Sep 5, 2008 1:56 am

When would a person ever use a variable annuity? A lot of people argue it’s for conservative investors and the psychology of investment; investor performance vs. investment performance, keeping the investor invested (buy & hold strategy). What’s the difference between a 6% income/withdraw for life rider versus a 5% CD? Do the insurance salesmen argue that with a VA there’s upside potential? Oh really…upside potential, looks dig into the facts.

-Using conservative estimate of fees- VA M&E fee=1.1% Fund Fee=1% Income/Withdraw Rider Fee=.65% That leaves the total at 2.75% correct? WRONG. The rider fee is actually based off the HIGHEST income base in the product. Here's what I mean: Original Account Value=100k Original Income Base=100k After years of withdraws, lets say... New Account Value: 50k Income Base: 200k (double due to ratchets and compounding feature in accumulation) Your rider fee is NOW .65 x 200k = $1300 (which is 2.6% of your account value) 2.6% + 1% (fund fee) + 1.1% (M&E fee) = 4.7% cost in fees ALONE. Where's the upside potential? Some like to argue yeah VAs are expensive, but it allows the client to invest more "aggressively"? Oh really, what if the fees ELIMINATE the upside potential? All it would take is a -15% in the first year to completely destroy the upside potential. After that, there is no chance for your income base to step up and your client is basically stuck with a 6% income stream for the rest of their life.

Sep 5, 2008 1:57 am

This is not to say I don't believe in the variable annuity, I just believe there are a lot better options out there for the "conservative" investor. Please discuss and show me something I'm not seeing?

Sep 5, 2008 2:14 am

First things first. Change your site name.

Sep 5, 2008 2:34 am

I think Ron thinks Chris Varick is a real name rather than a fictional name from the movie Boiler Room

Sep 5, 2008 10:43 am

Chris, I sell a fair amount of VA's. I also agree that if someone is looking for immediate income, a VA is not the place for this. I've made the same argument that the person would be better off in a CD at 5%. (We'll ignore the fact that one can't get 5% in a CD right now.)

By the way, your example is wrong in that if one is taking withdrawals like you are claiming, the income base wouldn't be growing. The point is still accurate that the cost of the rider as a % of the contract value increases as the contract value decreases which increases the chance of the contract value going to zero.

When one looks at a safe withdrawal rate being typically in the 4% range, but then factor in that the fees of the VA will drop a couple of % from the return without lowering the volatility and then couple this with withdrawals of 6%, it is easy to see how a contract value can end up being $0. If this happens, the person would have been much better off simply buying a SPIA.

That being said, I love VA's in the right circumstances. What's the right circumstances? I use them as an accumulation vehicle for IRA rollovers with conservative clients. The riders are used to control investor behavior. With these products, I can get a conservative investor to stay invested aggressively. I'll give you a simple example: Joe has $500,000 in his IRA. He wants to retire in 10 years with $1,000,000. He is conservative and if his investments lost money, he would probably pull out his money. A VA invested aggressively is the ONLY investment that I know of that gives him a possibility to achieve his goal with no chance of losing money. In short, I like VA's for qualified money that should be invested aggressively, but something about the client makes investing this money aggressively without guarantees a bad idea.

Sep 5, 2008 1:49 pm

You’re also missing the point on the purpose of that income rider. Whatever the cost, the guarantee is what people will be buying. VA’s aren’t being used these days simply for accumulation. 9 times out of 10 when I use a VA it’s just like anon said. IRA money for the conservative people who either need or just simply want the income guarantees. These are the people who generally tell me they would be happy making 5% for the rest of their lives, but don’t understand that I really need to make them 7-8% in order to keep up with inflation.

Sure, you can argue that you can buy a 5% CD and clip the coupon. I have one in my system right now. 5.2% for 10 years. So, what about in year 11? What about reinvesting that money. What if the best rate I can find is 4%. Inflation has been going up by 3% a year, so is the client going to be happy with 4%? Will he have to change his lifestyle because of what the fed has done to interest rates? I don't know that I can in good consience tell my client that a 5% CD is the best way to plan for income in retirement. BTW, it's not just insurance salesmen that using VAs for income planning. Some of the best and brightest financial planners are using VAs as a portion of the income plan for their clients. You need to rethink your income strategy, not just focus on the cost.

Sep 5, 2008 2:48 pm

[quote=anonymous]

Chris, I sell a fair amount of VA's. I also agree that if someone is looking for immediate income, a VA is not the place for this. I've made the same argument that the person would be better off in a CD at 5%. (We'll ignore the fact that one can't get 5% in a CD right now.)

By the way, your example is wrong in that if one is taking withdrawals like you are claiming, the income base wouldn't be growing. The point is still accurate that the cost of the rider as a % of the contract value increases as the contract value decreases which increases the chance of the contract value going to zero.

When one looks at a safe withdrawal rate being typically in the 4% range, but then factor in that the fees of the VA will drop a couple of % from the return without lowering the volatility and then couple this with withdrawals of 6%, it is easy to see how a contract value can end up being $0. If this happens, the person would have been much better off simply buying a SPIA.

That being said, I love VA's in the right circumstances. What's the right circumstances? I use them as an accumulation vehicle for IRA rollovers with conservative clients. The riders are used to control investor behavior. With these products, I can get a conservative investor to stay invested aggressively. I'll give you a simple example: Joe has $500,000 in his IRA. He wants to retire in 10 years with $1,000,000. He is conservative and if his investments lost money, he would probably pull out his money. A VA invested aggressively is the ONLY investment that I know of that gives him a possibility to achieve his goal with no chance of losing money. In short, I like VA's for qualified money that should be invested aggressively, but something about the client makes investing this money aggressively without guarantees a bad idea.[/quote] Hi Anonymous, I have read some of your posts and I must admit, you provide some very good knowledge. Same example, Joe has 100k IRA and needs 200k in 10 years for retirement. VA would only provide you 200k (provided we compounded at a 7% using a rider) for your income base value DISBURSED at 5/6% ever year. A CD compounding at 5% for 10 years would provide 162k fully LIQUID. Even with different surrender schedules, I see VAs as a LIFETIME investment product that is not liquid at all. What's the point of surrendering a contract you've been paying EXTRA FEES for if you're NOT going to use the income benefits. That's like financing a car and paying interest when you have no intention on driving it.

Sep 5, 2008 2:54 pm

[quote=Spaceman Spiff]You’re also missing the point on the purpose of that income rider. Whatever the cost, the guarantee is what people will be buying. VA’s aren’t being used these days simply for accumulation. 9 times out of 10 when I use a VA it’s just like anon said. IRA money for the conservative people who either need or just simply want the income guarantees. These are the people who generally tell me they would be happy making 5% for the rest of their lives, but don’t understand that I really need to make them 7-8% in order to keep up with inflation.

Sure, you can argue that you can buy a 5% CD and clip the coupon. I have one in my system right now. 5.2% for 10 years. So, what about in year 11? What about reinvesting that money. What if the best rate I can find is 4%. Inflation has been going up by 3% a year, so is the client going to be happy with 4%? Will he have to change his lifestyle because of what the fed has done to interest rates? I don't know that I can in good consience tell my client that a 5% CD is the best way to plan for income in retirement. BTW, it's not just insurance salesmen that using VAs for income planning. Some of the best and brightest financial planners are using VAs as a portion of the income plan for their clients. You need to rethink your income strategy, not just focus on the cost. [/quote] 7-8% return on investments? MAYBE i'll give you that. Going to prior example, it depends when you open the annuity and what kind of market you land on. (Please refer to my previous post and fees) The way I see it is that the guarantee of the insurance companies don't mean much. They can talk about their sharpe ratios and their hedging strategies all day long. If everyone's mutual fund crashes AND the CDs ever go below 3%, chances are our economy isn't looking too great. At that point, how many insurance companies do you think are left in the country? Going back to the liquidity issue, example: John Smith is 50 years old and needs an investment to guarantee income for the rest of his life. Assuming he lives till he's 85, how many emergencies do you think he will have that would trigger lump sum withdraws during the next 35 years? Everyone on this board is probably around that age, so let me ask you guys this, how many emergencies have YOU had during your lifetime? College tuition, surgery, medical reasons, children, etc. This is not to say I don't believe CDs are the perfect income solution, but it's just to say I think it's a better route for these ultra conservative clients.

Sep 5, 2008 3:31 pm

[quote=anonymous]

Chris, I sell a fair amount of VA's. I also agree that if someone is looking for immediate income, a VA is not the place for this. I've made the same argument that the person would be better off in a CD at 5%. (We'll ignore the fact that one can't get 5% in a CD right now.)[/quote]

I don't fact check you very much as you are usually right on target, but you can absolutely get 5% and more on CDs right now. I see over 5% in as little as five-year maturities.

Sep 5, 2008 5:38 pm

I don't understand why the guy titled this "Intelligent" conversation...if you have your mind made up, apparently there is no changing your mind.

