VA wholesaler was just here

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Jan 31, 2007 4:38 pm

I just had a VA wholesaler in my office.     


He was telling me his product can guarantee 6% income for life no matter what the market does and no matter how much is withdrawn from the account.


I asked him what the downside was on his product but his answer was a bit convoluted.


For this unbiased out there please enlighten me what the downsides are to his product.


Thanks in advance.


Scrim

Jan 31, 2007 4:55 pm

No matter what the "true" answer, this is the big problem with the products. Complicated for everyone. Annuity companies need to get smarter about the products they manufacture.


When I hear "convoluted", I see handcuffs.


So what is the downside?

Jan 31, 2007 5:10 pm

The downside probably being huge M&E fees to insure that puppy.  Is that 6% BEFORE or AFTER expenses?

Jan 31, 2007 5:40 pm

Those types of guarantees are becoming pretty common in VAs.  All of our vendors have something like that.  It's expensive.  50 bps avg.   On a typical annuity that puts the M&E up around 1.75 to 2%.    Hartford was the first to offer this at Jones.  The wholesalers like to talk about it, but I don't hear a lot of brokers using it for retirement income. 


The downsides are numerous.  Usually only available Point of Sale.  Not as tax efficient as annuitization since they normally take it out LIFO.  Sometimes they have to use the feature for 5+ years before they can stop it, if they can stop it.  Limited to what they can take out (capped at whatever the guaranteed amount is).  Death benefit decreases with every dollar taken out.  There are probably more I'm not thinking of.


The only time I have thought about using it is when a client wants the safety of a fixed annuity, but really needs the equity exposure for the future.  That feature hasn't sold any annuities in my office yet.


With that said, I have heard of some brokers using those features for estate planning purposes.  They take the guaranteed amount and use it as premiums for a life insurance policy.  Kind of like using an immediate annuity but still retaining control of the assets.  Guaranteed, predictable income, but no worries about the client dying next week.    

Jan 31, 2007 6:38 pm

Axa?

Jan 31, 2007 6:47 pm

The AXA Account must be annuitized in order to get the 6% of course you can drawn down the account first and then annuitize the benefit base, but try explaining that to the client

Jan 31, 2007 7:22 pm

Try explaning that to the client?


Try explaining that to me!


scrim

Jan 31, 2007 9:42 pm

A reasonable person can understand that because of the time value of money the annuitized benefit base does not really = a 6% return but they still advertise it as such

Jan 31, 2007 9:51 pm

Yeah, the annuitzing the benefit base case is not something you want to

get to (since it means the contract is outta $). However, ins companies

don't figure that will happen or they wouldn't offer the guarantee.



I've been through this struggle Scrim, and with the newest generation of

income benefits I have become a reluctant fan of using some VAs.

Upsides are easier to understand and vary by product....in fact, I've

started using the best parts of 2 or 3 benefits/contracts that complement

each other (ex: one with principal guarantee and one w/an income

guarantee).



The downsides (as I explain them to clients): more drag from expenses

(1-2%/yr more than similar funds) and reudced liquidity (4 or 7 years on

most products). You can make up a good bit or all of the expense diff by

raming up the equity allocation vs. what you would have otherwise. I use

a "laddered" approach if I can--add portions of an acct over time so that

the early $ is free of CDSC before tying up too much. I prefer to use the

VAs in IRAs, so the cap gains becoming income tax isn't an issue--but

that's a downside obviously in a non-qual acct. However, if the client

understands the above, I think these things beat the heck out of

individual bonds if the client is on edge of an acceptable withdrawal rate

(say around 6%).

Feb 1, 2007 10:39 am
Cowboy93:

I prefer to use the VAs in IRAs, so the cap gains becoming income tax isn't an issue--but that's a downside obviously in a non-qual acct.  


