Variable Annuities
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issues and ideas
I sold VAs for two years. Before this I was at Vanguard. I don’t know how I did it. Going from Vanguard, always, always having what’s best for clients to one of the biggest rackets in America, Variable Annuites.
Not only did I sell VAs, but VAs in 403bs and IRAs. The clients already weren’t paying taxes so no added tax benefits. If anyone knew anything they didn’t buy a VA. The VA market in America are investors not knowing enough.
I’m leaving my current company to go to a major wirehouse to do asset based business.
Anyone saying VAs are good, is lying to themselves. If you have a conscious it will catch up to you.
[quote=doright]I sold VAs for two years. Before this I was at Vanguard.
I don’t know how I did it. Going from Vanguard, always, always having
what’s best for clients to one of the biggest rackets in America,
Variable Annuites.
Not only did I sell VAs, but VAs in 403bs and IRAs. The clients
already weren’t paying taxes so no added tax benefits. If anyone knew
anything they didn’t buy a VA. The VA market in America are investors
not knowing enough.
I’m leaving my current company to go to a major wirehouse to do asset based business.
Anyone saying VAs are good, is lying to themselves. If you have a conscious it will catch up to you. [/quote]
How do you feel about variable annuitization?
[quote=doright]
Anyone saying VAs are good, is lying to themselves. If you have a conscious it will catch up to you. [/quote]
Variable annuities are appropriate for some people. There are
reps out there that specialize in selling VAs. Some can do $250k
per year in trails, from what I’ve heard. They do nothing but
crank out VAs.
Then there are those that take the up-front option
There is nothing wrong with variable annuities used in the appropriate curcumstances. Yes, they do have more expenses but they also carry some nice benefits that some people feel are valuable. The problem has been with abusive sales practices and a lack of supervision that allowed those practices to go forward. The regulators are veeeery closely watching this business. I feel that there is just as much if not more abuse in the sale of fixed annuities, particularly equity indexed annuities to senior citizens.
VA's are a great product when sold for the right reasons. The enhanced living (income) benefits and the death benefits provide clients with peace of mind. I have clients who bring me referrals after I sell them VA's because they feel so good about why they bought an annuity (qualified AND non qualified). Yes there have been abusive sales practices of the product & when I come across the old ladies who have a 15yr surrender on a 3% fixed annuity it makes me boil. But anyone who says that VA's are bad simply does not understand the product nor the financial planning scenarios where the VA provides the absolute perfect planning solution. For example how many other products can you think of that will "guarantee" an income stream that will "step up" each year for life at a 5% clip?
Like any other product they have the potential to be sold in a situation that they were not created or designed for. None the less, they are a very proper product for quite a few individuals.
[quote=Broker Fee]
VA's are a great product when sold for the right reasons. The enhanced living (income) benefits and the death benefits provide clients with peace of mind. I have clients who bring me referrals after I sell them VA's because they feel so good about why they bought an annuity (qualified AND non qualified). Yes there have been abusive sales practices of the product & when I come across the old ladies who have a 15yr surrender on a 3% fixed annuity it makes me boil. But anyone who says that VA's are bad simply does not understand the product nor the financial planning scenarios where the VA provides the absolute perfect planning solution. For example how many other products can you think of that will "guarantee" an income stream that will "step up" each year for life at a 5% clip?
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Please reveal to us how the annuity, fixed or variable, is appropriate for pre-tax investing for retirement?
[quote=Sierra][quote=Broker Fee]
VA's are a great product when sold for the right reasons. The enhanced living (income) benefits and the death benefits provide clients with peace of mind. I have clients who bring me referrals after I sell them VA's because they feel so good about why they bought an annuity (qualified AND non qualified). Yes there have been abusive sales practices of the product & when I come across the old ladies who have a 15yr surrender on a 3% fixed annuity it makes me boil. But anyone who says that VA's are bad simply does not understand the product nor the financial planning scenarios where the VA provides the absolute perfect planning solution. For example how many other products can you think of that will "guarantee" an income stream that will "step up" each year for life at a 5% clip?