Bottom line: a CD or other fixed income instrument gives you the coupon as the absolute BEST case scenario, while a VA invested in equity subaccounts gives a CD/bond like return as the WORST case scenario. It is NOT like having a car loan and not driving the car...it is like "throwing away" money on homeowner's insurance because your house probably won't burn down. And your lump sum example presumes you put all of someone's $ in a VA and it has a 35 yr surrender period....anyone with half a brain in our business doesn't use one vehicle and treat it like the perfect solution (so doesn't allocate 100% to it). The good news it that it is easy to compete against people like ChrisV when talking to a client or prospect.

Sep 5, 2008 7:17 pm

[quote=ChrisVarick][quote=Spaceman Spiff]You’re also missing the point on the purpose of that income rider. Whatever the cost, the guarantee is what people will be buying. VA’s aren’t being used these days simply for accumulation. 9 times out of 10 when I use a VA it’s just like anon said. IRA money for the conservative people who either need or just simply want the income guarantees. These are the people who generally tell me they would be happy making 5% for the rest of their lives, but don’t understand that I really need to make them 7-8% in order to keep up with inflation.

Sure, you can argue that you can buy a 5% CD and clip the coupon. I have one in my system right now. 5.2% for 10 years. So, what about in year 11? What about reinvesting that money. What if the best rate I can find is 4%. Inflation has been going up by 3% a year, so is the client going to be happy with 4%? Will he have to change his lifestyle because of what the fed has done to interest rates? I don't know that I can in good consience tell my client that a 5% CD is the best way to plan for income in retirement. BTW, it's not just insurance salesmen that using VAs for income planning. Some of the best and brightest financial planners are using VAs as a portion of the income plan for their clients. You need to rethink your income strategy, not just focus on the cost. [/quote] 7-8% return on investments? MAYBE i'll give you that. Going to prior example, it depends when you open the annuity and what kind of market you land on. (Please refer to my previous post and fees) The way I see it is that the guarantee of the insurance companies don't mean much. They can talk about their sharpe ratios and their hedging strategies all day long. If everyone's mutual fund crashes AND the CDs ever go below 3%, chances are our economy isn't looking too great. At that point, how many insurance companies do you think are left in the country? Going back to the liquidity issue, example: John Smith is 50 years old and needs an investment to guarantee income for the rest of his life. Assuming he lives till he's 85, how many emergencies do you think he will have that would trigger lump sum withdraws during the next 35 years? Everyone on this board is probably around that age, so let me ask you guys this, how many emergencies have YOU had during your lifetime? College tuition, surgery, medical reasons, children, etc. This is not to say I don't believe CDs are the perfect income solution, but it's just to say I think it's a better route for these ultra conservative clients. [/quote] The way I see it, the guarantees of the insurance companies mean everything. Insurance companies are required by law to have a certain amount of cash on hand to cover their liabilities. All of these riders are considered liabilities. In addition to that the good ones have reinsurance. So, if the insurance company goes out of business, then a reinsurance company steps in. My clients have asked that same question about what if everything crashed. First, banks wouldn't be around to give you CDs as they have crashed because everyone would have pulled all of their money out of the banks to literally stuff under their mattresses. That would make the sub-prime mess look like a cake walk. So, now where are you going to get a 3% CD smart guy? Second, if all mutual funds tanked, it means that all companies have stopped producing, shipping, and selling their products or services. For sure, we'd be talking about economic meltdown. At that point I don't really care what that paper says your worth, cause if you don't have something to trade for my corn, or beans, or cattle, then your paper is only good for one thing. So, if you think there's a greater possibility of that happening than there is of the US and global economies cycling back into prosperity again, we don't need to be talking about buying CDs, annuities, stocks, or even gold. We need to be talking about buying lead. And gunpowder. Cause if you can't mold bullets, load a gun, hit where you're aiming, kill it, clean it, cook it, eat it...it doesn't mean squat to me. These riders don't have anything to do with sharpe ratios and hedging strategies. They have to do with protecting your clients against you statement - "it depends when you open the annuity and what kind of market you land on." So, if we have a great 90's like market, perfect, we'll capture the annual increase in benefit base as the market goes up. If we have a flat or down market, it sucks, but your income base is guaranteed to double in the next 10 years. If your contract value does also, or does even better, bonus money!! I also agree with the last poster who said that you shouldn't put all of a clients money into a product like this. Simply because there might be a need for extra income. For that money, but them the CD. See, you can have your cake and eat it too.

Sep 5, 2008 7:27 pm

[quote=Cowboy93]

I don't understand why the guy titled this "Intelligent" conversation...if you have your mind made up, apparently there is no changing your mind.

Bottom line: a CD or other fixed income instrument gives you the coupon as the absolute BEST case scenario, while a VA invested in equity subaccounts gives a CD/bond like return as the WORST case scenario. It is NOT like having a car loan and not driving the car...it is like "throwing away" money on homeowner's insurance because your house probably won't burn down. And your lump sum example presumes you put all of someone's $ in a VA and it has a 35 yr surrender period....anyone with half a brain in our business doesn't use one vehicle and treat it like the perfect solution (so doesn't allocate 100% to it). The good news it that it is easy to compete against people like ChrisV when talking to a client or prospect.[/quote] Actually, I have NOT made up my mind yet, I was hoping to look to this forum for some insight I might not of come across. I'm not trying to offend anyone here, I'm just trying to view both sides of the spectrum. Bottom line: a CD or other fixed income instrument gives you the coupon as the absolute BEST case scenario, while a VA invested in equity subaccounts gives a CD/bond like return as the WORST case scenario. Refer back to my previous post where a 5/6% guarantee income rider might be the ONLY scenario your client might be the ONLY scenario your client can receive (due to the extreme fees, please refer to my first post). It is NOT like having a car loan and not driving the car...it is like "throwing away" money on homeowner's insurance because your house probably won't burn down. And your lump sum example presumes you put all of someone's $ in a VA and it has a 35 yr surrender period....anyone with half a brain in our business doesn't use one vehicle and treat it like the perfect solution (so doesn't allocate 100% to it). Hey if there was a FREE type of homeowner's insurance I would jump on it too considering it provided me comparable protection. Sure, you might not put ALL your client's money into a VA, but what if you put 25%? 25% of something is still something. Why not have that 25% free of fees AND completely liquid. Because that's exactly what CDs are, FREE and LIQUID. The good news it that it is easy to compete against people like ChrisV when talking to a client or prospect. No need for personal attacks, I'm just here to learn just like everyone else.

Sep 5, 2008 7:41 pm

[/quote]

The way I see it, the guarantees of the insurance companies mean everything. Insurance companies are required by law to have a certain amount of cash on hand to cover their liabilities. All of these riders are considered liabilities. In addition to that the good ones have reinsurance. So, if the insurance company goes out of business, then a reinsurance company steps in. My clients have asked that same question about what if everything crashed. First, banks wouldn't be around to give you CDs as they have crashed because everyone would have pulled all of their money out of the banks to literally stuff under their mattresses. That would make the sub-prime mess look like a cake walk. So, now where are you going to get a 3% CD smart guy? Second, if all mutual funds tanked, it means that all companies have stopped producing, shipping, and selling their products or services. For sure, we'd be talking about economic meltdown. At that point I don't really care what that paper says your worth, cause if you don't have something to trade for my corn, or beans, or cattle, then your paper is only good for one thing. So, if you think there's a greater possibility of that happening than there is of the US and global economies cycling back into prosperity again, we don't need to be talking about buying CDs, annuities, stocks, or even gold. We need to be talking about buying lead. And gunpowder. Cause if you can't mold bullets, load a gun, hit where you're aiming, kill it, clean it, cook it, eat it...it doesn't mean squat to me. These riders don't have anything to do with sharpe ratios and hedging strategies. They have to do with protecting your clients against you statement - "it depends when you open the annuity and what kind of market you land on." So, if we have a great 90's like market, perfect, we'll capture the annual increase in benefit base as the market goes up. If we have a flat or down market, it sucks, but your income base is guaranteed to double in the next 10 years. If your contract value does also, or does even better, bonus money!! I also agree with the last poster who said that you shouldn't put all of a clients money into a product like this. Simply because there might be a need for extra income. For that money, but them the CD. See, you can have your cake and eat it too. [/quote] I do believe that most insurance companies will have enough assets to follow through with their payouts. However, my point is that it's STILL the US Government insurance vs ONE (out of hundreds) of company's insurance out there. If we have a flat or down market, it sucks, but your income base is guaranteed to double in the next 10 years. If your contract value does also, or does even better, bonus money!! Why would an income base that disburses 5-6% every year matter when my ACCOUNT VALUE can double in 14 years and fully liquid whenever I need to withdraw. The insurance company LOCKS you into a 5%/6% withdraw for the rest of your client's life. Quite honestly, how many of your clients would keep a VA for the next 30 yrs? When they're out of surrender they might go into a different type of investment and then lose the income benefit they've been paying for all these years. My clients have asked that same question about what if everything crashed. First, banks wouldn't be around to give you CDs as they have crashed because everyone would have pulled all of their money out of the banks to literally stuff under their mattresses. That would make the sub-prime mess look like a cake walk. So, now where are you going to get a 3% CD smart guy? My argument was that if CDs EVER go below 3%, then the whole economy would've crashed by now. When it does, what would you rather have? An empty insurance policy on your mutual funds that you've been paying all these years for? Or some CDs that have been earning you 1% less interest, BUT you can now walk away with free of charges.

