The major benefit of GMIB and GMAB riders are that they allow the client to invest above their natural risk tolerance.  The fact that the rider most likely will never actually be needed is irrelevant.

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Exactly--people w/insurance (of any kind) can take more risk--and therefore likely earn a better long-term return and not need the insurance, which is a bit ironic.  Your house isn't going to burn down or get blown away or hit by a meteorite, but you probably want to keep that HO insurance just in case....even if the house is paid for.  One principle of insurance is that you want/need it if the event you're protecting against would be so devastating that you couldn't recover.  That's even IF the probability of that devastation is quite low.  This concept made me willing to consider VAs for retirement planning, as running out of money before running out of life would considered catastrophic for most of my clients (and therefore, for ME!).  When used the right way, those things can provide both principal and inflation protection.

I think they just show the account value going to zero to illustrate the idea about whatever guarantee they've got.....I find it amusing sometimes because wholesalers get all excited about what you get if the account goes to zero (with a straight face).  But I assume they just want a conceptual illustration in the propaganda, I mean, literature.

Maybe my mind works backwards but my point is that if you invest aggressively (100% equity mutual funds) it is basically impossible to lose money also over a ten year time period when you figure in reinvested dividends and such.

If you decrease the level of equity portion then the chances are even smaller.   It's practically zero.

If i'm losing business because I don't have the VA arrow in my quiver I'm better off anyway in the long run.

scrim

I'm just curious.

If clients buy all these riders so they can't ever lose money (subjected to the ability of the insurance company to pay)  wouldn't you just invest them all in the most aggressive allocations offered?

If not, why wouldn't you?

scrim

[quote=scrim67]One thing I can’t figure is if they assume a 0% return and a 0% withdrawal why is the account value declining every year?

scrim[/quote]

That's because of the costs of the riders.  If the market returns zero over 15 years, and you have, say 1.5% in contract costs, the contract will gradually decline.  That is a pretty far-fetched scenario, although it still compares favorable to say, the great depression.

in the example is shows it decreasing from 500k to 482k then 464.5k the next year.

The riders are 3.6% annually?      Am I figuring this right?

scrim

"If i'm losing business because I don't have the VA arrow in my quiver I'm better off anyway in the long run."

Maybe, maybe not.  All I'm telling you is that I felt pretty much the same way you do now back when I was fairly new to the business.  If I were a betting man, I would bet that you will find more and more applicability as you get further into your career and get more familiar with how a couple of good VAs work...don't try to learn them all...you just make yourself crazy.

"If clients buy all these riders so they can't ever lose money (subjected to the ability of the insurance company to pay)  wouldn't you just invest them all in the most aggressive allocations offered?"

Certainly, I am comfortable investing them much more aggressively that I would otherwise, but I still don't want to see my client contract value cut in half, even with the principal guarantee.  There's just something about seeing huge swings, even with the guarantees in place, that make nervous clients question you again and again.  They'll see their guaranteed value, but if the contract value is waaaaaaaay less than that, they still tend to get nervous...just the nature of most of my VA clients, I guess.

[quote=scrim67]

in the example is shows it decreasing from 500k to 482k then 464.5k the next year.

The riders are 3.6% annually?      Am I figuring this right?

scrim[/quote]

Sure looks that way to me...yikes...that IS an expensive contract!  I'd recommend you look for a different carrier...

indy,

that's so interesting to me.

even though it's supposedly impossible for them to lose principal..they still get "nervous".

If someone would get nervous when there's no way they could lose principal then they need more help than we can give.

scrim

Do you think that 3.6% includes the fund expenses.    I sure hope so.

scrim

That would be my guess, but you’d have to ask the company for sure…

[quote=scrim67]indy,

that's so interesting to me.

even though it's supposedly impossible for them to lose principal..they still get "nervous".

If someone would get nervous when there's no way they could lose principal then they need more help than we can give.

scrim[/quote]

I see that all the time to be honest.  If all they've ever had is CDs, they get nervous about everything initially.  It's really the fear of the unknown.  You just have to decide if they are a hopeless case, or if you can do a little hand holding until they get used to how their "new" investment works.  For the most part, they evetually settle down and will even ultimately thank you for introducing them to a better way of investing.

Working in a bank setting I see alot of that too.

I am confident that in a big market downturn I will only lose a small amount of business.   I figured if I set their expectations from the beginning combined with good service I shouldn't lose too many.

The ones I do lose I figure weren't good clients to begin with so it will be the proverbial addition by subtraction.

After two years, the one thing I know now is that as long as my health is ok, I will be in this business for a long time as it took me many years to find work I was passionate about.

scrim

"Maybe my mind works backwards but my point is that if you invest aggressively (100% equity mutual funds) it is basically impossible to lose money also over a ten year time period when you figure in reinvested dividends and such.

If you decrease the level of equity portion then the chances are even smaller.   It's practically zero.

If i'm losing business because I don't have the VA arrow in my quiver I'm better off anyway in the long run."

