself and they said there is no such product.  
They did say they have something that guarantees 6% annually but to get this you have to annuitize your contract.
scrim

babbling looney's picture
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Yes it is possible.   ING has an annuity that has a guaranteed 7% annual compounded living benefit.  Yes, you have to wait 10 years and must annuitize to receive the benefit.  But as long as the client is aware of these conditions, aware that they are paying for this benefit and hasn't put all of their money in the account, I don't see an issue.
If the contract market performance is greater than 7% annually (which we hope will happen) then they don't have to annuitize they can take the market value and withdraw as they see fit.  If the market performance is less, then the client is guaranteed an income stream on his higher 7% return.
This seems like a good safety net to me.

Indyone's picture
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Scrim,
It is this kind of product that you will forever be competing with.  Sure, the costs are higher, but the client is paying for a guaranteed double, with some nice income options, and contracts are just getting more and more competitive.  The key to your success is recognizing which clients are willing to accept the risk (your managed money account) in return for potentially greater reward, vs. which ones are uncomfortable with fluctuation and should definitely be steered toward a product that guarantees their principal, which providing a respectable, albeit lower average annual return (the variable annuity).  Embrace the alternatives and watch your business blossom.
A nice added side-effect is that the VA business is much easier to move if you decide that life in the bank no longer agrees with you.

TexasRep's picture
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wow!
indy "senior members" recognizing that the lowly and hated annuity has a viable place in some portfolios-- what next, a cure for cancer?
 

scrim67's picture
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Indy,
Point well taken.
My feeling is that if I offered side-by-side both options most people would take the guarantee.
As I've always said, I hesitate to place my client's hard earned assets in products they cannot reasonably understand.    VA's are convoluted IMHO so I refrain from using them.
I don't want to build my practice that way; unless I absolutely feel they will keep their assets in cash otherwise.     So far, I feel I've lost very little business by recommending non-insurance products.
When, not if, we have a market correction or bear market perhaps I will rue building my practice this way.   I'm just more comfortable builiding this way but the problem of course is I should be making my clients more comfortable as opposed to myself.   It's almost a conundrum!
scrim
 

BankFC's picture
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Scrim,
Do you really think your clients understand completely the amortization on their mortgage works, how their health insurance premium was determined, or even all the details of their 401K at work?
Most folks do not.  You are the expert Scrim.  That's why you are a paid professional.  You are supposed to make recommendations, and explain them clearly, but in the end, it's still up to you to do whats best for the client.
If someone would be more satisfied with 2% less return and a guarantee of principle and and guaranteed income for life (many times w/o annuitization), then you should give that to them.
If a man wants a brown suit, sell him a brown suit.

scrim67's picture
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I don't think they fully understand the above, however, I do believe they understand it more than an insurance contract.
Asset allocation is a much easier concept to grasp.
If we are the experts, don't we have a fiduciary responsibility to put their assets into the products that best (brown, gray, charcoal) suits their needs with a reasonable cost, tax implicatons and liquidity?
Perhaps one day I will be able to make a case for VA's but until that day comes I am bound by my conciousness to build my practice the way I feel is best.
YMMV
scrim

Indyone's picture
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TexasRep wrote:wow!
indy "senior members" recognizing that the lowly and hated annuity has a viable place in some portfolios-- what next, a cure for cancer?
 Maybe I'm an anomaly, but I've never felt that VAs don't have a place at the table...

BankFC's picture
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"reasonable cost"
Scrim, I respect your seemingly good work ethic and genuine concern for your clients interests, but I do question your willingness to learn new products (even if you are to learn you don't want to use them).
VA's cost in my opinion are reasonable.  Take for example John Hancock Venture VA.  M&E of 1.15 (pays for the guarantee), and subaccount allocation models (rebalanced daily) for between 0.80% (index allocation) and 1.19% (I'm quoting these numbers from my head, but I think they are accurate).
So you are all in for around 2% (maybe 1% more than your avg mutual fund), plus you get the safety of the guarantees.
Food for thought.

scrim67's picture
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cost if very reasonable in the above case.    I'm talking about some of the contracts where the costs are much more prohibitive.....with all the bells and whistles they can approach 2.5-3%.
I also enjoy keeping assets liquid and tax implications at withdrawal favorable.
I'm not saying all VA's are bad, that would be a stereotype.    I just choose not to use them in my practice in almost all situations.
scrim
 