Sep 5, 2008 8:14 pm

[quote=Spaceman Spiff]

The way I see it, the guarantees of the insurance companies mean everything. Insurance companies are required by law to have a certain amount of cash on hand to cover their liabilities. All of these riders are considered liabilities. In addition to that the good ones have reinsurance. So, if the insurance company goes out of business, then a reinsurance company steps in. My clients have asked that same question about what if everything crashed. First, banks wouldn't be around to give you CDs as they have crashed because everyone would have pulled all of their money out of the banks to literally stuff under their mattresses. That would make the sub-prime mess look like a cake walk. So, now where are you going to get a 3% CD smart guy? Second, if all mutual funds tanked, it means that all companies have stopped producing, shipping, and selling their products or services. For sure, we'd be talking about economic meltdown. At that point I don't really care what that paper says your worth, cause if you don't have something to trade for my corn, or beans, or cattle, then your paper is only good for one thing. So, if you think there's a greater possibility of that happening than there is of the US and global economies cycling back into prosperity again, we don't need to be talking about buying CDs, annuities, stocks, or even gold. We need to be talking about buying lead. And gunpowder. Cause if you can't mold bullets, load a gun, hit where you're aiming, kill it, clean it, cook it, eat it...it doesn't mean squat to me. These riders don't have anything to do with sharpe ratios and hedging strategies. They have to do with protecting your clients against you statement - "it depends when you open the annuity and what kind of market you land on." So, if we have a great 90's like market, perfect, we'll capture the annual increase in benefit base as the market goes up. If we have a flat or down market, it sucks, but your income base is guaranteed to double in the next 10 years. If your contract value does also, or does even better, bonus money!! I also agree with the last poster who said that you shouldn't put all of a clients money into a product like this. Simply because there might be a need for extra income. For that money, but them the CD. See, you can have your cake and eat it too. [/quote] Spiff, By far and away, the best post I've ever seen you post!

Sep 5, 2008 8:16 pm

I just posted about how the market really works (and I believe that), but let's look at the following scenario:

You put $100,000 into a VA in October 2007 and began taking the guaranteed 5% income. The account goes down due to market fluctuation, and it's value is further reduced by your withdrawals and fees. So, worst case scenario, you get your initial investment back over 20 years. (I'm talking about the old Marketlock feature with AIG.) Scenario 2 is that you buy a 20-year bond paying 6% with your $100k. Assuming it goes the full term, you'll get back your $100k and you've pocketed $120k in income over that time period. (Sounds like I'm defending the Boones, doesn't it?) I guess this is where I have difficulty with the VA. For all intents and purposes, you lose liquidity with the VA and you're only guaranteed to get back your principal over 20 years. The bond provides a stream of income that is predictable and independent of what will "most likely" happen with the VA. This is a good discussion; however, I'd like to see anyone make a living by selling CDs.

Sep 5, 2008 8:18 pm

Chris,

I think you should ask this question on w w w . r e g r e p s . c o m. Ask for Bobby. He might be able to give you some information regarding this stuff. Also, you should call Allianz or Pru and have them send you an Andex chart for your wall. Step about 10 feet away it, and look at the lines.

Sep 5, 2008 8:41 pm

[quote=Borker Boy]

I just posted about how the market really works (and I believe that), but let's look at the following scenario:

You put $100,000 into a VA in October 2007 and began taking the guaranteed 5% income. The account goes down due to market fluctuation, and it's value is further reduced by your withdrawals and fees. So, worst case scenario, you get your initial investment back over 20 years. (I'm talking about the old Marketlock feature with AIG.) Scenario 2 is that you buy a 20-year bond paying 6% with your $100k. Assuming it goes the full term, you'll get back your $100k and you've pocketed $120k in income over that time period. (Sounds like I'm defending the Boones, doesn't it?) I guess this is where I have difficulty with the VA. For all intents and purposes, you lose liquidity with the VA and you're only guaranteed to get back your principal over 20 years. The bond provides a stream of income that is predictable and independent of what will "most likely" happen with the VA. This is a good discussion; however, I'd like to see anyone make a living by selling CDs. [/quote] You're comparing two different things. People buy equities for growth and income (mutual funds, etfs, vas, etc) and Bonds for Income. I just met with a client who wants to invest for growth and income. I told them we can invest in mutual funds and withdraw at a rate of 5% for as long as we can or invest in a va where he and his wife will be able to withdrawal at 5% for the rest of their lives. The way I look at it is if the market trends upward like it always has it doesn't really matter whether they chose the mutual funds or the VA. However if the market continues to go down or goes flat, they would have wished they were invested for growth and income within a VA which has a Joint GWB For Life rider.

Sep 5, 2008 9:04 pm

[quote=snaggletooth]Chris,

I think you should ask this question on w w w . r e g r e p s . c o m. Ask for Bobby. He might be able to give you some information regarding this stuff. Also, you should call Allianz or Pru and have them send you an Andex chart for your wall. Step about 10 feet away it, and look at the lines. [/quote]

If you're going to promote the "alternate website" run by "Bobby", make sure that you are fair and that you also tell them about how he has a long history of getting pissed off at people that disagree with him, and how he normally bans them or even worse uncovers their real identity and then posts it all over his website and others.

Sep 6, 2008 1:19 am

I don't fact check you very much as you are usually right on target, but you can absolutely get 5% and more on CDs right now. I see over 5% in as little as five-year maturities. Thanks, Indyone, you are correct. I'm wrong. I didn't bother looking and I shouldn't have posted that. I pride myself on telling my clients "I don't know." It's much better than giving wrong info and I try to never give wrong info here.

Sep 6, 2008 1:34 am

Hi Anonymous, I have read some of your posts and I must admit, you provide some very good knowledge. Same example, Joe has 100k IRA and needs 200k in 10 years for retirement. VA would only provide you 200k (provided we compounded at a 7% using a rider) for your income base value DISBURSED at 5/6% ever year. A CD compounding at 5% for 10 years would provide 162k fully LIQUID. Even with different surrender schedules, I see VAs as a LIFETIME investment product that is not liquid at all. What's the point of surrendering a contract you've been paying EXTRA FEES for if you're NOT going to use the income benefits. That's like financing a car and paying interest when you have no intention on driving it. 1)Who are you using for your 10 year CD paying 5%? 2) Forget the income base. If I'm going 10 years, more than likely, I am using a 0% GMAB. 3)The VA isn't going to provide $200,000. It is going to provide whatever the subaccounts provide but no worse than $100,000. 4)A CD at 5% would provide $162,000 and GUARANTEE that the client won't achieve his financial goal. 5)A VA isn't very liquid, but neither is a 10 year CD. Of course, since I use these almost exclusively in IRA's with a decent time horizon, liquidity isn't much of a concern. 6) If I put someone in a VA, they are always using the guarantee. The way that my clients use these guarantees is that they allow the guarantees to influence their investor behavior. Put yourself in the shoes of a 55 year old very conservative investor who can't stomache losses. Your #1 goal is to retire in 10 years with $3,000/month of income. In order to do this, your IRA must get a 7% return between now and 65. Would you buy a 5% CD that is guaranteed to cause you to not reach your primary goal or would you invest aggressively and try to get a 7% return, but pay for a guarantee that won't allow you lose money? Or would you do something else. In the right situation, I see the upside of the VA to be much higher than a CD and there isn't much of a downside.

Sep 6, 2008 5:05 am

HEY SOMEONE STEAL MY NAME

Sep 6, 2008 5:01 pm

[quote=ChrisVarick]

