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%.

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.

[quote=anonymous]

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.[/quote]

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.[/quote]

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...

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%.

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.

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.

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.

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.

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.

[quote=silouette]

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.

[/quote]

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

Yo, Bobby, want some cheese curls with dat annuity?

Actually, my average tax rate is about 15%. Being a business owner, and expensing the sam out of lifestyle, 15% is cheap. Even though my national muni bond fund went up 10% last year, and has reasonable down market protection, may have to use the liquidity if real estate really tanks.

Howabbout some ranch dressing with dose cheese curls.

[quote=anonymous]

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%.

[/quote]

Anon,

Please. Using the example as I set out, could you show me where my calculations are wrong?

Set backs, so on so forth, they are all washed out by the fact that I use a zero percent amortization on the annuity and a zero percent growth rate. Further, I compared an appreciated asset against one that did not appreciate.

If the annuity does better than the 6% assumption then the client is always free to shop the dollar value somewhere else, for a better return.

Let me tell you what I did. I got the qoutes from the link provided and then I went to a mortgage website  (http://mortgage-x.com/calculators/amortization.htm) and found the interest rate that corresponded to the monthly I would get from a life with 20year certain immediate annuity. The rate came to 4.3%

If the AXA annuity were at half of that (so that AXA could be kicking in just 3% instead of the 6%) the client would still come out ahead of plan A. Considering, he did 877,000 better at zero interest and at 2.15% he'd get a total of 3.426MM from his million which is 1.3MM more than plan A.

It sounds too good to be true. I'd like to understand how it's not (true).  

[quote=anonymous]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[/quote]

BINGO, except that insurance companies have lots of experience with underwriting and pricing life insurance as well as hedging liabilities. Hence this rider is going to be correctly priced.

An annutisable VA is basicly a wrap of a forward  agreement on a SPIA and a put option on basket of mutual funds.

When the VA expires, you have the option to enter into a SPIA contract, and you can put-back the fund basket for the minimum guaranteed amount (the embedded put option). A forward contract on SPIA is worthless since the Insurance company would be happy to sell you a correctly priced SPIA any time you like. They can offer seemingly generious annuitisation terms, because you will infact be 10 years older when the SPIA is purchased.

While the annuity sums are invested into the underlying mutual funds, the insurance company at the same time takes out long term hedges against a market decline.

Just using a simple example from ivolatilty.com. Assuming Annuitsation contract expiring in 10 years with an underlying portfolio of the SPY etf and 3% gurantee; The embedded european put option is worth $13.20 per $100 over ten years for a roughly straight line M&E expense of 1.3%.

Now if we create all kinds of fancy fee's to bring the total all in expense to ~2.3% pa we do quite well for ourselves.

[quote=silouette]Yo, Bobby, want some cheese curls with dat annuity?[/quote]

How long are you going to hate me for those nasty things that I did with your mommy?

 But you taught me so much! Most of all, how to enjoy Cheetos and Coke for dinner. I don’t hate you, I wuv you Bobby.

[quote=anonymous]

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.

[/quote]

Hmm, All the people I run into with VA's that have supposed riders to protect their principal have lost their shirts, are pissed at the people who sold them and should NOT be investing more aggresively because of a rider they will never use.

PS - Silouhette (or however it's accurately spelled) is spot on - do yourself a favor by doing your clients a favor.

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.

BINGO, except that insurance companies have lots of experience with underwriting and pricing life insurance as well as hedging liabilities. Hence this rider is going to be correctly priced.

[quote=Ashland]BINGO, except that insurance companies have lots of experience with underwriting and pricing life insurance as well as hedging�liabilities.�Hence this rider is going to be correctly priced.



Yeah, GM had lots of experience handling their DB plan, too.
Think they got some help from an insurance company? Not sure if these
are priced correctly… What happens if interest rates go dramatically
higher. Don’t remember a time when tax rates were this low, either.
Insurance co’s have not priced in catastrophic natural disasters
correctly into P&C policies. Warren Buffett said so himself. How
do we know that they’ve done so on the life side… [QUOTE]



What is this? Are you trying to see how many irrelavent things you can bring up in the hope that one of them will stick?



The subject of this conversation is if a priori insurance companies expect to make an underwriting profit on VA’s. I say they do, and various ill informed people say that do not intend an underwriting profit.



If the insurance company makes an underwriting profit on the VA, then you have paid too much.



This question has nothing to do with P&C insurance, GM’s issues
with its pension plan, or interest rate movements, or current tax rates.



I’m not sure how many times I have to repeat this: A single VA contract
is zero sum, there is a winner and a loser. If you can’t see the
sucker…

[quote]The way these annuities get cooked is that we have a 10% down
year & our client’s taking out 6%. The 2.5% charge is against the
insurance benefit – now 16% lower the contract has to grow 20% +
8%(for the next yr’s w/d) to get back to even. One bad year… could
be next yr! So, I don’t sell them for inflation protection… just 6%
against current principal & the possibility if the annuitant dies
before 85 that the bene gets the full amt back.[/quote]



Grrr, we are talking about different things. The initial part of this
thread had to do with VA’s that have an investment period and then
converted to a SPIA. These a basicly a wrap of a forward agreement on a
SPIA, a european put option on the annuitisation date, and a “death
put”.



Your talking about VA’s with only a “death put”. Now this a basicly a
life insurance contract for the difference between the initial
investment amount and the current value of the fund basket.



A small contract that is surely worth less than what you are paying for it.