The VA Story

or Register to post new content in the forum

128 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Mar 24, 2007 12:00 am

I'm sorry but you people who keep saying "You have to annuitize the AXA to get the 6%" are wrong.

Whomitmayconcer, go back to the original post.  You'll see that he's talking about a GMIB and not a GMWB.  The contract will have to be annuitized to get the 6% and the 6% isn't legit since they use lower annuitization factors.

I must admit that my knowledge is not where it should be when it comes to GMWB riders.  Please explain how money can be taken out of the contract without paying taxes unless it is truly two separate contracts.  In your example, the investment grew from $1,000,000 to $2,000,000, the first $1,000,000 taken out would all be taxed as income.  Please help me to fill in my knowledge gap.  (The question is sincere and not sarcastic.)

Mar 24, 2007 3:01 am

[quote=Bobby Hull][quote=ManagedMoney] [quote=Bobby Hull]

Mutual funds are mutual funds and VA's are VA's. You sound stupid comparing two things that do different things. VA's are great if you want what a VA does. MF's are great if you want what MF's do. I like what VA's do and I like to sell them. I sell them to people who like what VA's do, also. Pretty neat, eh?

[/quote]


Help me out here. 

1.) What does a VA do that you like? (besides give you high commissions) 

2.) What does a VA do that your clients like?
[/quote]

Why would a guy named "managed money" want to know about VA's?

[/quote]

Apparently, the simple questions were too hard for you to answer.
Mar 24, 2007 4:01 am

[quote=Bobby Hull][quote=silouette]

Bobby, I may sound stupid, but I have been in this game a long time. There have been plenty of abuses with annuity contracts, and you are free to discover for yourself and your clients what works for most people over a long period of time.

Part of your job as a registered representative, CFP, experienced investor, and so on - is to bring perspective and education to bear on on financial planning problems, not just sell what you like, or what your clients think they like after you spend a little time with them.

A great joy over time is to see how it all fits together, the beauty of simplicity and the basic idea of stocks, bonds, cash, real estate, certificates - much of the beauty and efficiency gets obscured by the time frames and needs of everyone but the client.

That doesn't mean that annuities are not appropriate sometimes, fact is, they are way overused, and you have to pay your dues, or at least be stable with your business, I would say, before you gain a qualified perspective.

[/quote]

You've got me confused with someone who likes to do financial planning. I"m sure it's noble work, but I don't want to take the cut in pay.

[/quote]

I suppose that honest work like that would be a cut in pay compared to slogging the EIA with the highest commish to blue hairs, right?
Mar 24, 2007 4:20 am

[quote=joedabrkr] [quote=Bobby Hull][quote=silouette]

Bobby, I may sound stupid, but I have been in this game a long time. There have been plenty of abuses with annuity contracts, and you are free to discover for yourself and your clients what works for most people over a long period of time.

Part of your job as a registered representative, CFP, experienced investor, and so on - is to bring perspective and education to bear on on financial planning problems, not just sell what you like, or what your clients think they like after you spend a little time with them.

A great joy over time is to see how it all fits together, the beauty of simplicity and the basic idea of stocks, bonds, cash, real estate, certificates - much of the beauty and efficiency gets obscured by the time frames and needs of everyone but the client.

That doesn't mean that annuities are not appropriate sometimes, fact is, they are way overused, and you have to pay your dues, or at least be stable with your business, I would say, before you gain a qualified perspective.

[/quote]

You've got me confused with someone who likes to do financial planning. I"m sure it's noble work, but I don't want to take the cut in pay.

[/quote]

I suppose that honest work like that would be a cut in pay compared to slogging the EIA with the highest commish to blue hairs, right?
[/quote]

The only EIA I sell is a 5 year surrender with a 5% commish, but thanks for trying to take a swipe and ending looking stupid. It seemed so natural for you.

Mar 24, 2007 6:03 pm

Anon,

The second "tower" is really just an insurance policy. In essence AXA buys a term policy on the life of the first tower (maybe they buy it on the annuitant, I guess they could, based on the idea that they'll get their money back some day when the guy dies, which he eventually will)

The only "real money" the guy has is the money in the investment account (the first tower). AXA hopes that that account will grow faster than the second tower so that your client will cash out of the first tower and the second one is a moot point.