I do believe that most insurance companies will have enough assets to follow through with their payouts. However, my point is that it's STILL the US Government insurance vs ONE (out of hundreds) of company's insurance out there. - If we have a flat or down market, it sucks, but your income base is guaranteed to double in the next 10 years. If your contract value does also, or does even better, bonus money!! Why would an income base that disburses 5-6% every year matter when my ACCOUNT VALUE can double in 14 years and fully liquid whenever I need to withdraw. The insurance company LOCKS you into a 5%/6% withdraw for the rest of your client's life. Quite honestly, how many of your clients would keep a VA for the next 30 yrs? When they're out of surrender they might go into a different type of investment and then lose the income benefit they've been paying for all these years. My clients have asked that same question about what if everything crashed. First, banks wouldn't be around to give you CDs as they have crashed because everyone would have pulled all of their money out of the banks to literally stuff under their mattresses. That would make the sub-prime mess look like a cake walk. So, now where are you going to get a 3% CD smart guy? My argument was that if CDs EVER go below 3%, then the whole economy would've crashed by now. When it does, what would you rather have? An empty insurance policy on your mutual funds that you've been paying all these years for? Or some CDs that have been earning you 1% less interest, BUT you can now walk away with free of charges.[/quote] First, I really hope you're not having discussions with your clients like this. Cause I see arbitration in your future. CDs did go below 3%. And the economy didn't crash. Were you an "advisor" in 2002, 2003, and 2004 when the average 1 year CD rates were 2.4%, 1.5%, and 2.1%, respectively? Those are averages on CDs at EDJ, so your local banks may have been marginally better or worse. What would you have been telling a client in those years when it would have taken a minimum of 30 years to double their money? But...But... I wouldn't buy 1 year CDs. I'd go longer. Yeah right. Client's think of CDs as short term investments. They think that a year from now interest rates are going to be higher. Always. So, you might be able to convince them to go 2 or 3 years out, but you're not going to get them to go 10. And if you do, why wouldn't you look for an insured bond instead? Anyway, that's whole other topic. Second, if the economy got to a state where there was a real chance that all of the mutual funds in my portfolios would lose their value and become worthless, then chances are there would be a run on the banks too. Banks would start failing by the droves. FDIC is simply an insurance company and, just like the reinsurance companies backing the VA guarantees beyond Hartford or AIG or AXA, would eventually run out of money (that would have no value BTW because the Fed has gone out of business). So, we'd all be in the same boat. Back to the buying lead discussion. You are also COMPLETELY missing the point on this VA concept. IT'S FOR INCOME!!! So let's talk about just purely income for a minute. Let's say there are twin brothers in our town. They just retired and need income. They're not concerned about liquidity or wealth transfer. Just income. One comes to you for advice and one comes to me. You assert that your client is going to get a CD and just simply clip the 5% coupon for the next 10 years. Fine, for the sake of discussion I'll assume that to be a possibility. Now, let's look at my client who just purchased SunAmerica's Polaris II A product with a 7% guaranteed step up for the next 10 years. He's also going to be taking income immediately at 5% of the income base guaranteed. Let's also assume the market stays flat or goes down so that it doesn't become a factor in this case. Your client gets income of $5000 a year for 10 years for a total of $50,000. He's happy. My client gets the $5000 a year too. For the first year. Then his automatic 7% step up kicks in. Because he's taken 5% out, he nets a 2% step up. So, next year he gets to take 5% on $102K. His second year check is now $5100. This goes on until the end of the 10th year. He gets a total of $54,750 in income. At this point he can continue to receive a guaranteed check of $5975 a year for the rest of his life. And we're talking about a best case scenario for your CD and a worst case scenario for my client's VA. The reality would be that the account value would probably double in that 10 years and the income base could be well above double. You keep touting those CDs if you want. They're not the best income producing product. They're not the best growth product. They're a great safety net for the uninformed.

Sep 6, 2008 6:30 pm

[quote=Spaceman Spiff]

My client gets the $5000 a year too. For the first year. Then his automatic 7% step up kicks in. Because he's taken 5% out, he nets a 2% step up. So, next year he gets to take 5% on $102K. His second year check is now $5100. This goes on until the end of the 10th year. He gets a total of $54,750 in income. At this point he can continue to receive a guaranteed check of $5975 a year for the rest of his life. And we're talking about a best case scenario for your CD and a worst case scenario for my client's VA. The reality would be that the account value would probably double in that 10 years and the income base could be well above double. [/quote] Spiff, I completely agreed with everything you said, until you got to this point. You're saying that if you're taking 5% out immediately, you still believe your account value will double in 10 years?

Sep 6, 2008 6:30 pm

Spiff, if I'm one of the brothers, I'm taking the 5% CD. You didn't mention the age of the brothers, but let's use 58.

I'm getting $5000 for 10 years. In ten years, I have a CD that is still worth $100,000. When I annuitize it, I'll be able to get about $8,800/year guaranteed for life. (This is based upon current SPIA rates. We don't know future rates, but the SPIA rates in effect now are very low because of this low interest rate environment. If I had to guess, there is lots more upside than downside on these future rates.) I'll take my chances that I'll still be getting something significantly higher than $5975.

I know that you are thinking that yours is a worst case scenario. That's true, but the reality is that the greater the guarantees, the greater the chance that the guarantees are exactly what someone will get. There ain't no such thing as a free lunch. You are trying to take 5% out of an investment that probably has all in costs of 3% (haven't looked at it). If the market goes down, the costs actually increase because the GMIB cost is based upon the GMIB value and not the contract value. It is unlikely that a product like this will have it's contract value increase while 5% is being withdrawn. This is especially true if the market drops in the first couple of years. The odds favor the fact that this product will pay the guarantee. You are also COMPLETELY missing the point on this VA concept. IT'S FOR INCOME!!! I personally think that VAs are not good income products. I find them to be great accumulation products for risk averse people who can't afford to be risk averse.

Sep 6, 2008 8:16 pm

[quote=anonymous]

Spiff, if I'm one of the brothers, I'm taking the 5% CD. You didn't mention the age of the brothers, but let's use 58.

I'm getting $5000 for 10 years. In ten years, I have a CD that is still worth $100,000. When I annuitize it, I'll be able to get about $8,800/year guaranteed for life. (This is based upon current SPIA rates. We don't know future rates, but the SPIA rates in effect now are very low because of this low interest rate environment. If I had to guess, there is lots more upside than downside on these future rates.) I'll take my chances that I'll still be getting something significantly higher than $5975.

[/quote] Anon,
What are your thoughts on adding a COLA to the SPIA? Especially for someone retiring around 60?

Sep 7, 2008 11:29 am

What are your thoughts on adding a COLA to the SPIA? Especially for someone retiring around 60?

If we're dealing with someone in average health, actuarily speaking, it's all the same. Here's an example with made up #'s. The client is 60 and wants to annuitize $100,000. No inflation protection: $600 1% Cola: $550 2%: $500 3%: $450 4%: $400 The best choice will only be known in hindsite. If the client is a fat smoker and both of his siblings died in his 50's along with his parents, I'd take the $600 with no inflation. If the client runs marathons with his 93 year dad and 116 year old grandfather, I'm going with the $400 and the 4% inflation increase. It's also dependent on how much money the client needs and whether the SPIA has to actually pay the money. If $400 is enough, I'd probably go with the 4% option. If $500 is enough, I'd probably go with the 2% option. You get the idea. There are some products in which the SPIA doesn't have to pay out the money. I don't know how wide spread this concept happens to be. The basic concept is that the SPIA is set up inside of an IRA. It does not pay to the individual. It pays to the IRA. So, if we use the same example and don't use COLA, the SPIA will pay $600. However, if the person only needs $400, they can take $400 and the other $200 will grow tax deferred. By the way, I use SPIA's much more as a selling concept than I actually use them in practice. They help me sell one heck of a lot of whole life insurance.

Sep 7, 2008 7:29 pm

[quote=snaggletooth][quote=Spaceman Spiff]

My client gets the $5000 a year too. For the first year. Then his automatic 7% step up kicks in. Because he's taken 5% out, he nets a 2% step up. So, next year he gets to take 5% on $102K. His second year check is now $5100. This goes on until the end of the 10th year. He gets a total of $54,750 in income. At this point he can continue to receive a guaranteed check of $5975 a year for the rest of his life. And we're talking about a best case scenario for your CD and a worst case scenario for my client's VA. The reality would be that the account value would probably double in that 10 years and the income base could be well above double. [/quote] Spiff, I completely agreed with everything you said, until you got to this point. You're saying that if you're taking 5% out immediately, you still believe your account value will double in 10 years? [/quote] The account value would double? Please explain. As for the AIG product you're talking about, you're right if you take out 5% income immediately, the 2% will be added to your income base, however this is SIMPLE interest.

Sep 7, 2008 7:31 pm

[quote=anonymous]

Spiff, if I'm one of the brothers, I'm taking the 5% CD. You didn't mention the age of the brothers, but let's use 58.

I'm getting $5000 for 10 years. In ten years, I have a CD that is still worth $100,000. When I annuitize it, I'll be able to get about $8,800/year guaranteed for life. (This is based upon current SPIA rates. We don't know future rates, but the SPIA rates in effect now are very low because of this low interest rate environment. If I had to guess, there is lots more upside than downside on these future rates.) I'll take my chances that I'll still be getting something significantly higher than $5975.

I know that you are thinking that yours is a worst case scenario. That's true, but the reality is that the greater the guarantees, the greater the chance that the guarantees are exactly what someone will get. There ain't no such thing as a free lunch. You are trying to take 5% out of an investment that probably has all in costs of 3% (haven't looked at it). If the market goes down, the costs actually increase because the GMIB cost is based upon the GMIB value and not the contract value. It is unlikely that a product like this will have it's contract value increase while 5% is being withdrawn. This is especially true if the market drops in the first couple of years. The odds favor the fact that this product will pay the guarantee. You are also COMPLETELY missing the point on this VA concept. IT'S FOR INCOME!!! I personally think that VAs are not good income products. I find them to be great accumulation products for risk averse people who can't afford to be risk averse.[/quote] I agree Anonymous, at the most, I would use VAs as an accumulation benefit for a very conservative investor just to get them comfortable with the market. Using the VA as an income product will only guarantee that the worst case scenario is the ONLY scenario.

Sep 7, 2008 9:09 pm

Using the VA as an income product will only guarantee that the worst case scenario is the ONLY scenario.

Wow, it seems like I can argue with everyone regardless of what side they stand on this issue. If the market is fantastic, the worst case scenario won't be the ONLY scenario. The problem is that it will take a very good market for the worst case scenario to not be the only scenario. I'm sure that I have mentioned it elsewhere, but what is true about the guarantees is that the better the guarantee, the more likely that the guaranteed value is exactly what the client will get.

