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Jul 14, 2008 9:06 pm

Here's the facts.  With rare exception, fixed annuities with teaser rates, index annuities,  and Variable annuities with exotic riders are nothing more than smoke an mirrors.  Here's a few reasons: 7-15 year CDSC's, bait and switch rates, 80 BPs cost on a rider a client has no chance of using or coming out ahead on, limited investment choices in a Variable, floors of 3% on fixed rates that earn 3% from year 2 to 10, ticking tax time bombs to heirs, ordinary income rates on distributions instead of capital gains and dividend tax rates, penalties if you withdraw prior to 59 1/2, limited participation rates on index annuities, insurance company keeps the dividends on index annuities, overall returns capped on index annuities, high surrender penalties, 3% annual total cost in a variable, and so on.

If you really want to debate this issue, start a new thread and we'll see who comes out ahead.
 
If you are going to start a post with, "Here's the facts", you need to work with facts.
 
Here are two incorrect facts from your posts:
"80 BPs cost on a rider a client has no chance of using or coming out ahead on"
 
What's your definition of "no chance of using"?  One of Nick Murray's  points is that investor behavior is more important than investment behavior.  I am in complete agreement.  If the rider impacts investor behavior, it is being used!  I have clients who have done so much better than they otherwise would have done because of these riders.  The comparison needs to be how investor John Smith did because of the guarantees and not how the investment did. 
 
"insurance company keeps the dividends on index annuities"
 
Do you not understand EIA's?   The insurance company doesn't keep the dividends.  There aren't dividends to keep since the money is not invested in an index.  The index is simply the tool that is used to determine how to credit interest. 
 
I notice that you ignored the posts that disagreed with you about disclosing commissions.
Jul 14, 2008 9:23 pm

The investor behavior point is valid, but only to the extent that they actually use the riders they pay for. Personally, I think some of the GMWB and GMIB's out there right now are fantastic, but the fact is (at least this is what I have heard), that only about 7% of people actually annuitize or take regular distributions from annuities. The industry is now treating these as distribution products, while investors continue to treat them like accumulation vehicles (expensive, at that). And it should be the OPPOSITE. These should be used as distribution vehicles with the guarantees, and depleted over time (preferably through annuitization for tax purposes). I have heard prospects tell me time after time how they are getting "7% guaranteed, no matter what the market does". Well, yes and no. They seem to think it's like a mutual fund that they can earn 7% on, and tap it whenever they want. They have conveniently NOT been explained (or not full explained) the concept of the income riders/account value/income values, etc.



I still truly believe that many annuities are great products, but only when FULLY explained, and used PROPERLY. There are so many insurance salesmen and "advisors" out there that sell anuities in ALL situations. I don't know of ANY product that is appropriate in all situations.



I had a prospect that I just lost (technically, never had) that sunk ALL of his money into EIA's with a "senior retirement specialist". He had $1.2mm, and ALL of it was put into EIA's. They have 12 year surrenders. But hey, they pay 7%, guaranteed. When he brought me the contract, I pointed out all the "fine print". Needless to say, he was not aware of ANY of the stipulations.

Jul 14, 2008 9:51 pm

I agree with B24. Too many clients dont understand what they are buying. I had a client come to me with an annuity that would pay him 6% for the rest of his life. He didnt understand that if the market went down some ridiculous amount and his 500k became 100k, while he would collect the 6% for life, his principal would never be recovered. When I explained it to him he was out of his mind.

Annuities work in a lot of situations, but not all. No matter what the situation, if the client isnt fully made aware of all the "stuff", then it was nothing more than another high commission sale.
Here's another interresting thought, especially interesting in light of the times we are lving in right now. These living benefit guarantees have never been tested. What if.......
Oh yeah, I know, "are you kidding me? its (Met Life, AXA, whatever) ....that could neve happen to a fine company like that. They have billions to pay those guarantees if the market went to shit and stayed there!
What if.....
Jul 14, 2008 10:26 pm

B24 is right. These GMWBs are for INCOME ONLY. If you do not need income that lasts a lifestime, do not pay for it and not use it!

 
The behavior mod arguement has value, but have you noticed that with markets going down that suddenly Principal Preservation is key again in the investors mind?
 
Too much handholding with the behavior mod-- after all, the investors risk tolerance is unchanged.
 
