Riversource innovation
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Army13A, these products just do what they are supposed to do very well. The fees get in the way. Let me give you an example. Jim is 65. He has $200,000. He’s guaranteed to be able to take out $10,000/year for the rest of his life.
We know that the cost of the contract "all-in" is going to be over 3% (1.1% rider cost + 1.7% M&E + 1% fund expenses) 3.8% is just crazy. Let's assume that this can be done for 3%. What happens when the underlying investments earn 5%. The client has a gain of $10,000 -expenses of $6,000-withdrawal of $10,000. The contract value is now $194,000 and the expense % the next year will go up. If the underlying investments go up 5% each and every year, the contract value will be $0 in less than 20 years. Here's a much better way to take $10,000 a year. This is just one example, but there are many: Put all of the money into fixed products. Take out $10,000/year. Assuming 3-4% growth, in 12 years, there should still be about $140,000. Annuitize the remainder of the money at that time. Even at today's low rates, that should generate an income of about $15,000/year for the rest of his life. Another option is to split it into 2 $100,000 piles. The first pile invested very conservatively in fixed products will last about 12 years. With the other pile put it into a VA with a 10 year 0% GMAB. After 10 years invest it conservatively. If the market tanks, they'll still be over $100,000 and enough to take a guaranteed income of $10,000 a year. If the market does well, there will be a lot more.There too many variable to say the one option is better than the other. Rate of return on the market, tax deferral, annual step in income base. Also innovation will guarantee 20 percent increase in income base or higher contract value
[quote=anonymous]
We know that the cost of the contract "all-in" is going to be over 3% (1.1% rider cost + 1.7% M&E + 1% fund expenses) 3.8% is just crazy. When I compare a VA to a mutual fund/wrap pfolio, I say it's about 2% more expensive because you're going to have fund expenses in either option.Let's assume that this can be done for 3%. What happens when the underlying investments earn 5%. The client has a gain of $10,000 -expenses of $6,000-withdrawal of $10,000. The contract value is now $194,000 and the expense % the next year will go up. If the underlying investments go up 5% each and every year, the contract value will be $0 in less than 20 years. Isn't the selling point of a VA that regardless of your account value, you're guaranteed x amount per year? If the clients only concern is income, why should they care about the account value?
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[quote=skbroker]There too many variable to say the one option is better than the other. Rate of return on the market, tax deferral, annual step in income base. Also innovation will guarantee 20 percent increase in income base or higher contract value [/quote]
And Prudential’s HD6 policy will guarantee that if no withdrawal is taken after 10 years, your withdrawal base will be at least 200% of the original contract value, which is about 7.2% compounded over 10 years.
[quote=army13A] [quote=anonymous]
We know that the cost of the contract "all-in" is going to be over 3% (1.1% rider cost + 1.7% M&E + 1% fund expenses) 3.8% is just crazy. When I compare a VA to a mutual fund/wrap pfolio, I say it's about 2% more expensive because you're going to have fund expenses in either option.Let's assume that this can be done for 3%. What happens when the underlying investments earn 5%. The client has a gain of $10,000 -expenses of $6,000-withdrawal of $10,000. The contract value is now $194,000 and the expense % the next year will go up. If the underlying investments go up 5% each and every year, the contract value will be $0 in less than 20 years. Isn't the selling point of a VA that regardless of your account value, you're guaranteed x amount per year? If the clients only concern is income, why should they care about the account value?
[/quote][/quote] Army13, you seem to be missing some very key points. You can't say that it's 2% more expensive. That is only true when the contract value equals the rider value. The problem is that most of the time, the rider value will equal more than the contract value. Whenever this is the case, the cost of the contract becomes more expensive. If a contract starts at $100,000 and several years later the rider value is $150,000 and the contract value is still $100,000, the cost of the rider has increased from 1.1% to 1.65%. If the client's only concern is income, I just showed you how the client could have $10,000 for 12 years and then $15,000 for the rest of their life. Isn't this better than $10,000 every year?
Smoke and Mirrors. Instead, put the money into a VA with a GMAB. In 10 years, the contract value will be more. This is because the contract will probably cost on average 1-2% less per year. This makes a huge difference. The worst case scenario is that there will be no growth at all. If it is annuitized at that point it should give the same amount of income. At anything other than a worst case scenario, the GMAB combined with annuitization will give significantly more income.[quote=skbroker]There too many variable to say the one option is better than the other. Rate of return on the market, tax deferral, annual step in income base. Also innovation will guarantee 20 percent increase in income base or higher contract value [/quote]
And Prudential’s HD6 policy will guarantee that if no withdrawal is taken after 10 years, your withdrawal base will be at least 200% of the original contract value, which is about 7.2% compounded over 10 years.
Make sure to use a variable annuity WITHOUT investment restrictions. Last time I checked, Prudential does have investment restrictions (75/25 fixed income portfolio I believe). Why would anyone need an insurance wrapper for a bond portfolio? Keep it simple, use a VA with cheap expenses and NO investment restrictions for a conservative client.