===================================================
Please reveal to us how the annuity, fixed or variable, is appropriate for pre-tax investing for retirement?
[/quote]
A post from the old RR forum:
aka "single life" or "life only;" the annuitant receives income for their lifetime only, NO payment to any benefeciaries; which is what the life insurance is for. It's also tax free, rather than mostly non-taxable like the annuity payment.
this concept is commonly known as an "annuity straddle," I prefer to think of it as a way for the rep and the client to split 50/50 all the money that the client and bene's save in taxes. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
A few clarifications, for those who aren't familiar with Annuity Maximization.
A life contingency is any annuity with payments that last for life, including those life with period certain, life with cash refund, life with installment refund. Payments to the owner, or beneficiary, are contingent on the LIFE of the annuitant.
Annuity Max is essentially taking a lump sum, or aged deferred annuity with low basis, and annuitizing it. Part, or all, of payments, are used to purchase a life insurance policy, usually on the life of the annuitant. Due to differences in taxation, net results to beneficiaries can be improved, and in some cases, the annuitant enjoys more spendable income during life (i.e., where transfer costs are excessive, and annuitant is older). Plus, there are opportunites for arbitrage with medically underwritten annuities. A life policy is applied for competitively, seeking the best offer, and likewise, an annuity is applied for, competitvely seeking the best payment offer. This is called a Mortality Swap, with incremental improvements in lifetime duration internal rate of return.
I have a lot of fun with these. Especially, when I walk in behind a financial planner who is touting his fee-only approach to investment management. He'll wax rhapsodic about Modern Portfolio Theory, and low fee index funds, making his prospect catatonic with boredom. I walk in and nuke his proposal with a legal pad and pen, detailing massive increases in net spendable income for the life of the client, while often doubling the net after tax estate to the benefiaries -- and I do it with virtually NO risk.
From a revenue standpoint, it is no wonder why so many fee-only advisors are sucking hind teat. A properly structured Annuity Max deal can produce compensation on the order of 15% or more, of the total lump sum, and the advisor doesn't have to come back and apologize for the losses on quarterly statements ever again. Truly a win-win-win for all parties involved. Heck, even the Service benefits.
I watch my competition cutting their AUM fees, trying to keep clients happy, and I can't help but laugh. Consider a $1,000,000 lump sum. If my competiton charges 1% pear year, he's going to have to earn his 1%, every quarter, justifying his fees, apologizing for losses, explaining underperformance, fending off predators and competitors, until the client dies. That can be a lot of work over one year, multiplied by as many years as the client lives.
Who has the money when the client dies? A brokerage account, or trust department. Then my competition has to go sell the heirs to keep the assets, often competing with the brokerages and banks.
On the other hand, I close my deal and walk down the street and spend all my time selling my future clients -- the beneficiaries. When my client dies, who has the money? ME. I am the guy walking in with the BIG check. There's no discount brokerage, bank trust department, or wirehouse looking to back door my client. I'm the guy that's been courting them all these years, handling the small IRAs, and college funds, selling them cheap term insurance.
That's what I call Multi-Generational Wealth Management.
Barry Kaye has several books out that detail these strategies, and more. I bought one when I was a freshman agent, and my income doubled the next year with the first Annuity Max case I wrote. If a finacial planner is doing retirement and estate planning for seasoned citizens, and they haven't read these books, a simple life insurance agent that has can embarass them. <?:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" />
I'll say it again: If you haven't read Bruce Wright's The Wright Exit Strategy, you're going to lose accounts to those of us who did.
Rule #1 - Begin with the end in mind.
Lesson #2:
The problem with annuitization is that it isn't properly sold often enough. Most agents don't sell enough to be fluent with their suitable use. Most stock brokers don't know enough about insurance, other than how to spell it, and maybe where to find an app for the one paying the highest bonus gross this week. The typical financial planner only knows what they read in Money mag, and the lay authors that wrote those articles can't tell the difference between their arse and a whole in the ground, even with detailed directions, a topographical map, and an Indian guide.