OK, I'm confused.  Qualified or non-qualified, if there are gains that build up in the VA, they aren't taxed until you pull them out.  Then they are both taxed at ordinary income rates.  So, why put the preference for the VA in the IRA?  Only for the income bene?  Are you pulling the income guarantee off and then leaving it in the IRA? 

Feb 1, 2007 11:04 am

Cowboy93,


Which firm you riding for partner?

Feb 1, 2007 11:20 am

Forget the annuity.  You can put $100k in a can in the backyard.  You can draw out 5% for 20 years.  No risk of loss.


I have yet to see an annuity that can perform like a solid group of funds well allocated among asset classes.


American funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE.


In the very worst 10 year period 1996 to 2005, you can take a 5% annual withdrawal and still have about $103,000 in your account at the end of the 10 year period. (the can is empty then)


No need to annuitize, no CDSC.  Oh, and if you die, your kids get the step up WHICH THEY DON'T GET WITH ANNUITIES.


The sales guys are slick and they can help you close any sale.  You have to decide if you want to build your business making alot of money and not doing your best for people. 


I have found very few cases where annuities fit.

Feb 1, 2007 11:34 am
vbrainy:

Forget the annuity.  You can put $100k in a can in the backyard.  You can draw out 5% for 20 years.  No risk of loss.



  I am not sure that I agree completely, but that is a pretty funny analogy!

Feb 1, 2007 11:59 am

100k @6% gives you 16.66 years of principle to take out. The insurance company is betting that it will go up or you will 1035 it out before then. There is nothing free in life. I do not like annuities but you better at least show them to clients because someone else will.You can make a case to use them when someone take his pension payout in a lump sum. at least you can tell them the income will last.


Feb 1, 2007 12:37 pm
aldo63:

100k @6% gives you 16.66 years of principle to take out. The insurance company is betting that it will go up or you will 1035 it out before then. There is nothing free in life. I do not like annuities but you better at least show them to clients because someone else will.You can make a case to use them when someone take his pension payout in a lump sum. at least you can tell them the income will last.



I would rather take a small part of the lump sum and buy an immediate annuity for "income they cannot outlive" and take the rest and do a conservative 40/60 allocation.   We also need to keep the withdrawal rate reasonable (4-5%) to start and increase for inflation every year.


Does this make sense?


scrim

Feb 1, 2007 12:49 pm

While I haven't used the 6% for life feature (most annuity companies only give you 6% for life if you're over a certain age, ING is 76), I have used the 5% for life feature.  Basically, the client gets 5% of what they put in to the contract, or, with ING for instance, 5% of the highest QUARTERLY value it achieved before the income started. 


I would never put 100% of a client's money into this product, but I have figured out the clients "needs" money and put enough in the annuity to generate that amount for life.  At 5%, there's a good chance that the underlying principal can grow, and every year the client has the ability to lock in 5% of that higher number (if the account value has risen) for life.


As for the downside.  Once you start taking the income, any withdrawals, above the 5% amount, will affect the 5 or 6% gaurantee proportionally (sp?).  The worst case is that the underlying value of the annuity goes to 0. In that case, the client will still get 5% for life until they die, but the kids won't get anything.


This is better than annuitizing because the client can change their minds down the road and get more or less than what they put in.  Think of it as buying a pension that can be busted in case of an emergency.


I realize mutual funds can "make" more money than annuities. But, sometime our job as advisor is not simply to make more money for your client, it's to help them have a stable, rising, income throughout retirement.

Feb 1, 2007 1:49 pm

A"merican funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE."


Not exactly. Look at the internal transaction costs- the ones that dont show up in expense ratios, and arent required by the SEC to be disclosed. So that 0.7% figure is more than that.

Feb 1, 2007 1:52 pm
now_indy:

While I haven't used the 6% for life feature (most annuity companies only give you 6% for life if you're over a certain age, ING is 76), I have used the 5% for life feature.  Basically, the client gets 5% of what they put in to the contract, or, with ING for instance, 5% of the highest QUARTERLY value it achieved before the income started. 


