Am I missing something?

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Mar 4, 2007 9:18 pm

An annuity paying 7% with 2% m&e yields a 5% return, tax-deferred. A tax-free bond with a taxable equivalent yield of 6% returns 6%, tax free. 


Other than annuities paying a much better commission than munis, what are the advantages of an annuity versus a muni for a client?

Mar 4, 2007 9:45 pm

(Disclaimer, I've sold one annuity in my 2 plus year and many muni bonds.)


For starters you do have to be in a pretty high tax bracket to get a TEY of 6% on a muni.  Many clients are not. 


No flucuation of principal is another advantage.

Mar 4, 2007 9:52 pm

Also, if a client has a large built in tax gain from prior annuities they may be reluctant to move out of annuities and pay the gain.

Mar 4, 2007 9:54 pm

Thanks gad. I knew I was missing something.


As I've mentioned before, I'm battling some "bonus" annuity churners in town and I'm looking for a single product that will at least compare, but preferably beat, a fixed annuity. 


My market in this situation is old folks who want safety, guarantees, death benefit, etc., and some highly complex strategy is not going to be the solution they're looking for. Just something simple that I can show will benefit them.


Mar 4, 2007 9:56 pm

(Sorry I know, I should have lumped these all together.)


The one annuity I sold was a client whose guardianship over his son's account was expiring and he wanted the son not to spend it right away so he bought the annuity to discourage the son from spending.  (Admittedly rare, but surrender charges on occasion come in handy.)

Mar 4, 2007 10:09 pm

When I have clients looking at annuities elsewhere I usually focus on the one thing that clients really seem to grasp.  I explain to them how annuities are a terrible way to pass on money to the next generation.  Most clients when they start building up that gain never want to pull it out so it ends up getting passed on.  Since almost no annuities can stretch, this gives a BIG ONE TIME TAX LIABILITY to the children.  Seniors (most of my clientele) hate the thought of passing on a large tax liability to theirs kids.  


I don't know, but it seems that this has helped me turn quite a few people off of annuities.  Even though there are worse things about annuities, this is the one I've had most success using.   

Mar 4, 2007 10:23 pm
gad12:

When I have clients looking at annuities elsewhere I usually focus on the one thing that clients really seem to grasp.  I explain to them how annuities are a terrible way to pass on money to the next generation.  Most clients when they start building up that gain never want to pull it out so it ends up getting passed on.  Since almost no annuities can stretch, this gives a BIG ONE TIME TAX LIABILITY to the children.  Seniors (most of my clientele) hate the thought of passing on a large tax liability to theirs kids.  


I don't know, but it seems that this has helped me turn quite a few people off of annuities.  Even though there are worse things about annuities, this is the one I've had most success using.   



People buy life insurance to pass on money to the next generation, not annuities.  People buy annuities to safeguard against running out of money while they are alive.  Essentially, life insurance protects against an early death, while annuities safeguard against a long life.

Mar 4, 2007 10:27 pm

Can you tell I'm bored on a Sunday night?


A joint couple with 500K of investable assets is commonly in the 15% tax bracket.  With current shorter term (5 yrs or so) muni's near 4%, that would give them a tax free yield of around 4.7%.  (Still better than a 5% annuity in my opinion.)  (State tax can affect the numbers as well.)

Mar 4, 2007 10:33 pm

Be careful on the stretching part, more and more VAs can stretch.


On a side note, I had a wholesaler tell me that he ALWAYS makes non-deductible IRA contributions (he has a 401K at work) because they are the cheapest "annuities" possible. He has a point.

Mar 4, 2007 10:34 pm

[/quote]

People buy life insurance to pass on money to the next generation, not annuities.  People buy annuities to safeguard against running out of money while they are alive.  Essentially, life insurance protects against an early death, while annuities safeguard against a long life.
[/quote]


CORRECT!!! 


Too bad that's not how many people explain them to the clients.  Fact is they are OVERSOLD!!!  Truth is many clients will never touch them and they will end up going to the kids regardless. 

Mar 4, 2007 10:39 pm
now_indy:

Be careful on the stretching part, more and more VAs can stretch.


On a side note, I had a wholesaler tell me that he ALWAYS makes non-deductible IRA contributions (he has a 401K at work) because they are the cheapest "annuities" possible. He has a point.



Good point on the VA's, although I assumed Borker's bonus annuities where fixed. 


Also, I'll take an etf, with long term capital gains in a taxable account vs. a non-deductible IRA contribution and ordinary income taxes any day.

Mar 4, 2007 10:44 pm
now_indy:

Be careful on the stretching part, more and more VAs can stretch.


On a side note, I had a wholesaler tell me that he ALWAYS makes non-deductible IRA contributions (he has a 401K at work) because they are the cheapest "annuities" possible. He has a point.




now Indy,


does the stretch option on the VA's require annuitization? 


Thanks ahead. 

Mar 4, 2007 11:03 pm

The annuitites I'm referring to are fixed, and the client must annuitize the contract to receive the 10% bonus--which is the main reason the old farts decide to buy the annuity.


However, of course, the brokers don't tell them about what they have to do to receive the "bonus," or that there are 10+ year surrender fees. Then, they wind up in my office raising hell because they can't get to their money without paying huge fees, and they want me to do something about it. I have to inform them that we can only get 10% each year without paying surrender fees.  


I'm deaing with very simple, country folks, and I'm not interested in getting them to withdraw/surrender their annuities and move them to me. Instead I'm trying to find a way to get their money before its tied up and put it in something that will benefit them, and later, their heirs.