As a student of history, the reasons behind the ignorance surrounding annuities is easy to discern. In the old days, they were sold by life insurance agents, almost exclusively. Going back over a century ago, standard non-forfeiture options on permanent life insurance included annuitization of cash surrender values, and these values were used to sell insurance, so the public wasn't unaware, nor were the agents that sold insurance. With the advent of the income tax, deferred annuities slowly grew in popularity, and annuitization was more common then than it is today.
The problems started happening with the advent of modern financial planning. Insurance companies bought, or started, their own broker/dealers. Agents became licensed to sell securities, watering down annuity/life production with mutual funds, which also watered down the intelligence base of the salesperson. Insurance companies fielded wholesaler forces to get wirehouse brokers to pitch annuities over the phone. The emphasis on asset gathering, as the end all goal, became pervasive, and the focus on fee-based or fee-only planning all contribute to lower annuitization rates.
The fee-only planner has an inherent conflict of interest with any annuitization option, as does most fee-based advisors using an AUM model. The same people who touted commission based advice's conflicts of interest, deny, deny, deny they themselves have them, despite the fact that their existence is irrefutable and incontrovertible.
On the other hand, commission only life insurance agents, as a group, tend to still be the largest source of new SPIA premium, and virtually ALL settlement option premium. To this day, they are still trained in the suitable use of immediate annuities.
Over the last two decades, as financial services companies merged, insurance companies sought new distribution channels, namely wirehouse stock brokers. To spread the word quick, they hired wholesalers to do this, most of whom were failed stock brokers. Stock brokers, in general, at the time, sold over the phone, where sizzle sells. Despite any training to the contrary, essentially we had failed brokers teaching practicing brokers how to pitch annuities over the phone. What sizzle sales? One of the LEAST important benefits of the annuity contract -- tax deferral. What benefit was NEVER talked about? The MOST important, and exclusive, benefit of the annuity contract -- an income that cannot be outlived.
Add in the lay press spewing their ignorance, and our current situation, with regulators frothing at the mouth, litigation sharks drooling at the thought of contingency fees on class action suits, and compliance officers greasing up their anuses for the next round of abuse is all to predictable, if one only thinks about it.
Our world is complex, and these days, we expect rank and file financial advisors, in every channel, to be fluent in every topic. That's impossible. Just because someone has MD after their name, do you automatically assume they can perform brain surgery? Likewise, just because an advisor has a license, or some letters after their name, we can't assume they know diddly squat about annuities in general, and annuitization, specifically. The odds are, they don't know much, and what they do know is based on urban legend and mythology.
The upside? If you're learn the product, and its suitable uses, you're heads above 99% of your competition. Guarantees still sell, friends, and a guaranteed income for life is a tangible benefit people WILL buy, when presented with the choice.
"Despite any training to the contrary, essentially we had failed brokers teaching practicing brokers how to pitch annuities over the phone."
Anybody here ever pitched an annuity over the phone? I'm glad to know the source of the bad press annuities get, it was brokers. Good thing people were never ripped-off by insurance salesmen pitching the only "investment" rpoduct they had....
"Annuity Max is essentially taking a lump sum, or aged deferred annuity with low basis, and annuitizing it. Part, or all, of payments, are used to purchase a life insurance policy, usually on the life of the annuitant."
I’ve seen this done a number of times, but for those who haven’t, a couple of questions;<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
So the client pays taxes on any withdrawals from the annuity that might constitute gains, and buys an insurance policy with that stream of funds (or takes premium payment needs from a non-VA source, like a savings account or brokerage). Wouldn’t this represent a loss of income (the annuity stream being used for insurance, rather than income) so it would be for those with limited need for income from that asset, right?
What sort of age range are we talking about where a life insurance policy would provide real, meaningful leverage on the stream of income? Obviously the older the person, the larger the cost of the insurance, right? So what’s the age of the person best suited here?
Medical qualification for the insurance?