Since the first tower is only the guy's own money in the example (he put in a Mil and it stayed at a mil) the money he's taking out is his own principal. He's able to take it out at a 12% rate because the second tower is still "growing" at a 6% pace on the 2MM. (if the guy took only 60M the second tower would still grow.I'm not 100% sure, but the second tower might also represent the death benefit, I think it can outside of NYS).

Mar 24, 2007 6:24 pm

All of these guarantees are fun to talk about, but do any of you guys make your clients a lot of money in the VA’s? The VA I’ve been using has significantly outperformed the S&P over the last 4 1/2 years that I’ve been using it. The guarantees are a very small part of what I discuss with people.

Mar 24, 2007 11:01 pm

Bobby,

It has been the guarantees that have allowed my clients to make a lot of money.  Clients with guarantees invest more aggressively than clients who don't have guarantees.

Mar 24, 2007 11:24 pm

[quote=anonymous]

Bobby,

It has been the guarantees that have allowed my clients to make a lot of money.  Clients with guarantees invest more aggressively than clients who don't have guarantees.

[/quote]

I'll buy that. Another thing that helps is that they only get quarterly statements and the don't have ticker symbols that they can watch every day. I never get calls from people worrying about their annuities.

Mar 25, 2007 2:42 am

Yes, I do,(make money for my clients) and I am known to trade out of them (when it makes sense) too!

Mar 25, 2007 5:21 am

Since the first tower is only the guy's own money in the example (he put in a Mil and it stayed at a mil) the money he's taking out is his own principal. He's able to take it out at a 12% rate because the second tower is still "growing" at a 6% pace on the 2MM. (if the guy took only 60M the second tower would still grow.I'm not 100% sure, but the second tower might also represent the death benefit, I think it can outside of NYS).

Great, I'll take some McFries with that contract. Hope Ronald has a favorable record under the terms of the contract, underwise we'll  be eating humble pie in a cardboard sleeve. Maybe they'll sell us a salad to go along and make it healthy food. Let's see, for what I spent I could have had a nice piece of fresh halibut and fresh baked bread ...

Mar 25, 2007 12:50 pm

[quote=silouette]

Since the first tower is only the guy's own money in the example (he put in a Mil and it stayed at a mil) the money he's taking out is his own principal. He's able to take it out at a 12% rate because the second tower is still "growing" at a 6% pace on the 2MM. (if the guy took only 60M the second tower would still grow.I'm not 100% sure, but the second tower might also represent the death benefit, I think it can outside of NYS).

Great, I'll take some McFries with that contract. Hope Ronald has a favorable record under the terms of the contract, underwise we'll  be eating humble pie in a cardboard sleeve. Maybe they'll sell us a salad to go along and make it healthy food. Let's see, for what I spent I could have had a nice piece of fresh halibut and fresh baked bread ...

[/quote]

Let me guess....your parents rejected you when you came out of the closet.

Mar 25, 2007 6:40 pm

 Don’t tell anyone.

Mar 26, 2007 11:11 pm

Here's a recent excerpt from Bob Veres newsletter concerning VA's. I though it was interesting:

Honolulu-based advisor David Jacobs, in his periodic DavidsDiamonds review, offers some insights into the Guaranteed Minimum Income Benefit (GMIB) provisions in variable annuities contracts. These guarantee riders typically cost 50 to 60 basis points a year, and guarantee 5% annual growth of the income base no matter what the contract's underlying performance happens to be. But Jacobs points out that the 50-60 bp fee is assessed against the guaranteed income base, which means that the company's fee automatically goes up each year. If the market drops and the account value goes down, say, 30%, suddenly what was a .5% fee can be (depending on how long the raises have been going on) 70, 80 or 90 basis points.

Also, Jacobs points out, you only get the guarantee if you annuitize the contract. In most cases, he says, if you annuitize the contract under the GMIB rider, the company will give you a far more conservative annuitization rate than you would have gotten otherwise. How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.

