INTELLIGENT Conversation About VAs
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[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.[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?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=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?
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.[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.[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.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.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.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?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.[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.
“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.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.
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
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.
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.spiffy,
You seem to be one of those people that hits a hornets nest, gets stung and can't understand why.[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…