Couldn’t the estate tax advantage of the insurance policy over the annuity also be gained by way of placing that income stream into a standard trust, as opposed to a ILIT?
In it’s core, isn’t this just taking an asset a person doesn’t expect to use during their lifetime (and can’t once it’s been placed into a policy in an ILIT) and getting it past estate taxes while hoping to use insurance to leverage it?
Also, isn’t the name “annuity max” a bit misleading since it sounds like you’re maximizing the stream of income the donor receives, when it’s really a way to pass the donor's "unneeded" assets to the next generation?
[quote=doright]I sold VAs for two years. Before this I was at Vanguard. I don't know how I did it. Going from Vanguard, always, always having what's best for clients to one of the biggest rackets in America, Variable Annuites.
Not only did I sell VAs, but VAs in 403bs and IRAs. The clients already weren't paying taxes so no added tax benefits. If anyone knew anything they didn't buy a VA. The VA market in America are investors not knowing enough.
I'm leaving my current company to go to a major wirehouse to do asset based business.
Anyone saying VAs are good, is lying to themselves. If you have a conscious it will catch up to you. [/quote]
I'm not aware of any other investment that will contractually guarantee a minimum income stream which you can't out live.
I'm in my 30's and I own a VA inside of my........(drum roll please)...... IRA.
"Wouldn’t this represent a loss of income (the annuity stream being used for insurance, rather than income) so it would be for those with limited need for income from that asset, right?"
<?:NAMESPACE PREFIX = O />Correct. Let me give a real life example. The concept is primarily used with assets that would have otherwise been simply passed on to the heirs. So here's Grandpa Stanbrown with $500k sitting in his checking account along with another $2 million in various diversified assets. Grandpa only consumes $50k annually & at 72 yrs old it's doubtful that he'll ever have a $500k emergency.
You being the sharp advisor that you are uncover Grandpa's desire to transfer as much money as possible to his grandchildren. You recommend that he purchase a Variable Annuity that will generate X amount of GUARANTEED annual income for the rest of his life funded with a portion of the $500k. The excess (net of taxes) will purchase a life insurance policy that will not only replace the 500k when Grandpa Stan keels over on his computer keyboard but will also create a legacy for his beneficiaries. Often depending on the estate size it is necessary to implement this strategy with a trusty attorney drawing up an ILIT so as not to create an estate tax situation depending on the dynamics you may have to involve the beneficiaries as well to implement a gifting strategy (i'm getting to involved...)
"What sort of age range are we talking about where a life insurance policy would provide real, meaningful leverage on the stream of income? Obviously the older the person, the larger the cost of the insurance, right? So what’s the age of the person best suited here?"
Works best when your client is 60ish to early 70ish. You're right, the earlier the better because they do have to go thru under writing so if Grandpa rolls into your office with the oxygen tank - forgetaboutit!
"Couldn’t the estate tax advantage of the insurance policy over the annuity also be gained by way of placing that income stream into a standard trust, as opposed to a ILIT?"
In a word...YES. But we live in a financial world where there are multiple solutions to our clients problems. This concept works well for many families looking to max out their current assets in order to create a legacy for their family. A standard trust does not offer the guarantees of that legacy...thus the annuity max.
"Also, isn’t the name “annuity max” a bit misleading since it sounds like you’re maximizing the stream of income the donor receives, when it’s really a way to pass the donor's "unneeded" assets to the next generation?"
Depending on one's explaination of the term to the layman client the term could be misleading.
I'm not aware of any other investment that will contractually guarantee a minimum income stream which you can't out live.
I'm in my 30's and I own a VA inside of my........(drum roll please)...... IRA.
You got it! Not only will you have a guarantee of income but the better products will increase that income stream (usually up until age 80) annually depending on the underlying performance of the funds and to top it off...the client NEVER has to annuitize the contract.
I would change jobs to if I spent 2yrs selling a product which I didn't believe in or more correctly, I couldn't explain to clients where it was appropriate.