Perhaps a bond ladder instead for 80-100% of port?
Jul 14, 2008 10:41 pm
B24:

The investor behavior point is valid, but only to the extent that they actually use the riders they pay for. Personally, I think some of the GMWB and GMIB's out there right now are fantastic, but the fact is (at least this is what I have heard), that only about 7% of people actually annuitize or take regular distributions from annuities. The industry is now treating these as distribution products, while investors continue to treat them like accumulation vehicles (expensive, at that). And it should be the OPPOSITE. These should be used as distribution vehicles with the guarantees, and depleted over time (preferably through annuitization for tax purposes). I have heard prospects tell me time after time how they are getting "7% guaranteed, no matter what the market does". Well, yes and no. They seem to think it's like a mutual fund that they can earn 7% on, and tap it whenever they want. They have conveniently NOT been explained (or not full explained) the concept of the income riders/account value/income values, etc.



I still truly believe that many annuities are great products, but only when FULLY explained, and used PROPERLY. There are so many insurance salesmen and "advisors" out there that sell anuities in ALL situations. I don't know of ANY product that is appropriate in all situations.



I had a prospect that I just lost (technically, never had) that sunk ALL of his money into EIA's with a "senior retirement specialist". He had $1.2mm, and ALL of it was put into EIA's. They have 12 year surrenders. But hey, they pay 7%, guaranteed. When he brought me the contract, I pointed out all the "fine print". Needless to say, he was not aware of ANY of the stipulations.



Have you considered cancelling all of your insurance policies? It's not like you're gonna use them.  You are a bitter man because you lost a prospect to an annuity. Serves you right. Your competition was smart enough to figure out that your prospect didn't want to lose any money. 7%, tax deferred, with no chance of losing money, is quite satisfactory to many, many people. Total rookie mistake.

Jul 14, 2008 10:54 pm
B24:

They have 12 year surrenders. But hey, they pay 7%, guaranteed .



And what do you have that guarantees 7%?

If they won't need the money until the surrender period is up it's a great deal, EIA's or annuities may not be for every client but just because you can't offer certain things doesn't make them bad.


Jul 15, 2008 7:32 am

Point is (and I know both of you know this, but are trying to dance around it), most investors are not aware that the "guaranteed" rate of return is not really a rate of return in all cases. Most investors are NOT using the guarantee "column". They are assuming they get 7% guaranteed on their principle, which, they don't.



I am not arguing the merits of the guarantees, the riders, or the annuities themselves. I actually think there is a future in guarantees. My argument is that investors are completely unaware of what they are buying. And it is often too late to even do anything, if they ever find out (before their heirs are stuck with much less than the deceased would have expected).



And the argument for cancelling insurance policies is not even a real comparison. When I buy a death benefit, I know what I am getting.

Jul 15, 2008 9:09 am
B24:

Point is (and I know both of you know this, but are trying to dance around it), most investors are not aware that the "guaranteed" rate of return is not really a rate of return in all cases. Most investors are NOT using the guarantee "column". They are assuming they get 7% guaranteed on their principle, which, they don't.



I am not arguing the merits of the guarantees, the riders, or the annuities themselves. I actually think there is a future in guarantees. My argument is that investors are completely unaware of what they are buying. And it is often too late to even do anything, if they ever find out (before their heirs are stuck with much less than the deceased would have expected).



And the argument for cancelling insurance policies is not even a real comparison. When I buy a death benefit, I know what I am getting.



When you get on an airplane, do you KNOW how to fly it or do you just get in your seat and wait to get to your destination? Noone KNOWS what their airbags look like. They just want them to deploy when they get into an accident. Did you KNOW that the details of the guarantees are spelled out in the prospectus? The ones who want to KNOW can look there if they need to be refreshed.

Jul 15, 2008 10:17 am
B24:

Point is (and I know both of you know this, but are trying to dance around it), most investors are not aware that the "guaranteed" rate of return is not really a rate of return in all cases. Most investors are NOT using the guarantee "column". They are assuming they get 7% guaranteed on their principle, which, they don't.

I am not arguing the merits of the guarantees, the riders, or the annuities themselves. I actually think there is a future in guarantees. My argument is that investors are completely unaware of what they are buying. And it is often too late to even do anything, if they ever find out (before their heirs are stuck with much less than the deceased would have expected).

And the argument for cancelling insurance policies is not even a real comparison. When I buy a death benefit, I know what I am getting.

 
I use these all the time for IRAs especially large roll over's from company retirement plans.  The client isn't going to be taking out of the account until 59 1/2 anyway and they are not going to be concerned about the cap gains converted to ordinary income issue because it would be the same in or out of an annuity because of the IRA status.   The IRA is meant to be a supplemental income in retirement and not a wealth accumulation vehicle to pass on to their heirs.  The VA with a guaranteed retirement income is perfect.
 