Sep 8, 2008 2:23 pm

anon - usually I can agree with you, but when you assert that the guarantees are what the clients are going to get, I can't. Here's why. In the marketing piece for the annuity I mentioned they give a scenario of a guy age 55, invests $100K in 1992, gets the income rider and takes his first withdrawal of 5% at age 65. They use the equivalent of the American Balanced fund as their example. Using that simple fund starting in 1992, by 1998 the guaranteed income has surpassed your $8900 SPIA idea. It shows the client receiving $13,371 last year, guaranteed for life. And if he dies today, he passes on $187K to his benes.

I would assert that looking at the last 15 years is a good representation of what the market can do at it's best and worst. Thus giving us a great picture of average and making this scenario more possible to repeat over the next 15 years. So, sure I'll concede the point that if the market goes straight down for the next 10 years, clients will be better off using CDs and SPIAs to generate income. However, if it acts more like the last 15 years, I'd rather have my client's money in the VA. At least I can point to a dollar figure on their statement that never goes down.

Sep 8, 2008 2:24 pm

This is my first down market, but I assume that when it recovers, VAs will go by the wayside due to their high costs, and mutual funds will again be all the rave.

Then, of course, the market will go down again, we and our clients will get jumpy, and out will pop our VA sales literature. If we really believe in the market like we claim to, why not just sell mutual funds and work our tails off at educating our clients about the importance of investing long term, diversifying and keeping fees low?

Sep 8, 2008 4:03 pm

Spaceman Spiff, I think that you can continue to agree with me. What I said is either being misinterpreted or I failed in making myself clear. Let me try to clarify.

anon - usually I can agree with you, but when you assert that the guarantees are what the clients are going to get, I can't. Here's why. In the marketing piece for the annuity I mentioned they give a scenario of a guy age 55, invests $100K in 1992, gets the income rider and takes his first withdrawal of 5% at age 65. I never asserted that the guarantee is exactly what the client will get. That was ChrisVarick's argument and I argued against it. My viewpoint is that the greater the guarantee, the greater the liklihood that all that one would get is the guarantee. I do think that it is very likely that all one will get is the guarantee WHEN WITHDRAWALS START IMMEDIATELY. If someone is waiting 10+ years to start withdrawals, I'm of the belief that the person will do better than the guarantee provided that the investments do better than about 2.5%. I'm only arguing in favor of CD's + a SPIA based upon the scenario that ChrisVarick gave to us: Choice 1: 5% CD return and the desire to have immediate income. Choice 2: VA with GMIB taking immediate income. With those being our only choices, I'm going with choice 1. In your scenario of income starting in 10 years, I would definitely go with Choice 2. The only difference is that I would probably use a GMAB and not a GMIB. The reason for this is that although the GMIB will give more guaranteed income, the GMAB option will likely provide more income as long as the investments earn more than 2.5% and the contract value will definitely be higher.

Sep 8, 2008 5:58 pm

[quote=Borker Boy]

This is my first down market, but I assume that when it recovers, VAs will go by the wayside due to their high costs, and mutual funds will again be all the rave.

Then, of course, the market will go down again, we and our clients will get jumpy, and out will pop our VA sales literature.

If we really believe in the market like we claim to, why not just sell mutual funds and work our tails off at educating our clients about the importance of investing long term, diversifying and keeping fees low?[/quote]

Logically, this should work. However, we are all emotional creatures. When push comes to shove, fear overcomes logic 100% of the time. Whatever tools you can use to take fear out of the equation will make you a better advisor. A VA is a very effective tool to do this.

Sep 8, 2008 6:29 pm

If we really believe in the market like we claim to, why not just sell mutual funds and work our tails off at educating our clients about the importance of investing long term, diversifying and keeping fees low? 1) We can be wrong. The market may be such that the VA's guarantees beat comparable mutual funds. 2) We would have to keep educating our clients over and over. In order to be able to afford to spend the time to do this, we would have to put everyone in a fee-based account. This won't be low cost. 3) Our sales skills aren't always good enough. No matter how educated the client becomes if the market takes big drops a couple of years in a row and the news is negative, many (most?) investors won't stay the course. By the way, it's not a decision between mutual funds and VA's. Most of my clients who have VAs also have mutual funds. Whole life insurance and fixed investments/savings also get factored into the equation. The more things that a client has that are guaranteed to increase in value, the less the need becomes for the guarantees on their investments.

Sep 8, 2008 11:16 pm

“At least I can point to a dollar figure on their statement that never goes down.”

Spaceman Spiff, I missed this when I first read your post. I think that this is one of the problems with GMIB riders and leads to the misunderstanding that some agents and many (most?) clients have. The problem that I'm referring to is thinking of the GMIB value as a dollar figure. I would argue that it's a number and not a dollar figure. After all, if it was a dollar, the higher the GMIB value, the more money someone would have. It's simply not the case. A 5% GMIB doesn't pay more than a 7% GMIB. If a company came out with a 10% GMIB it wouldn't be any better. The higher the GMIB, the lower the annuitization rate. By giving a dollar value of the GMIB, clients believe that they are getting a 7% return, etc. Personally, I think that the most honest way to use a GMIB is to talk numbers and not percentages and understand that the value of the GMIB does not correspond to dollars and cents as we know them. "Mr. Client, at age 70, you can have an annual income of $6200/month. This is the worst case scenario."

"4) Income planning doesn't follow the same rules as accumulation."

This is very, very true, but the reality is that GMIB riders don't do a good job of income planning. Their true value is actually as an accumulation product that changes investor behavior.

Sep 9, 2008 12:36 am

At the risk of getting bashed, seems to me that any product that fosters so much debate and is either extremely loved by some and extremely hated by others with almost no in between, must be a bad idea for MOST (not all but most) people. No disrespect meant to those that use them. Just a simple observation.

Sep 9, 2008 1:05 am

Let's look at some other things that get debated and are either loved or hated.

Whole life insurance
Long Term Care insurance
Using an advisor that earns commissions
Using an advisor that charges fees

fee only advisors fee based advisors wirehouse reps insurance company reps
SPIAs
load funds
active funds
passive funds universal life
equity indexed annuities Ok, that's a quick, stupid list that I put together. My point is that everything gets debated. We should love almost all products. We should hate almost all products. The idea needs to be that the products aren't good or bad. They are either appropriate or inappropriate based upon the situation. A VA is an awful investment for a 22 year old who needs the money to buy a house next year. It can be a great investment for a 55 year old rolling over his IRA with a low risk tolerance and a need for a good return. Sportsfreakbob, I respectfully suggest that you re-read this thread. I think that the one thing that this thread is actually missing is people with strong views about this being a love it or hate it product. Instead, it seems to be more of a conversation of when VA's are appropriate. I have to say that most people who hate a product don't understand the product or don't understand the proper use.

Sep 9, 2008 2:29 pm

anon - I reread your posts with the thought of simply discussing based on how Chris started this thread. I see the point you are trying to make. And I’d agree if you take any positive market returns out of the equation, then your CD to SPIA makes perfect sense.

I can't believe you left EDJ off of your list of things that get debated.

Sep 9, 2008 2:36 pm

spiffy,

You seem to be one of those people that hits a hornets nest, gets stung and can't understand why.

Sep 9, 2008 2:44 pm

[quote=Spaceman Spiff] anon - I reread your posts with the thought of simply discussing based on how Chris started this thread. I see the point you are trying to make. And I’d agree if you take any positive market returns out of the equation, then your CD to SPIA makes perfect sense.

I can’t believe you left EDJ off of your list of things that get debated.

[/quote]

Because everybody can agree that EDJ sucks.

I keed, I keed…

Sep 9, 2008 2:55 pm

cj - no, around here I know when I’m hitting the hornets nest and what’s going to happen when I do.

Sep 10, 2008 1:38 am

Anon - i will admit that i didnt read this entire thread. It just seems to me that the debate on VA’s is endless, and seems to get more “press” here than anything (except maybe EDJ). In my post, my point of reference was all the collective threads on VA;s which seem to never end.

I dont personally hate them at all, i;ve done them from time to time, although its not a focus for me. I agree, the issue that should be addressed is not whether they are appropriate but in what circumstances they are apprropriate. With that said, these days, i guess you could say the same thing about Lehman or FNM pfd!!!

Sep 11, 2008 8:09 pm

[

You are also COMPLETELY missing the point on this VA concept. IT'S FOR INCOME!!! So let's talk about just purely income for a minute. Let's say there are twin brothers in our town. They just retired and need income. They're not concerned about liquidity or wealth transfer. Just income. One comes to you for advice and one comes to me. You assert that your client is going to get a CD and just simply clip the 5% coupon for the next 10 years. Fine, for the sake of discussion I'll assume that to be a possibility. Now, let's look at my client who just purchased SunAmerica's Polaris II A product with a 7% guaranteed step up for the next 10 years. He's also going to be taking income immediately at 5% of the income base guaranteed. Let's also assume the market stays flat or goes down so that it doesn't become a factor in this case. Your client gets income of $5000 a year for 10 years for a total of $50,000. He's happy. My client gets the $5000 a year too. For the first year. Then his automatic 7% step up kicks in. Because he's taken 5% out, he nets a 2% step up. So, next year he gets to take 5% on $102K. His second year check is now $5100. This goes on until the end of the 10th year. He gets a total of $54,750 in income. At this point he can continue to receive a guaranteed check of $5975 a year for the rest of his life. And we're talking about a best case scenario for your CD and a worst case scenario for my client's VA. The reality would be that the account value would probably double in that 10 years and the income base could be well above double. You keep touting those CDs if you want. They're not the best income producing product. They're not the best growth product. They're a great safety net for the uninformed.