TexasRep's picture
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Indyone wrote:TexasRep wrote:wow!
indy "senior members" recognizing that the lowly and hated annuity has a viable place in some portfolios-- what next, a cure for cancer?
 Maybe I'm an anomaly, but I've never felt that VAs don't have a place at the table...

 
maybe you are....but more often than not, whenever the 2 words: annuity/bank get mixed in the same sentence, the indy and wirehouse guys come out with guns blazing about how all bank FA's sell annuities to little old ladies----- all the while, the trophy $15,000 fee based acct NEVER gets scrutinized, in fact it's held up as the standard, as if these accts, 1 year and 2 years in, are really going to be getting the attention they are paying for--
 
 
 

Indyone's picture
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scrim67 wrote:I don't think they fully understand the above, however, I do believe they understand it more than an insurance contract.
Asset allocation is a much easier concept to grasp.
If we are the experts, don't we have a fiduciary responsibility to put their assets into the products that best (brown, gray, charcoal) suits their needs with a reasonable cost, tax implicatons and liquidity?
Perhaps one day I will be able to make a case for VA's but until that day comes I am bound by my conciousness to build my practice the way I feel is best.
YMMV
scrim
Scrim, I've been in your shoes, and I've questioned the VA much as you do, but the bottom line is, you have to make the investment fit the client's profile.  Before you recommend anything, you need to spend some time getting to know the client/prospect, their likes/dislikes, risk tolerance, etc.  Usually, by the time I'm done with the profiling part, I already know what the client wants/needs.  In rare instances where I'm not pretty positive as to what fits best by that point, I'll lay the alternatives side by side and go through a pro & con with the client/prospect and help them reach a conclusion.  Usually, though, by that time, it's obvious if they are a fee-based, or retail mutual fund, or municipal bond, or VA, or whatever-type of client, and that it what I recommend.
If you spend some time really learning a couple of good VAs, and then really profile your clients, you'll find they will fit other products like VAs more often than you think.  If you steer that kind of client into managed money, my experience is that you'll spend a lot of time hand-holding in the next market downturn and still have some nervous clients cashing perfectly good investments at the bottom of the market.  At that point, it really doesn't matter if you or I think that the investment being liquidated was the best choice for the client...the best choice is the one that they'll keep...

scrim67's picture
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the guarantees are covered in the M&E?
The contracts I've seen that have a GMIB usually cost around 40-60 basis points and I was always under the impression it was a separate fee.
Can any experts clarify as VA's are self admittedly not my forte?
scrim

waterboy's picture
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Scrim,getting back to your original question,It is your principle is protected 100% and will be returned( they allocate a portion to fixed and a portion to subaccts) . NOT A 100% RETURN ON THE INVESTMENT.

scrim67's picture
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Excellent post Indy.
That is why I always "sell" myself first and not a product.
I hope this strategy helps when we hit a bear market!!!!!
Time will tell.
scrim

scrim67's picture
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Waterboy,
I was told it was 100% on the investment.    
There money will double in 10 years worst case scenario.
scrim

Indyone's picture
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waterboy wrote:Scrim,getting back to your original question,It is your principle is protected 100% and will be returned( they allocate a portion to fixed and a portion to subaccts) . NOT A 100% RETURN ON THE INVESTMENT.
Au contraire...some annuities guarantee principal only and some guarantee a double, which is basically a 7% return for 10 years.

FreedomLvr's picture
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scrim67 wrote:
the guarantees are covered in the M&E?
The contracts I've seen that have a GMIB usually cost around 40-60 basis points and I was always under the impression it was a separate fee.
Can any experts clarify as VA's are self admittedly not my forte?
scrim

Although far from an expert, I know that SOME VA benefits are built into the M&E's but most are "a la carte".

scrim67's picture
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"At that point, it really doesn't matter if you or I think that the investment being liquidated was the best choice for the client...the best choice is the one that they'll keep"
Indy,
I respectfully disagree with you on this one.
If this was true, I'd put clients into the investments they perceive as the most safe.    Their accounts would probably only grow around 5% annually before taxes.   I would probably never lose the accounts though!
scrim

Mike Damone's picture
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scrim67 wrote:
the guarantees are covered in the M&E?
The contracts I've seen that have a GMIB usually cost around 40-60 basis points and I was always under the impression it was a separate fee.
Can any experts clarify as VA's are self admittedly not my forte?
scrim

Scrim, Most living benefits GMIB / GMWB are add on features which is an additional cost.
 