HOWEVER, you do need to be very clear to explain to the client that the 7% step up on the income pool is not an actual 7% step up of principle.  I find myself going over this aspect of the contract several times and have to approach it from several angles in order to get the concept clear to the client.   Even then, I'm not always convinced that they "get it".   You can't always blame the selling rep for the client's inability to understand.
 
Another big advantage of these products is that my current account reviews are less stressful.  Yes....we are down in principle in some cases, but the income pool (which is what the IRA client is concerned with) is growing.  
Jul 15, 2008 10:21 am
Hobby Bull:
B24:

Point is (and I know both of you know this, but are trying to dance around it), most investors are not aware that the "guaranteed" rate of return is not really a rate of return in all cases. Most investors are NOT using the guarantee "column". They are assuming they get 7% guaranteed on their principle, which, they don't.

I am not arguing the merits of the guarantees, the riders, or the annuities themselves. I actually think there is a future in guarantees. My argument is that investors are completely unaware of what they are buying. And it is often too late to even do anything, if they ever find out (before their heirs are stuck with much less than the deceased would have expected).

And the argument for cancelling insurance policies is not even a real comparison. When I buy a death benefit, I know what I am getting.



When you get on an airplane, do you KNOW how to fly it or do you just get in your seat and wait to get to your destination? Noone KNOWS what their airbags look like. They just want them to deploy when they get into an accident. Did you KNOW that the details of the guarantees are spelled out in the prospectus? The ones who want to KNOW can look there if they need to be refreshed.

 
Oh that's cute.  Defer to the prospectus.  Clients hire us to give them the truth and fully explain what they need to know. 
 
As far as the airplane comparison, wouldn't it be a shame if the client learned too late that, yes, we will have no problems flying to our destination, except in a storm we will likely crash?  Oh, forgot to mention that?  Ooooh, sorry........Or we will have no problems flying Newark to Detroit.  BUUUUUUT, if you want to go Newark to Indianapolis, well, good luck.  You need to pay an additional $400 to exit from that airport.  Didn't I explain that to you first?  Ooooooooh, sorry.  It was in the fine print on the airlines website. Sorry!
Jul 15, 2008 10:24 am
babbling looney:
B24:

Point is (and I know both of you know this, but are trying to dance around it), most investors are not aware that the "guaranteed" rate of return is not really a rate of return in all cases. Most investors are NOT using the guarantee "column". They are assuming they get 7% guaranteed on their principle, which, they don't.

I am not arguing the merits of the guarantees, the riders, or the annuities themselves. I actually think there is a future in guarantees. My argument is that investors are completely unaware of what they are buying. And it is often too late to even do anything, if they ever find out (before their heirs are stuck with much less than the deceased would have expected).

And the argument for cancelling insurance policies is not even a real comparison. When I buy a death benefit, I know what I am getting.

 
I use these all the time for IRAs especially large roll over's from company retirement plans.  The client isn't going to be taking out of the account until 59 1/2 anyway and they are not going to be concerned about the cap gains converted to ordinary income issue because it would be the same in or out of an annuity because of the IRA status.   The IRA is meant to be a supplemental income in retirement and not a wealth accumulation vehicle to pass on to their heirs.  The VA with a guaranteed retirement income is perfect.
 
HOWEVER, you do need to be very clear to explain to the client that the 7% step up on the income pool is not an actual 7% step up of principle.  I find myself going over this aspect of the contract several times and have to approach it from several angles in order to get the concept clear to the client.   Even then, I'm not always convinced that they "get it".   You can't always blame the selling rep for the client's inability to understand.
 
Another big advantage of these products is that my current account reviews are less stressful.  Yes....we are down in principle in some cases, but the income pool (which is what the IRA client is concerned with) is growing.  
 
Babs, that's because you know what you are doing and are one of the ethical ones.  You know that the issue we are debating happens ALL the time in this business.  But you are right, when fully explained, and used for the right reasons, they are very good products.
Jul 15, 2008 10:28 am
B24:
Hobby Bull:
B24:

Point is (and I know both of you know this, but are trying to dance around it), most investors are not aware that the "guaranteed" rate of return is not really a rate of return in all cases. Most investors are NOT using the guarantee "column". They are assuming they get 7% guaranteed on their principle, which, they don't.