[/quote]

First of all, I am a VA guy. My basic business model is to rollover 401(k)'s into VA's. That shit is easy and it pays well. I struggle with my income now clients, like it seems most here do.

That being said, i was interested in your comments about the Polaris annuity because that sounds like a pretty strong income story. An income story better than i have seen on any other VA. It sounded to good to be true. Upon further research it was to good to be true.

As with most VA's, the income credit is turned of once you take a w/d. So, you are not going to be taking a 5% w/d and be credited with 2%. You are going to be taking a 5% w/d and get what your subs give you. If you have been selling this product as you described above, you may need to do some ass covering right now. That is a total misrepresentaion of that product, and quite frankly a slam dunk lawsuit. Now, i did do some quick research, so i may be off base. But i believe i am correct. Not trying to bash, just inform.

Sep 11, 2008 9:14 pm

You are wrong.

Look at the MarketLock Income Plus.

Sep 11, 2008 9:52 pm

You are off base. It does sound too good to be true, so I questioned it the first time I heard it too. It does in fact work the way I explained. Here's the quote directly from the website:

"What’s more clients can receive an annual income credit—even after they begin taking withdrawals. (If clients take a withdrawal up to the maximum withdrawal amount available, the income credit percentage available on the next contract anniversary will simply be reduced by the percentage of their Income Base withdrawn. Please see the prospectus for more information about the calculation of the income credit." I'd give you the link, but it's specific to Jones advisors and I'd hate to get in trouble.

Sep 12, 2008 10:54 am

I don’t know the specifics of this product, but…

When you have a product with high expenses(I'm guessing 3%), and you take 5% withdrawals, the odds favor the contract value decreasing and very possibly going to zero. My point is that these products sound great, but there is a very good chance that the guarantee is exactly what the person is going to get. We can all agree that at times, annuitizing money makes a lot of sense for a client. Look at the guaranteed annuitization rates in the contract. Do you notice anything about them? I can answer without ever having seen the contract. They suck. In the last 2 years, a popular insurance company has made 2 "improvements" to their living benefits. In both instances, these improvements came with lowered their guaranteed annuitization rates. I've heard people talk about these great improvements, but nobody mentioned the annuitization rates. This tells me that the people selling these products don't have the understanding that they should. The "improvements" tend to increase the worst case scenario at the same time that they increase the odds that this worst case scenario is exactly what the client will get. TANSTAAFL (I'm not anti-VA. I like them in many instances for 401(k) rollovers.)

Sep 12, 2008 2:14 pm

Perhaps I’m missing something, but I didn’t think we were talking about annuitization rates. If I’m going to annuitize something I’m going to use a SPIA, not a VA. None of the VAs I use with my clients, mostly with 401K rollovers like you do, are going to be annuitized. In fact I don’t know that I’ve ever even spoken with the wholesaler about annuitization. So, I guess you’re right in what you said.

Sep 12, 2008 3:58 pm

WOW!!!!..........I just got off the phone with a SunAnerica Rep. You guys are right, and I apologize Spiff. That is a strong income story and that arrow is going in my quiver. Thanks. As i said earlier i struggle with my income now clients, but this makes sure they get a raise in income every year for 15 years. WOW!!! I feel ready to steal some clients from the anti annuity crowd in town!

Sep 12, 2008 6:15 pm

If you like that story you can also look at Hartford’s latest version on a theme. They are now giving clients the ability to give themselves a raise every 5 years, basically for the rest of their lives. Their living bene used to be based on how old clients were when they took their first check. If you were 65 it was say 5.5%. If you waited until 70 you got 6% and so on and the only way your income would go up is if you got a step up in benefit from the market.

Now they're saying that on 5 year birthdays clients can get .5% higher income for the next 5 years. So, if the client starts income at 60 he gets 5%, when he turns 65 he gets 5.5%, 6% at 70...until age 90 where it caps. If clients can wait 5 years before taking the first withdrawal, they get those raises automatically. If they take income immediately, they have to request them, but they're still available. That's a pretty powerful story for your income now clients. And before anon jumps in again, when I talk with clients about these riders I tell them point blank that there is a possibility that they will exhaust all of the contract dollars and only be getting the income base dollars because they are paying extra for that income guarantee. So, it's not appropriate for all of their money, but for a portion that they want some guarantees on either idea is a great one.

Sep 13, 2008 1:55 am

Perhaps I’m missing something, but I didn’t think we were talking about annuitization rates.

We weren't talking about annuitization rates, but you are missing something simply because we should be talking about annuitization rates. Spiffy, I'm not saying not to sell these products. I sell them. I just don't think that they work for an "income now" client. They work for an "income later" client, but only to the extent that the guarantees improve investor behavior. There's no free lunch. Unless the insurance company is trying to be less profitable, every enhancement must be accompanied by an equal detraction. They advertise the enhancements and bury the detractions. If I'm going to annuitize something I'm going to use a SPIA, not a VA. If you are going to annuitize something TODAY you are going to use a SPIA and not a VA. None of the VAs I use with my clients, mostly with 401K rollovers like you do, are going to be annuitized. Why not? Ex. You have a 60 year old married client. He doesn't need income today. He buys a VA. His goal is simply to have enough money so that he and his wife can live happily ever after. His wife dies in 5 years years. At age 70, he wants to start taking money. His goal is to have the biggest possible guaranteed income stream and he doesn't have a desire to leave money behind. Annuitization may make lots of sense. My point is that the product may not be bought with the specific intent of annuitization, but we don't have a crystal ball. In fact I don't know that I've ever even spoken with the wholesaler about annuitization. So, I guess you're right in what you said. Wholesalers usually understand the product. They intentionally don't talk about the annuitization rates. Look at the marketing material. There is no mention of annuitization rates. Look at a prospectus. Again, there is no mention of annuitization rates. The only way to find the annuitization rates is to look in an actual contract. Heck, I just received some producer only marketing material from an insurer and in small print it mentioned a "change" in the annuitization rates. They couldn't even bring themselves to say that they lowered the rates. The insurance company has to be profitable. They won't give a benefit that causes them to make less money. If they can, they want to give a benefit that will allow them to be more profitable. A selling point of VA's should be guaranteed annuitization rates. In other words, if you buy a policy today and annuitize it 25 years from now, the annuitization factors are guaranteed in the contract. So, if people start living to be 125 or if interest rates are 1%, that won't negatively impact someone who buys a contract today. Instead, what has happened is that everytime that the living benefits have been "enhanced", the annuitization rates get worse. What this does is increases the chance that if the client is taking their 5% (or whatever else based upon the contract), they have a greatly increased chance of only being able to get this amount. Let me give a made-up example. (Don't anyone bother telling me how wrong the numbers happen to be.) A SPIA for a 72 year old man has a annuity factor of 9.8. This means that $100,000 would pay $980/month. In older VA products, the annuity factor was 8.8. This means that age 72, the insured could annuitize and get $880/month (for every $100,000). Then VA's started having living benefits. With each improvement, the annuitization factor has dropped. Maybe at first, it was 7.5, and then it was 6.5, and now it is 4.6. Why is this so important? Your 62 year old client buys some sort of VA with a fancy GMIB. It guarantees that the client can always take 5% a year and their GMIB value will stay the same. We should be able to agree that in doing this, the contract value has an excellent chance of decreasing since we are talking about a product that costs 3%. 10 years later, the client is still taking out 5% and the GMIB value is still $100,000. The contract value has dropped to $60,000. If your now 72 year old client needs income, he only has 4 real choices. 1) Continue taking the $5000/year 2)take the $100,000 GMIB value and annuitize it 3)Take the $50,000 and run. 4)Take the $50,000 and annuitize it. If the annuitization rates in the contract were based upon mortality experience like SPIA rates, the payout (using my wrong numbers) would be in the neighborhood of $11,000 + a year. Instead, they artifically lower them. Therefore, the client is only going to get in the neighborhood of $5000 if it gets annuitized. It is very possible that he'd get more money if he took his $50,000 contract value and bought a SPIA. The insurance company is giving with one hand and taking away with the other. Nobody knows this because nobody bothers to read the actual contracts!

Sep 13, 2008 7:30 pm

Let me try a much simpler response on this. If someone has a GMIB type living benefit and the investments are really poor, the worst case scenario is to either take the 5% (or whatever is guaranteed) or to annuitize the contract.