Mike Damone's picture
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babbling looney wrote:
Yes it is possible.   ING has an annuity that has a guaranteed 7% annual compounded living benefit.  Yes, you have to wait 10 years and must annuitize to receive the benefit.  But as long as the client is aware of these conditions, aware that they are paying for this benefit and hasn't put all of their money in the account, I don't see an issue.
If the contract market performance is greater than 7% annually (which we hope will happen) then they don't have to annuitize they can take the market value and withdraw as they see fit.  If the market performance is less, then the client is guaranteed an income stream on his higher 7% return.
This seems like a good safety net to me.

 
Amen Mama.

waterboy's picture
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Indy, 
 I Dont know of any VA that will will double the money in 10 yrs AS A LUMP SUM W/D OPTION. Would love to get a rollover from a 50 y.o and in a worst case scenario give them double what they put in at 60.  

waterboy's picture
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Babbling Looney lets see
 Retire at 65,Start contract ,wait 10 yrs .then start w/d . Will more than likely be DEAD BY THE TIME i REALIZE BENEFITS. Oh and forget beneficary, I annuitized so death benefit ( depending on which option I take) can be ZERO.
How does this help the client and beneficiaries?

Kargon's picture
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scrim67 wrote:
"At that point, it really doesn't matter if you or I think that the investment being liquidated was the best choice for the client...the best choice is the one that they'll keep"
Indy,
I respectfully disagree with you on this one.
If this was true, I'd put clients into the investments they perceive as the most safe.    Their accounts would probably only grow around 5% annually before taxes.   I would probably never lose the accounts though!
scrim

 
Nah, I'd come in and show them why 5% sucks and take your client.  Inflation plus taxation makes 5% almost nothing.  (unless we are talking tax free muni's)  Not selling performance, but selling risk tolerance and the general nature of the stock market over the past 70+ years.  I even show them my account and how I invest.

Kargon's picture
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waterboy wrote:
Babbling Looney lets see
 Retire at 65,Start contract ,wait 10 yrs .then start w/d . Will more than likely be DEAD BY THE TIME i REALIZE BENEFITS. Oh and forget beneficary, I annuitized so death benefit ( depending on which option I take) can be ZERO.
How does this help the client and beneficiaries?

Personally, I use annuities to protect assets, defer taxes, or for the death benefit properties.  I typically don't tie up money that may be needed in them.  However, I do use some of the bonus products as a way for a select group of clients who are self-employed to have a nice "pension-like" product that matches a portion of their contributions, as long as they are maxing out their other retirement vehicles.

babbling looney's picture
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waterboy wrote:
Babbling Looney lets see
 Retire at 65,Start contract ,wait 10 yrs .then start w/d . Will more than likely be DEAD BY THE TIME i REALIZE BENEFITS. Oh and forget beneficary, I annuitized so death benefit ( depending on which option I take) can be ZERO.
How does this help the client and beneficiaries?

First of all I said as long as you don't put everything into the annuity. Of course you need to have some liquidity. DOH. And as Indyone said you need to address each client's individual needs. In your scenario I wouldn't touch a 10 year annuity with a 10 foot pole.
Ok.... here is a real life scenario from one of my clients.  Retiree at 57, sold one of his businesses. Has a 480K profit sharing plan roll out. All cash.  Doesn't plan to draw IRA income for at least 8 to 10 years. Has other passive income for now. Divorced and his kids are well off.  He doesn't plan to scrimp and leave a legacy for the kids. 
I put 175K in a moderate to mildly aggressive mutual fund portfolio, 175K into 7% compounding annuity in aggressive sub-accounts. The rest 180K into various REITS and short term bonds for now. 
Worst case scenario the 175K in the mutual funds goes to ZERO (hardly likely), guess what?? he will still have 300K in 10 years when he might want to begin to draw an income. 
Best case scenario, we get an average return on the mutual funds of 10 to 12% and because the annuity does have those nasty expenses, we only get a 8 to 10% return.  The bond and REIT portfolio is flexible and we can move with interest rates or other market changes.    Since we all know that past performance is not indicative of future yada yada yada., we can't guarantee anything on the entire portfolio. But we can on the annuity.
So to be conservative in our projections: over 10 years the entire ball of wax gets 8% annual return.  Future value 1.036 M.
I don't know if this helps his beneficaries but it sure helps him.