I am not arguing the merits of the guarantees, the riders, or the annuities themselves. I actually think there is a future in guarantees. My argument is that investors are completely unaware of what they are buying. And it is often too late to even do anything, if they ever find out (before their heirs are stuck with much less than the deceased would have expected).

And the argument for cancelling insurance policies is not even a real comparison. When I buy a death benefit, I know what I am getting.



When you get on an airplane, do you KNOW how to fly it or do you just get in your seat and wait to get to your destination? Noone KNOWS what their airbags look like. They just want them to deploy when they get into an accident. Did you KNOW that the details of the guarantees are spelled out in the prospectus? The ones who want to KNOW can look there if they need to be refreshed.

 
Oh that's cute.  Defer to the prospectus.  Clients hire us to give them the truth and fully explain what they need to know. 
 
As far as the airplane comparison, wouldn't it be a shame if the client learned too late that, yes, we will have no problems flying to our destination, except in a storm we will likely crash?  Oh, forgot to mention that?  Ooooh, sorry........Or we will have no problems flying Newark to Detroit.  BUUUUUUT, if you want to go Newark to Indianapolis, well, good luck.  You need to pay an additional $400 to exit from that airport.  Didn't I explain that to you first?  Ooooooooh, sorry.  It was in the fine print on the airlines website. Sorry!



Are your eyes almond shaped?

I'm sorry that you are losing money to annuities. I'm sorry that you don't know that you can lose business to honest people. If you were honest yourself, you would know this. As long as guys like you are putting people into stocks, mutual funds and asset based fee accounts, we will have an easy way to steal your clients.

Jul 15, 2008 1:17 pm

Just keep fleecing 'em Holly.  It's easy to steal clients with false claims (I consider deception and ommission of material facts a false claim).


Oh, I forgot, it's in the fine print in the prospectus.  Silly me.

Jul 15, 2008 1:31 pm
B24:

Just keep fleecing 'em Holly.  It's easy to steal clients with false claims (I consider deception and ommission of material facts a false claim).


Oh, I forgot, it's in the fine print in the prospectus.  Silly me.



Okie dokie.

Jul 15, 2008 2:26 pm
pratoman:

I had a client come to me with an annuity that would pay him 6% for the rest of his life. He didnt understand that if the market went down some ridiculous amount and his 500k became 100k, while he would collect the 6% for life, his principal would never be recovered. When I explained it to him he was out of his mind.

 
This is the exact situation that he is buying that guarantee.  If his account went from 500k to 100k in mutual funds or stocks, he'd be SOL.  If he was in an annuity, the 6% a year for the rest of his life from the 500k would be significantly more valuable than the 100k in pricipal.  Significantly.
 
Prato- Did you really sell him out of one of the biggest features in his VA?  What did you tell him, that if the account went from 500k to 100k, that instead of 30,000 per year, he could take 4,000 from his remaining principal?  Wouldn't he flip out at that?
Jul 15, 2008 2:28 pm
snaggletooth:
pratoman:

I had a client come to me with an annuity that would pay him 6% for the rest of his life. He didnt understand that if the market went down some ridiculous amount and his 500k became 100k, while he would collect the 6% for life, his principal would never be recovered. When I explained it to him he was out of his mind.

 
This is the exact situation that he is buying that guarantee.  If his account went from 500k to 100k in mutual funds or stocks, he'd be SOL.  If he was in an annuity, the 6% a year for the rest of his life from the 500k would be significantly more valuable than the 100k in pricipal.  Significantly.
 
Prato- Did you really sell him out of one of the biggest features in his VA?  What did you tell him, that if the account went from 500k to 100k, that instead of 30,000 per year, he could take 4,000 from his remaining principal?  Wouldn't he flip out at that?



Pratoman is lying.

Jul 15, 2008 4:13 pm
Hobby Bull:



Pratoman is lying.



Deja Vu

Jul 15, 2008 5:07 pm

"The investor behavior point is valid, but only to the extent that they actually use the riders they pay for. "

 
B24, I don't think that you understand the investor behavior point.   The way that these riders are being used is that the simple act of owning these riders can impact investor behavior.    Here's a simple example:
 
Client A and Client B both need robust returns to achieve their retirement goals.  Client A invests fairly aggressively in mutual funds.  Client B invests fairly aggressively in a VA with a 10 year 0% GMAB.   The market takes a serious hit.  Both accounts are down in the neighborhood of 20%.  Client A can't stomach the loss.  He moves his money into CD's.  His retirement plans may be toast even if the market comes back.  Client B doesn't make any changes BECAUSE HE HAS A GUARANTEE.  His goals are still achievable.   The insurance company probably won't have to make good on the guarantee, but you better believe that the rider was used by the investor and was a very worthwhile expense!
 