Ex. Contract starts at $100,000. Client keeps taking out $5000 and the investments suck causing the contract value to go all the way to zero. However, the GMIB stays at $100,000. The client can do whatever is better. 1)Annuitize the $100,000 using the rates guaranteed in the contract or 2) Keep taking the $5000. (There is another company that does the same thing, but they allow 6% instead of 5%. So we assume, that this contract must be better since the client can take $6000 and the GMIB value will stay at $100,000.) Sometimes, choice 1 will be better. Sometimes choice 2 will be better. Choice 1 is roughly the equivalent of having an annuity payout factor of 4.0. If the company at a certain age has a payout factor of 5.2, the client will take this option instead and get $520/month. With the company with the "better" GMIB, they will have worse annuity factors. Choice 1 will be roughly the equivalent of having an annuity payout factor of 4.9. But at the same age, the payout factor of their annuitization tables may be 5.1 instead of 5.2. This means that if the client takes this option they'll get $510/month. The worst case scenario with the "better" GMIB is actually worse! Don't sell GMIB benefits without understanding annuitization factors. GMIBs sound good, but often, making them "better" does nothing to improve the worst case scenario for the client. We are not helping our clients by allowing the wholesalers and the insurance companies to keep us in the dark. We're being kept in the dark intentionally.

Sep 13, 2008 9:33 pm

[quote=anonymous]Let me try a much simpler response on this. If someone has a GMIB type living benefit and the investments are really poor, the worst case scenario is to either take the 5% (or whatever is guaranteed) or to annuitize the contract.

Ex. Contract starts at $100,000. Client keeps taking out $5000 and the investments suck causing the contract value to go all the way to zero. However, the GMIB stays at $100,000. The client can do whatever is better. 1)Annuitize the $100,000 using the rates guaranteed in the contract or 2) Keep taking the $5000. (There is another company that does the same thing, but they allow 6% instead of 5%. So we assume, that this contract must be better since the client can take $6000 and the GMIB value will stay at $100,000.) Sometimes, choice 1 will be better. Sometimes choice 2 will be better. Choice 1 is roughly the equivalent of having an annuity payout factor of 4.0. If the company at a certain age has a payout factor of 5.2, the client will take this option instead and get $520/month. With the company with the "better" GMIB, they will have worse annuity factors. Choice 1 will be roughly the equivalent of having an annuity payout factor of 4.9. But at the same age, the payout factor of their annuitization tables may be 5.1 instead of 5.2. This means that if the client takes this option they'll get $510/month. The worst case scenario with the "better" GMIB is actually worse! Don't sell GMIB benefits without understanding annuitization factors. GMIBs sound good, but often, making them "better" does nothing to improve the worst case scenario for the client. We are not helping our clients by allowing the wholesalers and the insurance companies to keep us in the dark. We're being kept in the dark intentionally.[/quote] Excellent post! Out of curiosity, which VA and which income/withdraw rider do you use? And why? Thanks!

Sep 14, 2008 12:23 am

I’m going to stay mum on the specific VA. My only reason is that I feel that talking company specifics could compromise my anonymity. Let me just say that since the guarantees are only as good as the claims paying ability of the insurance company, I do believe that company strength matters if one is using a guarantee.

I use a GMAB more often than a GMIB or GMWB rider. A GMAB is less expensive so it will always give the client a greater contract value. Based upon the low guaranteed annuitization rates in the contracts and looking at current SPIA rates, A GMIB will only give more future income than a GMAB if the contract averages a rate of return of less about 3%. If SPIA rates increase, and they will if interest rates increase, it is possible that a GMAB will give more income than a SPIA regardless of contract performance. The only time that I think that a GMIB makes more sense than a GMAB is if someone wants income now. However, I think that if someone wants income now, a VA is not a good choice for them.

Sep 15, 2008 2:49 am

[quote=the word]

You are also COMPLETELY missing the point on this VA concept. IT'S FOR INCOME!!! So let's talk about just purely income for a minute. Let's say there are twin brothers in our town. They just retired and need income. They're not concerned about liquidity or wealth transfer. Just income. One comes to you for advice and one comes to me. You assert that your client is going to get a CD and just simply clip the 5% coupon for the next 10 years. Fine, for the sake of discussion I'll assume that to be a possibility. Now, let's look at my client who just purchased SunAmerica's Polaris II A product with a 7% guaranteed step up for the next 10 years. He's also going to be taking income immediately at 5% of the income base guaranteed. Let's also assume the market stays flat or goes down so that it doesn't become a factor in this case. Your client gets income of $5000 a year for 10 years for a total of $50,000. He's happy. My client gets the $5000 a year too. For the first year. Then his automatic 7% step up kicks in. Because he's taken 5% out, he nets a 2% step up. So, next year he gets to take 5% on $102K. His second year check is now $5100. This goes on until the end of the 10th year. He gets a total of $54,750 in income. At this point he can continue to receive a guaranteed check of $5975 a year for the rest of his life. And we're talking about a best case scenario for your CD and a worst case scenario for my client's VA. The reality would be that the account value would probably double in that 10 years and the income base could be well above double. You keep touting those CDs if you want. They're not the best income producing product. They're not the best growth product. They're a great safety net for the uninformed.

[/quote]

First of all, I am a VA guy. My basic business model is to rollover 401(k)'s into VA's. That shit is easy and it pays well. I struggle with my income now clients, like it seems most here do.

That being said, i was interested in your comments about the Polaris annuity because that sounds like a pretty strong income story. An income story better than i have seen on any other VA. It sounded to good to be true. Upon further research it was to good to be true.

As with most VA's, the income credit is turned of once you take a w/d. So, you are not going to be taking a 5% w/d and be credited with 2%. You are going to be taking a 5% w/d and get what your subs give you. If you have been selling this product as you described above, you may need to do some ass covering right now. That is a total misrepresentaion of that product, and quite frankly a slam dunk lawsuit. Now, i did do some quick research, so i may be off base. But i believe i am correct. Not trying to bash, just inform. [/quote] So if the annuity guarantees are only as good as the company issuing them, how do you feel about this product given AIG's current state? Apparently, tThe private funders have left the table...

Sep 15, 2008 1:55 pm

anon - great post. It's still early and the caffeine and sugar from my Coke haven't quite hit the system yet, so I'm still digesting everything you said. I will agree wholeheartedly with you that for income now clients, VAs are not the best alternative. I don't typically use them for that. It's usually income later clients who hear about them.

Now, to snagg's comment about AIG. If my client's money was invested directly with AIG, like some of my GMAC or LEH bond holders, I'd be more upset. However, SunAmerica is the company making good on the Polaris contract's guarantees, not the parent company AIG. AIG is undoubtedly struggling right now, but SunAmerica is not. In fact they are the most profitable part of AIG. The only issue I see is who is going to own SunAmerica a year from now. It may or may not be AIG. I'm not concerned at all about SunAmerica and therefore not concerned at all about the annuity and it's guarantees.

Sep 15, 2008 2:32 pm

You're welcome. I really want to make this as easy as possible to understand, but I'm struggling a little bit. Let me make a third run at this. For "income later" clients, the maximum amount of guaranteed minimum income is going to be based upon two factors.

Factor #1: How is the income based determined? Factor #2: How much income can be taken from this income base? With Factor #2: The greatest amount of guaranteed income that can be taken is the larger of either what can be received by annuitizing the income base or some set guaranteed %. The annuitization usually leads to more money. The more that Factor #1 is guaranteed to grow, the worse that the company makes the annuitization rates. Since the annuitization rates is usually what governs the worst case scenario because annuitization rates are usually higher than the guaranteed %, the increasing of the guaranteed % that one can remove actually causes the worst case scenario to get worse instead of getting better. Ex. (again ignore whether the numbers are correct) Product A: Older 5% GMIB where one couldn't remove money and keep GMIB base the same versus Product B: New GMIB for 6% where one can remove money and keep GMIB base the same or even have it grow and if nothing is touched after 10 years, they'll make it 7%. First of all, if the market is good, Product A will be better because it is less costly and the guarantee, in hindsite, doesn't matter. If we start with 100,000 and if the market sucks, in 10 years, product A has a contract value of $50,000 and a GMIB value of $163,000 Product B has a contract value of $48,000 (greater fees) and an GMIB value of $200,000. What's better? We don't have enough info. It depends on the annuitization rates. I guarantee that Product A has better annuitization rates. Let's say that the guy is now 75 years old and the annuitization rates in Product A for a 75 year old are 8.1. This means that if he annuitizes, he has a guaranteed monthly income of $163 (GMIB value in thousands) x 8.1 (annuitization rate) = $1320 In Product B the annuitization rates are 6.5. $200(GMIB value) x 6.5 (annuitization rate) =$1300 or alternatively, he can keep taking 6% and get $1200/month of income.

Sep 17, 2008 3:50 pm

[quote=anonymous]I’m going to stay mum on the specific VA. My only reason is that I feel that talking company specifics could compromise my anonymity. Let me just say that since the guarantees are only as good as the claims paying ability of the insurance company, I do believe that company strength matters if one is using a guarantee.