If you move the numbers around a little bit you discover that the account would have to have declined by a total of 11% over ten years for the guarantee to have benefited the consumer. Otherwise, you were better off without the guarantee. Jacobs doesn't have to state the obvious, but I will: when has any reasonable equity portfolio ever declined by 11% over any ten-year period?

This is very interesting and detailed analysis. I bring it up because I think most members of the FPA would say that they would like to see this kind of evaluation in their peer-reviewed professional magazine--something that digs into the numbers in a sophisticated way, and talks to them, as professionals and adults, about the hard-dollar impacts of their choices and the numbers behind what's breathlessly touted in the marketing materials.

Instead, we have a cover story which includes a sidebar which explains GMIBs with a credulous marketing-material illustration showing that after 12 years, the annuity portfolio has lost 15% (!), but (ta da!) because of the GMIB rider, the consumer still has $179,585 to annuitize. The article contains no mention or analysis of the RATE that it will be annuitized. Meanwhile, the article goes back and forth, saying that some say that annuities are good, some are more cautious, never digging into the numbers or asking an actuary to estimate the actual costs and profit margins of these guarantees. Page after page forthrightly insulting the readership's intelligence by saying that you have to factor in peace of mind when selling annuities to clients--when, in fact, these expensive training wheels have become the primary selling point since the tax benefits were exposed to be nonexistent.

Mar 27, 2007 7:29 am

Well presented. Don't expect any big intellectual rebuttal from the annuity closers here.  For the thinkers and real planners, what more needs to be said?

Mar 27, 2007 7:41 am

[quote=silouette]Well presented. Don’t expect any big intellectual rebuttal from the annuity closers here.  For the thinkers and real planners, what more needs to be said?[/quote]



It’s so much simpler, any insurance product is a bet against a bunch of
actuaries who have worked out all the angles. The Insurance company
expects to win even after taking a 6% handicap from sales commisions.



An insurance contract is a zero sum game; and if you can’t spot the sucker…

Mar 27, 2007 9:10 am

It's absolutely ridiculous for a "thinkers and planners" like yourself to get your information from an article instead of from a primary source. 

He's wrong about how the pricing of the GMIB works.  There may be one that works that way that he describes, but that is not the norm.  Most of them go by the contract value. 

He's also wrong about the negative 11%.   I've done the calculations and it usually works out that it makes sense to annuitize if the contract has averaged around 2.8% (give or take a few tenths based upon exact details) compound annual growth.

Do I expect any of my clients to ever use the guarantees inside of a VA?  No.  Do I use guarantees?  Yes. (Primarily GMAB because I do believe that the stated % in the GMIB is disingenuous.)  If someone thinks that piece of mind does not have a lot of value, then they probably haven't been in the business very long. 

I've said it many times that my VA clients have outperformed my mutual fund clients and it's because they are paying for a guarantee.  The value of the guarantee is two-fold. 

1)The VA client is able to invest more aggressively than his risk tolerance will allow.   In other words, we're able to do an unfair comparison.  This client, if invested in MFs, might be 30% stocks and 70% bonds, yet in the VA, they are 100% stocks.

2)Just about all of our clients are less aggressive than they think.  It's easy to be aggressive when the market is going up.  However, when the market goes down, our clients aggressiveness goes down with it.  Ex. Market goes down 30%.  Client portfolio drops from $200,000 to $140,000.  MF client, in many, many cases, is going to start investing much more conservatively.  Annuity client, with guarantee, will keep money invested aggressively. 

We too often focus on investment performance instead of investor performance.  The fees inside of a VA often hurt investment performance, but at the same time, help investor performance.

AllReit, The insurance company expects to win after paying the commission in the same way that the Mutual Fund company expects to win after paying the commission.  The commission gets paid from annual expenses taken from the client or an up-front sales charge deducted from the account.  On the other hand, if you are talking about the insurance company making money from living benefit riders, it is questionable.  

Are the insurance companies trying to make money on every contract that they sell?  Yes.  Are they trying to make money on the living benefit riders?  It doesn't appear to be the case.  The riders are really designed to attract additional money to the product.  It's the additional hundreds of millions of dollars in the product that makes additional money for the insurance company and not the riders.  There is a lot of concern in the industry that these riders (GMIB, GMAB, GMWB) may be underpriced.   Therefore, I'd be very careful to only use these riders with very strong insurance companies.