 
Personally, I think some of the GMWB and GMIB's out there right now are fantastic, but the fact is (at least this is what I have heard), that only about 7% of people actually annuitize or take regular distributions from annuities.
 
I don't know if the stat is correct (I think that it's lower), but it is very misleading.  Most deferred variable contracts don't get annuitized, but plenty of people annuitize.  What's the difference?  Mr. Smith has a deferred variable annuity with XYZ Company.  He decides to turn it into an income stream.  XYZ company will pay him $2300/month.  However, there are hundreds of insurance companies.  If he can find one that will pay better than $2300/month, there is no reason to annuitize with XYZ, thus the contract doesn't get annuitized, but Mr. Smith is still annuitizing his money.
 
The industry is now treating these as distribution products, while investors continue to treat them like accumulation vehicles (expensive, at that).
 
I don't think that it's an either/or.  It's both.  If someone isn't taking money now, it is a an accumulation product that has a worst case scenario for distribution. 
 
And it should be the OPPOSITE. These should be used as distribution vehicles with the guarantees, and depleted over time (preferably through annuitization for tax purposes).
 
It depends because if one does it through annuitization, they are often better just buying a SPIA and not using the contractual guarantees.
 
 
I have heard prospects tell me time after time how they are getting "7% guaranteed, no matter what the market does". Well, yes and no. They seem to think it's like a mutual fund that they can earn 7% on, and tap it whenever they want. They have conveniently NOT been explained (or not full explained) the concept of the income riders/account value/income values, etc.
 
There's no question that prospects often don't understand these things.  That's not a problem with the product.  That's a problem of the person buying something that they don't understand and the problem of a rep not understanding what they are selling or nor being forthright.

 
Jul 15, 2008 5:33 pm
snaggletooth:
pratoman:

I had a client come to me with an annuity that would pay him 6% for the rest of his life. He didnt understand that if the market went down some ridiculous amount and his 500k became 100k, while he would collect the 6% for life, his principal would never be recovered. When I explained it to him he was out of his mind.

 
This is the exact situation that he is buying that guarantee.  If his account went from 500k to 100k in mutual funds or stocks, he'd be SOL.  If he was in an annuity, the 6% a year for the rest of his life from the 500k would be significantly more valuable than the 100k in pricipal.  Significantly.
 
Prato- Did you really sell him out of one of the biggest features in his VA?  What did you tell him, that if the account went from 500k to 100k, that instead of 30,000 per year, he could take 4,000 from his remaining principal?  Wouldn't he flip out at that?
 
Snaggletooth, I thought the same thing.  The $500 VA contact would most likely provide $25,000 year for life (5% withdrawal rate), regardless of market performance.
 
If the individual invested in mutual funds or stocks & bonds a $25,000 withdrawal would last until the account value hit zero.  In the above situation, that would be 4 years.
 
 
Jul 15, 2008 5:33 pm
snaggletooth:
pratoman:

I had a client come to me with an annuity that would pay him 6% for the rest of his life. He didnt understand that if the market went down some ridiculous amount and his 500k became 100k, while he would collect the 6% for life, his principal would never be recovered. When I explained it to him he was out of his mind.

 
This is the exact situation that he is buying that guarantee.  If his account went from 500k to 100k in mutual funds or stocks, he'd be SOL.  If he was in an annuity, the 6% a year for the rest of his life from the 500k would be significantly more valuable than the 100k in pricipal.  Significantly.
 
Prato- Did you really sell him out of one of the biggest features in his VA?  What did you tell him, that if the account went from 500k to 100k, that instead of 30,000 per year, he could take 4,000 from his remaining principal?  Wouldn't he flip out at that?
 
I'm sick to death of these flippin' fictitious, undocumented "scenarios" that annuity salesman tirelessly perpetuate. What if your 500K in mutual funds went to 100K...blah, blah, blah. Do any of you annuity turds realize that's an 80% decline in the value of your investments?!?! Are you smoking crack?
 
Neither annuities nor mutual funds are short term investments. I'll put any mutual fund I use against any annuity in the universe over a 7-10 year period, and the mutual fund will blow the doors off your high cost, high commission, low return annuity.
 
That, I'll GUARANTEE.