Mr. A makes good points.  With the underlying guarantees you can invest a client who might not otherwise be as aggressive as they need to be.

I have a client that we just did a 6 month review on his VA.  Compounds at 7% annually, 10 year commitment.  He is willing to set this money aside and ignore it for 10 years when he will be approaching retirement... doesn't need it at all. If the contract does worse than 7% the client can annuitize the amount at the end of the 10 years or wait to set up an income stream later.  If the contract does better than 7% the income stream can be from the higher amount.  Death benefit and income benefit is ratcheted quarterly.   We put in $63,000 in August at the end of January it was worth almost $75,000.  We just beat the pants off of 7% and the client is a happy camper.  

Could I have gotten an even better return using those same funds in a wrap account? Yes. However, without the safety net, my client would not have been so willing to let me go heavily international and small/mid cap.  

This strategy wont work for people who need to take income from the contract during the surrender period.  In that case set up another source of immediate or liquid income.   Like Mr. A ....I don't do very many annuities.  When I do, the client is fully informed and aware of the pros and cons.

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?

For myself, I think this is stone cold cool.

Boomers in trouble, most annuity contracts way to complicated and looking like a future blinking yellow light, maybe handcuffs.

Immediate annuitization can happen at the last moment, or when interest rates are relatively high. Maybe 1/3 of principle.

This is not the sweeping, bells and whistles guaranteed income strategy.

I have been thinking about this a lot. I'll take the middle road and hedge bets with you any time. Wanna be my planner?

“principal, Joe.”

Well, Scrim, hopefully you have found a few downsides. …for some reason

these things arouse relatively strong emotions. I am hopeful that the

marketplace will continue to get more competitive and the cost, liquidity,

and other downsides will continue to be less bad.

When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.

By the time I'm finished reading the contract (or even the slick brochures for that matter) I feel like Tom Hanks in BIG (1988) when he's in the meeting and raises his hand and says "I don't get it"

scrim

When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.

Obviously annuity products are evolving. It just seems when you look at the risk management features of this insurance product, you hit a wall of diminishing returns. I mean, the idea of betting that I will live longer or less longer than a person my age, and transfering that risk, this is a basic concept.

The idea of bringing market risk down to the individual contract level feels gimmicky, with floors and ceilings and so on. That's when you have to start reading the fine print about fees and fiddle.

And since these are insurance products, to what extent are the performance guarantees tied to the success of the group of insureds (or is it just tied to the general fund of the insurance company since it is not life or health insurance?)

It seems the idea of an individual advisor manipulating the subaccounts as to outperform some kind of baseline return, if that is what we are talking about, well, that kind of goes against the whole risk transfer idea, and seems like individual superior performance would be arbitraged out by the whole market over time.

In other words, either just accept the risk outside an insurance contract, or transfer the risk. I know this is a hybrid, but do we run the risk of mediocrity? Why insure a big up or downside? What do we have here, a baby hedge fund?

I guess I'm too dull to get it.

I rather delegate the investment activity inside the contract to an institutional investment manager, and focus on the highest possible fixed rate of return off the general account.

Or do something else with the money.

[quote=vbrainy]

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.

[quote=scrim67]

When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.

By the time I'm finished reading the contract (or even the slick brochures for that matter) I feel like Tom Hanks in BIG (1988) when he's in the meeting and raises his hand and says "I don't get it"

scrim

[/quote]

Glad I am not the only one.  I spent 20 minutes on the phone with John Hancock trying to get them to explain to me ALL of the expenses of the Venture III.  With the grpIII it turns out it was about 3.60%.  But, that was after 20 minutes and transfers to several people.  That just stinks.  Scrim is right.

 Babbling Looney wrote: "Compounds at 7% annually"

Sorry, Babs, but when you say this, it shows that you don't really understand the contract.  I hope that you never say that to a client. 

The 7% is not real!  I don't simply mean that you have to annuitize the money.  It's fake because the insurance companies lower the annuitization rates and/or have an age setback. 

Ex. Over a ten year period, the contract returns an average of 4% a year.  The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 

The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!

This post is written by someone who is a big fan of qualified VA's in the right situation.

The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 

The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!

Interesting analysis. Less than CDs packaged in a tax deferred wrapper.

Well, insurance company product designer, what do you have to say about this?

Interesting analysis. Less than CDs packaged in a tax deferred wrapper.

This better not be an "interesting analysis".  If someone sells VA's with GMIB benefits, they better understand this or they don't have a right to be talking to clients.   It's also not less than CDs because the 3% is only what they are going to get as a worst case scenario.  

I find the "tax deferred wrapper" to be a negative.  Thus, almost all of my VA's are qualified.

[quote=anonymous]

 Babbling Looney wrote: "Compounds at 7% annually"

Sorry, Babs, but when you say this, it shows that you don't really understand the contract.  I hope that you never say that to a client. 

The 7% is not real!  I don't simply mean that you have to annuitize the money.  It's fake because the insurance companies lower the annuitization rates and/or have an age setback. 

Ex. Over a ten year period, the contract returns an average of 4% a year.  The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 

The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!

This post is written by someone who is a big fan of qualified VA's in the right situation.

[/quote] I think this is probably the most important part of the VA contract that is misunderstood by advisors in general.   If many advisors don't understand how can we ever expect the average investor to?  

That is why I am very reluctant to introduce VA's to my practice.

I will never present something to my client they cannot understand.

scrim

[quote=planrcoach]“principal, Joe.”[/quote]

eh?

 If many advisors don't understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Explanation for a 58 year old client of a 5% 10 year GMIB

Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)

Explanation of a 10% GMAB

Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.

eh?

You trained me to look harder for my own typos. Famous and you don't even know it.

If many advisors don’t understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Good points. I am standing here with my pile of cash. If I sign the contract, we both make long term commitments (aside from the type of contractual commitment described by an immediate annuity, a pension).

We contractually manage the potential risks and rewards of future unknown market activity.

With my pile of cash, I am thinking, if I wait, maybe I can get a better deal down the road, a better time, a better product, a more efficient product.

In the dim recesses of my mind, I remember CFP studies talking about risk and reward. The "baseline" would be U. S. government treasury returns, and risk would be, how much return can you get about that level, compared to the security of owning treasuries.

In other words, take expenses and fancy packaging completely out of the picture.

I think if product manufacturers could do some work to clarify the risk/reward in terms of some objective baselines, while packaging the immediate annuity pension concept, these products could take off. I guess they are already.

The product needs to be simplified to accord the instincts of the experienced analytical.

[quote=anonymous]

 If many advisors don't understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Explanation for a 58 year old client of a 5% 10 year GMIB

Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)

Explanation of a 10% GMAB

Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.

[/quote] What are the time frames for this feature usually?   We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

scrim

Would I be accurate in saying this GMAB feature is akin to buying flight insurance?

No one even buys that anymore since the risk of being in a fatal airplane crash has to be less than 1%.  I'm not an actuary but i'm surmising it's way less than 1%.

scrim

We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.

The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  

If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 

Perception beats reality everytime.

[quote=babbling looney]

We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.

The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  

If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 

Perception beats reality everytime.

[/quote] I haven't run the numbers but I would hazard to guess that if someone started investing in 1992 they were still ahead when the market bottomoed out ten years later.   Can anyone verify this info as I'm not 100% sure.

scrim