I use a GMAB more often than a GMIB or GMWB rider. A GMAB is less expensive so it will always give the client a greater contract value. Based upon the low guaranteed annuitization rates in the contracts and looking at current SPIA rates, A GMIB will only give more future income than a GMAB if the contract averages a rate of return of less about 3%. If SPIA rates increase, and they will if interest rates increase, it is possible that a GMAB will give more income than a SPIA regardless of contract performance. The only time that I think that a GMIB makes more sense than a GMAB is if someone wants income now. However, I think that if someone wants income now, a VA is not a good choice for them.[/quote] Hey anonymous, I just ran the numbers and you're completely correct. I use a worst case and best case scenario with both the GMAB/SPIA vs the GMIB+ and the SPIA would beat the GMIB+ annuitization in either outcome. The only time that I think that a GMIB makes more sense than a GMAB is if someone wants income now. However, I think that if someone wants income now, a VA is not a good choice for them. Can you explain that to me? Cause I figured if the client wants income now, they would be stuck with the guarantee of 5/6% since there is no more upside potential. Wouldnt' a SPIA give a higher payout starting Day 1?

Sep 17, 2008 5:34 pm

Can you explain that to me? Cause I figured if the client wants income now, they would be stuck with the guarantee of 5/6% since there is no more upside potential. Wouldnt' a SPIA give a higher payout starting Day 1? Well, first of all, a GMAB is useless for a client who wants income now. If we compare a SPIA to a GMIB for income, it depends. (Of course, there is a big difference whether we are talking about a 70 year old man vs. a 60 year old woman.) The GMIB still has lots more upside potential. Ex. 60 year old female; $100,000 investment; SPIA pays $X; GMIB allows her to take $6000/year and GMIB stays at $100,000. What happens in 10 years? The SPIA will continue to pay $X. The GMIB can continue to pay $6000 or it can be annuitized based upon the guaranteed contractual values which may or may not be more than $6000 or the contract vaue can be used to purchase a SPIA which may pay more or less than annuitizing the GMIB and will be more or less than the $6000. If the investments do well and the contract value doesn't lose too much, it is very possible that the GMIB + future annuitization will lead to the most income. It's just that the $5000/$6000 is a very real possibility.

Sep 18, 2008 2:31 am

[quote=anonymous]

Can you explain that to me? Cause I figured if the client wants income now, they would be stuck with the guarantee of 5/6% since there is no more upside potential. Wouldnt' a SPIA give a higher payout starting Day 1? Well, first of all, a GMAB is useless for a client who wants income now. If we compare a SPIA to a GMIB for income, it depends. (Of course, there is a big difference whether we are talking about a 70 year old man vs. a 60 year old woman.) The GMIB still has lots more upside potential. Ex. 60 year old female; $100,000 investment; SPIA pays $X; GMIB allows her to take $6000/year and GMIB stays at $100,000. What happens in 10 years? The SPIA will continue to pay $X. The GMIB can continue to pay $6000 or it can be annuitized based upon the guaranteed contractual values which may or may not be more than $6000 or the contract vaue can be used to purchase a SPIA which may pay more or less than annuitizing the GMIB and will be more or less than the $6000. If the investments do well and the contract value doesn't lose too much, it is very possible that the GMIB + future annuitization will lead to the most income. It's just that the $5000/$6000 is a very real possibility.[/quote] I agree, for younger clients that want income right away, I would probably have to go with the GMIB. Btw, I did run some numbers across the board and it seems that SPIAs would beat the GMIB payout in worst case scenarios and realistic case scenarios. However in extreme bullish markets (and I say this because performance has to be so aggressive that it beats out the fees and still comes on top 10-15%), the GMIB would be better for younger clients that take income right away. Why not then just buy a fixed annuity instead of a GMAB and then exchange it for a SPIA when the client is ready to take income? GMAB riders limit the VA into very conservative models, therefore killing ANY upside potential. Buy a fixed annuity for 5% and then exchange it for a SPIA to begin an income stream? Thanks for the talk anon, I really appreciate it.

Sep 18, 2008 3:24 am

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Sep 18, 2008 10:07 am

I agree, for younger clients that want income right away, I would probably have to go with the GMIB. Btw, I did run some numbers across the board and it seems that SPIAs would beat the GMIB payout in worst case scenarios and realistic case scenarios. However in extreme bullish markets (and I say this because performance has to be so aggressive that it beats out the fees and still comes on top 10-15%), the GMIB would be better for younger clients that take income right away. Why not then just buy a fixed annuity instead of a GMAB and then exchange it for a SPIA when the client is ready to take income? If a younger client wants income right away, I am using neither a SPIA nor a VA. GMAB riders limit the VA into very conservative models, therefore killing ANY upside potential. Buy a fixed annuity for 5% and then exchange it for a SPIA to begin an income stream? Thanks for the talk anon, I really appreciate it. You're welcome. I'm always glad to have these talks. GMAB riders don't limit the VA into very conservative models. Find a different VA. What's better...the fixed annuity paying X% or the GMAB that guarantees 0%? We can only use hindsite or ask the client. With a 10 year + time horizon, personally, I'd rather see the client use the GMAB. The worst case scenario isn't that much worse, but the best case scenario is much better.

Sep 18, 2008 1:20 pm

[quote=anonymous]

I agree, for younger clients that want income right away, I would probably have to go with the GMIB. Btw, I did run some numbers across the board and it seems that SPIAs would beat the GMIB payout in worst case scenarios and realistic case scenarios. However in extreme bullish markets (and I say this because performance has to be so aggressive that it beats out the fees and still comes on top 10-15%), the GMIB would be better for younger clients that take income right away. Why not then just buy a fixed annuity instead of a GMAB and then exchange it for a SPIA when the client is ready to take income? If a younger client wants income right away, I am using neither a SPIA nor a VA. GMAB riders limit the VA into very conservative models, therefore killing ANY upside potential. Buy a fixed annuity for 5% and then exchange it for a SPIA to begin an income stream? Thanks for the talk anon, I really appreciate it. You're welcome. I'm always glad to have these talks. GMAB riders don't limit the VA into very conservative models. Find a different VA. What's better...the fixed annuity paying X% or the GMAB that guarantees 0%? We can only use hindsite or ask the client. With a 10 year + time horizon, personally, I'd rather see the client use the GMAB. The worst case scenario isn't that much worse, but the best case scenario is much better. [/quote] Sorry, by younger I meant in younger in the VA world (which is 60). What would you say is around a good fee that allows upside potential but a decent guarantee?

Sep 18, 2008 10:11 pm

The lower the better, but it's not so much about the exact fee. It's more of a question as to whether having the guarantees will allow someone to invest more aggressively and get a greater return than they otherwise would get.

Ex. Joe is 60 and needs an 8% return to achieve his goal of retiring at age 70. He is conservative and is not willing to take investment risk. If Joe invests according to his risk tolerance, he won't achieve his financial goal. The guarantee of the VA will allow him to invest aggressively, and more importantly, stay invested aggressively. He may not reach his goal, but he at least has a chance. Will the return of the VA less the fees equal what the client would get if they invested without the guarantees? We don't know, but it's often worth the risk if the client is ok with the worse case scenario. When a VA is used for accumulation, the worst case scenario should be the equivalent of about a 3% return with a GMIB and 0% for a GMAB. This is pretty good for worst case.

Sep 19, 2008 2:02 pm

Back to my ORIGINAL argument BEFORE the AIG crisis: If your mutual funds which comprise of thousands of diversified equity holdings go down the drain, would you want to bet that ONE financial firm (an insurance company) will still be around to have their claim-paying abilities?

Would you rather have governmment insurance versus business insurance? "But oh...the account value will still be there because they're in separate accounts" What's the point of charging your client those extra fees for all those years? P.S genworth isn't looking too hot right now either.

Sep 19, 2008 8:53 pm

And how would the government insurance help me if all of my mutual funds go down the drain? You must have missed the talking heads discussing FDIC and that if there are enough banks that go under, FDIC goes right along with them. There isn’t a government agency out there that could handle a catastrophic banking failure. If this country gets to that point, funds, CDs, VAs, insurance, etc will all be a moot point. The question is do you know how to hunt or fish or grow veggies?

Sep 20, 2008 12:46 am

Back to my ORIGINAL argument BEFORE the AIG crisis: If your mutual funds which comprise of thousands of diversified equity holdings go down the drain, would you want to bet that ONE financial firm (an insurance company) will still be around to have their claim-paying abilities?

Would you rather have governmment insurance versus business insurance? "But oh...the account value will still be there because they're in separate accounts" What's the point of charging your client those extra fees for all those years? Chris, let me apologize in advance because this is the 2nd post in a row that I'll be ripping into you on this subject. If this is your original argument, you don't understand the concept of the guarantees. If everything goes down the toilet, like Spaceman said, everything goes down the toilet. It doesn't matter how much one paid in fees. What if we use a more realistic scenario? Things don't go down the drain. They just aren't so hot for the next 10 years and we wake up with the S&P down 10% lower than it is today. The guarantees will get used and the insurance companies will be able to make good on them. What if we use a different scenario? The next 10 years are really good and the VA investors average 10%. Might these VA holders benefit from the guarantees if they wouldn't have invested aggressively without them? What about all of the people who sell their investments when the market falls, but don't sell if they have the guarantee to rely on... and the market bounces back? The guarantee is not used to protect against the end of the world. It's used to improve investor behavior.

Sep 20, 2008 12:59 am

Anon, I agree with you again. It appears as if Chris is stuck on fees so much he can’t see the forest through the fees.

A little bit of knowledge can do a lot of damage.

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