You are definitely thinking backwards.  Are some of your clients conservative?  Do some of these conservative clients need to get high rates of return to accomplish their goals?  What would happen when they invest aggressively and lose 20% the first year?  Aren't they going to want to pull their money out?  If they do, haven't they just blown any chance of accomplishing their retirement goals?  If they keep their money in and the market goes down a second year, what happens then?  What happens when you get sued and you show the attorney the risk tolerance questionairre that showed that they are conservative, but you invested aggressively or that you didn't use one?  Are you saying that you don't want the clients who actually need your help the most?

I would never invest aggressively if there risk tolerance is low.

If my client has a low tolerance for risk and a ten year time frame I will do a 60/40 allocation to begin with in most cases.     Upside potential is around 25% and downside risk in any given year is a loss of 15%.    I tell them to expect two down years of every ten and one in ten if we flip it to a 40/60.     As long as their diversified they will be fine.

After fees that averages 7% annually and much of the income is tax free using muni's.

What's nice is that their assets remain liquid just in case they need to tap it, the taxation upon withdrawal is favorable too.

scrim

Scrim, I have to pick your entire post apart.

"I would never invest aggressively if there risk tolerance is low."

Are you saying that instead of using a VA, you would just tell your client, "I'm sorry.  Because you are conservative, your goal of retiring at 10 years is impossible.  Please decide if you want to work longer or lower your standard of living?"

"If my client has a low tolerance for risk and a ten year time frame I will do a 60/40 allocation to begin with in most cases."

You can't do that if you have a client who is not willing to lose money.  

"After fees that averages 7% annually"

You have no clue what that will average.  It may have in the past, but so what. 

"much of the income is tax free using muni's"

muni's are not appropriate for the majority of investors.

"the taxation upon withdrawal is favorable too."

What makes it favorable? 

How likely is it for a 60/40 allocation to lose money over a ten year period?   My opinion is Zero.

From my understanding when you take withdrawals out of a VA it's taxed quite unfavorably compared to a mutual fund.

I'm not sure why Muni's aren't appropriate...especially a fund that is diversified.

scrim

to answer your first point,

yes, they might have to work longer or lower their standard of living in retirement.

I don't see how a VA can help with that.

let's face it...if they haven't had a plan for many years it's too late so matter what we do.

scrim

Scrim, you are missing some very key points. 

1)It doesn't matter if it won't lose money over a 10 year period.  For a conservative investor, it may not be appropriate to lose money over a one year period.

2)For some people a 60/40 mix might guarantee that the client can't achieve their investment goals.

Let's assume that we are talking about qualified money so that the taxes are the same.  If we were talking unqualified, the annuity might be an advantage or disadvantage based upon specific facts.  (Advantage: tax deferred growth.  Disadvantage: taxed as ordinary income and not capital gains)

Muni's aren't appropriate for most investors because they pay less interest. 

anonymous is completely correct on the difference b/w a SPIA and the VA annuity (based on the benefit base) annuity payout. 

It does make me a little mad when people trash something that havent even read or understand.  Most peoples anger comes from them not picking up the contract and deciding to give opinion on the numbers when they wont even read to find out what the numbers really are and what they mean.  You are arguing without even looking into the other side of the argument, and that is why you will likely lose this case.  Boy wouldnt you hate to lose the case to an ANNUITY SALESMAN!! How about going out and finding what products and solutions would accomplish the same goals and be more cost effective and beating the guy at AXA EQ.  I used to use their products and know that there are plenty of good competitors products that may be as good or better for the client.  Maybe not. 

You can double a clients money in 10 years by earning 7.2% annually.  That does not take into consideration potential taxes (depending on this being a Qual or NQ acct). 

Depending on the version of this contract (which the only main difference is how many years there is a surrender charge), the fees are probably similar to what people charge for managed money.  A little over 1%, lets say 1.25% is the base charge.  Then you pay additional money for the GMIB rider, which is probably 60 - 70 basis points.  I believe this product would be 1.8-1.85% expense for those options (that is using the standard contract, not the one that gives you a bonus or that has no surrender charge).  So your clients pay 60-70 basis points annually in order to have a form of protection, in this case a 6% guarantee.  So, on 100k account, they pay 600 bucks a year (increasing with acct. value) to know that if all the money goes away, they arent broke. 

Then you have your MF expenses, say from 80-150 basis points.  So how much cost difference is there between doing a wrap account and doing the VA?  Pretty much the cost of the GMIB rider, 60-70 basis points. 

Are there other costs?  Ya, opportunity cost if the client ends up not needing the insurance(GMIB).  They say that 90% of all VA's are never annuitized, so your paying for the 10% chance that you will need this option.  Another opportunity cost is associated with being limited to the funds available in the contract.  Hell, depending on your firm, they contract may offer more funds than you can.  Then again, maybe you can offer anything and the funds in the contract are just not up to par with what your client needs. 

And guess what, if you laid this out to the client, you would win the business.  But you can't even open up the damn contract.