babbling looney's picture
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Oh, yeah and if he dies before 10 years his beneficaries do get a stepped up death benefit on the annuity. Quartely ratcheted to the highest value.

waterboy's picture
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Nice trade Looney

Ready2Jump's picture
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I NEVER sold an EVIL VA the first 2 years out.  Once I understood them better, though, I had no problem using them for a portion of a client portfolio.  AND I"M SELLING STUPID A-SHARE VA's!! 
As a matter of fact, I am currently putting my mother-in-law in one for the income.

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babbling's example above is one of many where the 10 yr worst case aint all that bad (for a worst case).  In the case where there are other pots of $ to draw from in the mean time, I treat this like a 7%/yr bond.

anonymous's picture
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Uh oh.  We've got a huge problem here.  It sure seems that none of you understand the GMIB rider.  You are selling the product in a way that is dishonest for the client. 
Here's a quiz.  What is higher--a 5% GMIB or a 7% GMIB?  What is the true value of a 7% GMIB? 
The rates are bullsh*t!  Why?  All of the insurance companies use either an age setback or lower annuitization rates in conjunction with their GMIB riders. 
Quiz answer:  They are around the same.  Both tend to be around 3%.  What this means is that if the account grows at 4% and the client wants to annuitize the contract the GMIB feature is useless because they will get more money by buying a SPIA using the insurance companies SPIA rates instead of taking the 7% and using the annuitization rates offered with the GMIB contract.
The GMIB is a good feature, but never tell the client that they will get a minimum % return in exchange for annuitizing the contract.  If you want to sell it honestly, say, "Invest X dollars and after Y Years, the insurance company will give you a lifetime income of $Z/month for the rest of your life.
Read the contract!  It is not in the insurance company's interest to explain how the contract actually works.
Has anyone ever actually read the contract???
Example for anyone who doubts me and wants to run the numbers:
50 year old invests $100,000.  Investments earn 4% over the next ten years.  Account value at age 60 equals $148,000.  How much will this pay for a SPIA?  If GMIB option is taken, the value becomes $196,000.  How much will this pay using the GMIB annuity rates?  Use the rates from any company that has a 7% GMIB and you'll see that the $148,000 will pay more than the $196,000!

Cowboy93's picture
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?  What are you, an actuary?  That is interesting, and if true, news to me.  No, I've never read the whole contract.  Maybe I'll check the #s to see if it plays out that way...if you have quick #s, what do the monthly or annual payments in your above example come out to??

Cowboy93's picture
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PS Scrim, if you can verify anonymous's explanation above, you will smoke whoever is trying to use this solution w/your client, because it blows apart the whole argument for using the product (along with MY logic for considering it!).

rankstocks's picture
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anonymous,
    Excellent point.  I was reading through this thread, and before I could beat you to the punch, you very elequently explained the BS surrounding the GMIB.  This is a SCAM brokers use to sell annuities to unsuspecting clients.  I've run across more people than I can count that think the GMIB is a GUARANTEED rate of return, no matter what their underlying investments do.  When I explain the truth, they are PISSED.  Two different clients filed complaints after I pointed the lies their broker told them about the GMIB and both got their money back.
    I have NEVER run across ONE PERSON this type of annuity was sold to that truly understands that the GMIB must be annuitized, let alone the fact that the insurance company sets the true rate.  The posts on this thread prove the me that we have uneducated neophites pitching these products without a basic knowledge of what they are selling.