Variable annuities are not a big part of my practice, but they are definitely a valuable tool.   My primary use for them is qualified money when the guarantee allows the client to invest more aggressively and the money can be tied up for a period of time.  The total annual cost of the annuity that I use, including all fund expenses and bells and whistles, is about 2.3%.   

Mar 27, 2007 3:47 pm

Variable annuities are not a big part of my practice, but they are definitely a valuable tool. 

No one could reasonably condemn them outright, or say they are never appropriate, since they can transfer the risk of outliving money.

It always seems to come down to the appropriateness of immediate annuitization, and whether money should be tied up until that (unlikely) event.

Underpricing is a great example, because either contract owners will be paying too much now, or too much later. How many of would make the commitment now, with our own money? Who would sell a product they would not want to own themselves? I can do better just owning municipal bonds at non qualified, along with handful of long term stocks holdings ( even funds) and don't need the tax protection at qualified. Why wouldn't that strategy be good enough for my clients? 

If they want to transfer risk, do immediate annuitization.

Has anyone found any solid research to convincingly argue otherwise ( leaving the occasional peace of mind case aside)? As advisors, we don't change client's risk tolerance, but we better be educating them instead of pandering to their fearful emotions .

Mar 27, 2007 4:06 pm

How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.

What exactly does that mean?

It means that he can buy an immediate annuity with a rate of 2.5 to 3%?

I went to the website and put this example in... 72yo male no spouse $1,000,000 and the nums came up $8272 for straight, no period certain. This means that they think your going to live for 10 years and their not giving you any interest on your money.

If you take life with 5 year certain the num goes to 7,998 which means you are giving up nearly half your money if you get hit by a beer truck on the way home from the meeting.

If you take L W/ 10yc you give away 10% of your money.

Take LW/15yc and you are guaranteed to get back 1.225MM from your mil.

Lw/20yc = 1.5MM!

Question being, where is he making the comparison? Off the 5 and 10 year? Can't be on the straight life because 2 times zero is still zero.

The twenty year number is a 4.3% number.

So if the AXA (for example) Annuity grew by nothing and paid you out by nothing versus annuitizing your portfolio which grew by the fees in the annuity (let's call them 3.5% non compounded) over the 12 year period and then annuitized as per the above.

(1,000,000 X 3.5%) x 12 + 1,000,000 = 1,420,000  

1,420,000 @ Lw/20yc = 8,844

(8,844 X 12) X 20 = $2,122,560

AXA

(1,000,000 X .000) X 12 + 1,000,000 = 1,000,000

Monthly Income = 10,000

Capital expires in 8.25 years

Annuity pays $8,333/month 240 months = 2,000,000

1,000,000 + 2,000,000 = 3,000,000

$3,000,000 - 2,122,560 = 877,440

I'm open, tell me where this is wrong!

Mar 27, 2007 5:18 pm

I can do better just owning municipal bonds at non qualified, along with handful of long term stocks holdings ( even funds) and don't need the tax protection at qualified. Why wouldn't that strategy be good enough for my clients? 

Let's keep this to qualified since that's what I sell for the vast majority of my annuities.   The purpose of these annuities has nothing to do with tax protection. 

The answer to why it is not good enough for your clients is because an all equity portfolio inside of a variable annuity should be expected to outperform a bond portfolio that is coupled with a handful of long term stock holdings.  I have been in business for over 10 years.  100% of my VA clients (who have owned a VA longer than 1 year) have lifetime returns of over 10% annually.  Many have been in the 13-15% range.  0% of my clients with mostly bond holdings have returns over 10%.

Again, what makes a VA good is how it impacts investor behavior.   I'm not sure that this can be measured, but it certainly should not be an underestimated factor.

Mar 27, 2007 5:24 pm

How much is the company taking back in this deal? When Jacobs looked at the illustrated payout on the GMIB from an annuity issued by Guardian, he found that you could go to www.immediateannuities.com and buy the same payout for roughly half as much as the guaranteed growth on the account.

What exactly does that mean?