<O:P>
"You being the sharp advisor that you are uncover Grandpa's desire to transfer as much money as possible to his grandchildren. You recommend that he purchase a Variable Annuity that will generate X amount of GUARANTEED annual income for the rest of his life funded with a portion of the $500k."<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
You recommend an annuity to a 72 yr old who currently has tons of liquidity? He's already in a position where income for the rest of his life is not an issue. He surely doesn't need a "guarantee" on an income stream he already has. In the meantime you're erasing much of the liquidity he may need for nursing home care. Doesn't sound like much of a deal so far for Grandpa Stan....
" The excess (net of taxes) will purchase a life insurance policy that will not only replace the 500k when Grandpa Stan keels over ..."
The excess net of what taxes? He currently owes no taxes. Are you saying net of the taxes he'll be paying on an income stream from the annuity you just sold him? That he paid for with money he didn't need to pay taxes on to start with (aside from taxes on money market returns)?
Somehow this 72 yr old is going to get such a nifty rate of return on his heretofore liquid and untaxed money via an annuity, that not only will it provide Grandpa Stan with current income (replacing something he already had) but it will buy him an insurance policy to replace the $500k he had to begin with?
Unless he's getting a surprisingly large stream of income and he's paying surprising low premiums for the replacement policy, he's getting screwed. The actuaries writing the annuity pay-out tables see him as a risk in that a 72 year old could live to 100 and get that income the entire time, and the actuaries writing the life insurance policy see him as a massive risk because Grandpa Stan, at 72, is a good bet to die long before he pays a pittance towards that life insurance death benefit.
BTW, there’s a guy here from compliance and another from the NASD that want to talk with you about selling annuities to 72 year olds…..
[quote=Mike Damone]
[quote=doright]I sold VAs for two years. Before this I was at Vanguard. I don't know how I did it. Going from Vanguard, always, always having what's best for clients to one of the biggest rackets in America, Variable Annuites.
Not only did I sell VAs, but VAs in 403bs and IRAs. The clients already weren't paying taxes so no added tax benefits. If anyone knew anything they didn't buy a VA. The VA market in America are investors not knowing enough.
I'm leaving my current company to go to a major wirehouse to do asset based business.
Anyone saying VAs are good, is lying to themselves. If you have a conscious it will catch up to you. [/quote]
I'm not aware of any other investment that will contractually guarantee a minimum income stream which you can't out live.
I'm in my 30's and I own a VA inside of my........(drum roll please)...... IRA.
[/quote]
You're kidding, right? Even if you think you need a guarantee on your IRA generated income later in life, why buy it now, at your age? Grow that money without the annuity fee structure and if you still feel the need for a guarantee, buy an annuity much later.
I must admit that this tricksy annuity set up is giving me a headache And that at age 30 the client might be too young for an annuity.
However, a VA in a qualified account isn't always bad. Just today, I positioned part of a client's rollover IRA into a VA. The situation is this: We put 150K into mutual funds and 175K into a VA. The annuity carries the guarantee (yes expensive) of 7% return if held for 10 years and annuitized for an income stream: essentially a guarantee of doubling the 175 K at minimum in 10 years. I expect/hope that we will do better than 7%. But, because there are guarantees we agreed that we coud be more aggressive in the annuity than we would have been without the guarantees. The safety net feeling was important to the client and he was willing to absorb the extra costs. If we do better than 7%, then of course, there is no need to annuitize.
The mutual funds will provide some liquidity should the client need to withdraw sooner than 10 years. In addition we have another approx. 155K to position in a few weeks. The client was on overload mode by the end of the appointment. (Me too)
I feel that this VA was entirely appropriate for the client given his age and risk tolerance and other assets that he has.
BL
No doubt about it...explaining the annuity concept along with providing all the disclosures can be very overwhelming. The paperwork/application alone is ridiculous. You're better off taking care of your client and moving on to the next appropriate annuity presentation as opposed to trying to justify the product on an internet forum. I've got a good presentation next week (similar dollar amount as yours)where I'll be presenting that same product mix...nice one. In the meantime, I'm off to the beaches for the weekend.