STL Indy's picture
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I think the point of the GMIB is that you do not have to annuitize the annuity in order to draw an income for life, and can stop taking it and pull out the cash value of the account at any time.
Like annuitization, in a SPIA, you're stuck and have no future options with that either, and leave no legacy for the kids.
The VA w/ a GMIB rider seems to offer a win-win for the client that doesn't want you to take away his asset (ie. SPIA or annuitization) but can give him the option to start/stop an income stream at any point in the contract without having to make a permanent decision on taking that income.
anonymous - your example is flawed in that you're assuming that VA is will never outperform that 5%/yr thereby never taking advantage of a stepup feature (which helps them lock in gains and increase their income for life... something that's not going to happen with a SPIA or annuitization where payments are fixed for life based on actuarial tables). 
Also, you assume that VA's cash value is going to goto $0 and have no other benefit of than the 5% guarantee for life.  Sure, that's a worst case scenario, but the chances of that are slim and none (and if a VA's value actually did that while a client was pulling out 5% annually, I'd hate to see what their mutual fund portfolio did... probably $0 as well, and no GMIB there).  These companies can offer that 5% for life very safely considering that most subaccounts are going to do well beyond that 5% return on the long-term.  If they happen to have a few bad years in a row and the account takes a beating, they know the client is then essentially stuck because they have the 5%/life to hang onto and in the meantime the subaccount will hopefully rebound and get them back where they need to be anyway. 

anonymous's picture
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STL Indy, it sounds as if you have no idea what a GMIB is.  You are confusing it with a GWIB.
For the record, I don't have a problem with a GMIB rider and I believe that it is appropriate at times.  My problem is that the insurance company's are dishonest by calling it 7%.  The agents are at fault for selling something that they don't understand.
Don't learn on your clients.  Learn for your clients.  If you are learning about products from wholesalers and marketing pieces, your clients are in trouble.  Read the actual contracts!
 

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Oops, I meant GMWB. STL Indy is talking about a guaranteed minimum withdrawal benefit and not a guaranteed minimum income benefit.

scrim67's picture
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Whether Anonymous is 100% accurate (which I believe he's pretty close), 0% accurate, or somewhere in between; this thread only reinforces why I tend to shy away from using these insurance products.
If some of us professionals don't fully grasp all the nuances of a VA, I'm sure not many clients truly understand either.
scrim

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Scrim, instead of shying away, stop being a lazy advisor.  VA's are a very powerful investment tool in the hand of the appropriate investor.  You owe it to yourself and your client to take the time to learn how these products work.
I'm calling you lazy because I'm willing to bet that you have never read the actual contract.

scrim67's picture
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You would be correct on that one.
I've never read an entire mutual fund propectus either.
scrim

STL Indy's picture
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anonymous wrote:Oops, I meant GMWB. STL Indy is talking about a guaranteed minimum withdrawal benefit and not a guaranteed minimum income benefit.
Correct.  It was late when I was typing that last night, I thought we were talking about the same thing.  I don't really even sell the GMIB benefit on some of these VA's as the clients that I steer towards VA's are looking to draw income now (without killing their asset like annuitizing or buying a SPIA).  I usually combine the GMWB rider with an enhanced death benefit rider (depending if the client is concerned with leaving a legacy).
However, even though the GMIB rider forces you to get that guarantee and recover your loss over a long period of time, that's something that a individual stocks and mutual funds can't offer outside of a VA.  It's better than not having it at all for safety minded retirees, and I think most senior clients would be happy to have the potential safety net there (even if they never want to use it).  We can't expect the insurance company to make them whole at the end of the 5/7/10yr contract and just let them walk away.  If a no-loss guarantee w/ walkaway feature at the end of the surrender period is the most important thing to them, perhaps a fixed annuity would be more suitable.
No one product is right for everyone, and there is a place in the market for all of them I think (even EIA's, at least a good one like ING's Secure Index product line).  Know your client and the rest is easy.

RealityBichslap's picture
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Find out what matters to your client most, then give the fitting product to them.
 
Amazing how many fools try to force a product where it isn't wanted. These idiots wonder why a prospect does business elsewhere and eventually starve out of the business.
 
Unless the client's way is committing financial suicide or getting you busted, capture the assets FIRST...THEN drip in your agenda.