I would never put 100% of a client's money into this product, but I have figured out the clients "needs" money and put enough in the annuity to generate that amount for life.  At 5%, there's a good chance that the underlying principal can grow, and every year the client has the ability to lock in 5% of that higher number (if the account value has risen) for life.


As for the downside.  Once you start taking the income, any withdrawals, above the 5% amount, will affect the 5 or 6% gaurantee proportionally (sp?).  The worst case is that the underlying value of the annuity goes to 0. In that case, the client will still get 5% for life until they die, but the kids won't get anything.


This is better than annuitizing because the client can change their minds down the road and get more or less than what they put in.  Think of it as buying a pension that can be busted in case of an emergency.


I realize mutual funds can "make" more money than annuities. But, sometime our job as advisor is not simply to make more money for your client, it's to help them have a stable, rising, income throughout retirement.



Well, what are you?  a Financial Advisor or an insurance salesman?  Can't you explain to clients the value of the stock market? 


Hey, if your first priority was not to GET PAID THE HUGE ANNUITY COMISSION, you could sell them a AAA bond with a coupon, put the rest in the stock market and call it a day.


There is one reason for the explosion in the annuity market and the hype and BS they spend millions of dollars on to sell this junk, IT IS BECAUSE THEY ARE MAKING A TON OF MONEY off the backs of hard working people who have retired.


That is NOT the way I prefer to make my money.

Feb 1, 2007 5:06 pm
blarmston:

American funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE."

Not exactly. Look at the internal transaction costs- the ones that dont show up in expense ratios, and arent required by the SEC to be disclosed. So that 0.7% figure is more than that.


...and there's that pesky thing called a "load"...

Feb 1, 2007 5:09 pm

It depends on what the meaning of the word "is" is.


The annuity offers you something that you cannot offer otherwise in the world of equity investing, that something is "IS".  'This contract compounds at 6% per year or the rate that you get on your investments, whichever is higher. If you buy $1MM of this contract and the market goes to zero over the next 12 years, your income IS based off of a $2,000,000 value. You will be able to take a Life with 10 year certain annuitization which will give you at least $12,000 per year.' (Actually I'm not 100% on what the annuitization deal is and it dependes on the age of the client at the time of annuitization at the time a male over 75 would have an annuitization rate of about 7.4%).


You can not say that with a portfolio of Mutual funds, even if it monte carlo's out at 99% of the time. Not honestly, anyway.


Meanwhile, over the last two years I kicked the market's azz net of all fees and commissions inside an American Skandia annuity where they were jiggering around my cash position (I sold them out when I netted people at least 20% profit, and I do it in IRAs so don't gimme crap about taxes or stepped up cost basae). I kicked the market's azz in Hartford's annuity too, up over 50% in one year. I'm outperforming the market in the John Hancock, and I'm working on a $1MM case for AXA.


Could I have done better without the Annuity wrapper? Yeah. I'd have made more money too in B shares. But would I have been as aggressive without the wrapper? NO!  As a result, I would NOT have done as well, even thought I could have done better. The fact that I can shift the risk off to the annuity company for x basis points is absolutely worth it for me and for the client (and the annuity company got those fees and didn't have to pay out a claim against them so they're happy too.) Not to mention... Would the client have bought without the assurance? NO!


Annuities have come a long long way over the past five years. What they offer you now is a way to assure investors with an IS. That's important, because every investor IS not certain that nobody IS going to Hijack a Jetliner into the Indian Point Nuclear Power plant, making NYC dark and unliveable for a thousand years (I know that the plant can take a direct 747 hit without imploding, exploding or melting down) The fact is you don't KNOW what IS in the future and the annuity gives you that "suspenders and a belt" of IS.


I don't do a huge number of them but I do use them and the AXA product is one of the ones that have my name on some contracts.


Mr A