Indyone's picture
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You're all getting hung up on some confusion over one possible rider of the VA contract and calling them all bad.  I want to see the assumptions used and the calculation about how the end result is only 3% annual return...call me skeptical, but it's real easy to throw numbers around on this board without any substantiation.  My suspicion is that for this doomsday scenario to play out, you would have to assume less than 7% performance in the first ten years, client conversion to monthly income immediately after ten years (which has been very rare in my book), and about a 2% annuitization rate for at least 25-30 years.  That just doesn't happen very often, so the GMIB is more or less a security blanket for a nervous client, to get them in or keep them in the market.
Scrim, you are showing a bias toward believing those posts that support your own conclusions rather than investigating things for yourself.  Get some illustrations for various scenarios (current income, current tax deferral/retirement income, etc.) and study them.  Ask questions until you understand the products, and then put them in your arsenal.
I just had an illustration ran for some money a client wants to draw income from, and on a $35,000 initial premium, he is immediately able to draw 5% of the contract value, and this draw is based on an increasing contract value, which is ratcheted up each year the contract value is higher.  If the contract value declines, the income draw stays the same for that year.  At the end of the illustration, which runs from February 1985 to April 2006, the client has withdrawn a total of $95,402, and has an account value and guaranteed death benefit of $88,292, for an average total annual return of 11.62%.  This is on an 80/20 stock/bond mix for the duration of the contract.
Given the protections provided, (the annual ratchet, guaranteed income and guaranteed death benefit), please tell me how this is a bad thing for my nervous client?!!!

RealityBichslap's picture
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Indyone wrote:
 
Given the protections provided, (the annual ratchet, guaranteed income and guaranteed death benefit), please tell me how this is a bad thing for my nervous client?!!!

 
It's a bad thing for the brokers who don't have insurance licenses and CAN'T offer them.

STL Indy's picture
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RealityBichslap wrote:
It's a bad thing for the brokers who don't have insurance licenses and CAN'T offer them.

And for the insurance agents w/o securities licenses that can only push fixed products (most of which don't have a clue about good VA's, how they work, and the protection they can provide)... and then when they do sell a EIA to Mr. and Mrs. Smith it's usually some complete piece of 15yr garbage with double digital commissions and not a good one that pays them only 4-5%.

scrim67's picture
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I try to remain neutral.
My point was that they are very complex and confusing products.   I prefer presenting products that are very easy to understand for the average person.
For my "nervous" investor, I'd rather setup a conservative asset allocation plan, keep withdrawal rates reasonable, preach living at or below their means, etc.... to ensure that my clients have a very little chance of ever running out of money.
All this stuff is a moving target of course, but by acting as their fidicuary I feel this is a better option and a much easier concept to grasp.
scrim

Indyone's picture
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scrim67 wrote:For my "nervous" investor, I'd rather setup a conservative asset allocation plan, keep withdrawal rates reasonable, preach living at or below their means, etc.... to ensure that my clients have a very little chance of ever running out of money.
scrim
Scrim, that is why your competitors have a natural leg up with "nervous" investors.  The example I posted above satisfies nervous investors while allowing for generous withdrawal rates (5% of an increasing balance) and virtually no chance of them running out of money, while giving them the potential for better overall returns.
I'm not here to twist your arm and tell you you're wrong, just stay neutral and keep an open mind about VAs...otherwise, I suspect that you're limiting yourself here...

scrim67's picture
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I will always keep an open mind.
Until the time where my clients are leaving in droves because they are losing more money than they expected I would prefer building my clientele with those who are like minded as me.
I set there expectations that in any one calendar year there downside is a loss of approx. 5% but of course that comes with the limited upside of around 20%.      I tell them right off the bat that expect your principal to fall 1 or 2 years out of ten and to go up 8 or 9 years on average.   Because we use municipals in alot of cases for the bond allocation much of their return is taxfree as well.   The taxable portion we stick to tax efficient MF's.     
So far, this approach seems to work for "nervous" clients to date.  But then again, I'm only two years into my practice.    I'm always open to change.
scrim
 

anonymous's picture
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"My point was that they are very complex and confusing products.   I prefer presenting products that are very easy to understand for the average person."
Scrim, how do you know that they are complex and confusing products when you have never read the contract?  
Read and understand the contract and then it will be easy to explain.
"I try to remain neutral."
You sound like a good guy, but when you don't understand products, you are not remaining neutral, you are remaining ignorant. 
 

scrim67's picture
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Joined: 2005-04-28

I have a VA packet in front of me.
On the 6% withdrawal strategy hypo's with a 500k starting base  it's showing the Account Value going down every year between ages 55 to 70.  
Why is the hypo showing a decrease every year in account value?  Can an account decrease 15 years in a row?
This just doesn't pass the smell test.
scrim
 

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