INTELLIGENT Conversation About VAs
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cj - no, around here I know when I’m hitting the hornets nest and what’s going to happen when I do.
Anon - i will admit that i didnt read this entire thread. It just seems to me that the debate on VA’s is endless, and seems to get more “press” here than anything (except maybe EDJ). In my post, my point of reference was all the collective threads on VA;s which seem to never end.
I dont personally hate them at all, i;ve done them from time to time, although its not a focus for me. I agree, the issue that should be addressed is not whether they are appropriate but in what circumstances they are apprropriate. With that said, these days, i guess you could say the same thing about Lehman or FNM pfd!!![
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]
First of all, I am a VA guy. My basic business model is to rollover 401(k)'s into VA's. That shit is easy and it pays well. I struggle with my income now clients, like it seems most here do.
That being said, i was interested in your comments about the Polaris annuity because that sounds like a pretty strong income story. An income story better than i have seen on any other VA. It sounded to good to be true. Upon further research it was to good to be true.
As with most VA's, the income credit is turned of once you take a w/d. So, you are not going to be taking a 5% w/d and be credited with 2%. You are going to be taking a 5% w/d and get what your subs give you. If you have been selling this product as you described above, you may need to do some ass covering right now. That is a total misrepresentaion of that product, and quite frankly a slam dunk lawsuit. Now, i did do some quick research, so i may be off base. But i believe i am correct. Not trying to bash, just inform.You are off base. It does sound too good to be true, so I questioned it the first time I heard it too. It does in fact work the way I explained. Here's the quote directly from the website:
"What’s more clients can receive an annual income credit—even after they begin taking withdrawals. (If clients take a withdrawal up to the maximum withdrawal amount available, the income credit percentage available on the next contract anniversary will simply be reduced by the percentage of their Income Base withdrawn. Please see the prospectus for more information about the calculation of the income credit." I'd give you the link, but it's specific to Jones advisors and I'd hate to get in trouble.I don’t know the specifics of this product, but…
When you have a product with high expenses(I'm guessing 3%), and you take 5% withdrawals, the odds favor the contract value decreasing and very possibly going to zero. My point is that these products sound great, but there is a very good chance that the guarantee is exactly what the person is going to get. We can all agree that at times, annuitizing money makes a lot of sense for a client. Look at the guaranteed annuitization rates in the contract. Do you notice anything about them? I can answer without ever having seen the contract. They suck. In the last 2 years, a popular insurance company has made 2 "improvements" to their living benefits. In both instances, these improvements came with lowered their guaranteed annuitization rates. I've heard people talk about these great improvements, but nobody mentioned the annuitization rates. This tells me that the people selling these products don't have the understanding that they should. The "improvements" tend to increase the worst case scenario at the same time that they increase the odds that this worst case scenario is exactly what the client will get. TANSTAAFL (I'm not anti-VA. I like them in many instances for 401(k) rollovers.)Perhaps I’m missing something, but I didn’t think we were talking about annuitization rates. If I’m going to annuitize something I’m going to use a SPIA, not a VA. None of the VAs I use with my clients, mostly with 401K rollovers like you do, are going to be annuitized. In fact I don’t know that I’ve ever even spoken with the wholesaler about annuitization. So, I guess you’re right in what you said.
WOW!!!!..........I just got off the phone with a SunAnerica Rep. You guys are right, and I apologize Spiff. That is a strong income story and that arrow is going in my quiver. Thanks. As i said earlier i struggle with my income now clients, but this makes sure they get a raise in income every year for 15 years. WOW!!! I feel ready to steal some clients from the anti annuity crowd in town!
If you like that story you can also look at Hartford’s latest version on a theme. They are now giving clients the ability to give themselves a raise every 5 years, basically for the rest of their lives. Their living bene used to be based on how old clients were when they took their first check. If you were 65 it was say 5.5%. If you waited until 70 you got 6% and so on and the only way your income would go up is if you got a step up in benefit from the market.
Now they're saying that on 5 year birthdays clients can get .5% higher income for the next 5 years. So, if the client starts income at 60 he gets 5%, when he turns 65 he gets 5.5%, 6% at 70...until age 90 where it caps. If clients can wait 5 years before taking the first withdrawal, they get those raises automatically. If they take income immediately, they have to request them, but they're still available. That's a pretty powerful story for your income now clients. And before anon jumps in again, when I talk with clients about these riders I tell them point blank that there is a possibility that they will exhaust all of the contract dollars and only be getting the income base dollars because they are paying extra for that income guarantee. So, it's not appropriate for all of their money, but for a portion that they want some guarantees on either idea is a great one.Perhaps I’m missing something, but I didn’t think we were talking about annuitization rates.
We weren't talking about annuitization rates, but you are missing something simply because we should be talking about annuitization rates. Spiffy, I'm not saying not to sell these products. I sell them. I just don't think that they work for an "income now" client. They work for an "income later" client, but only to the extent that the guarantees improve investor behavior. There's no free lunch. Unless the insurance company is trying to be less profitable, every enhancement must be accompanied by an equal detraction. They advertise the enhancements and bury the detractions. If I'm going to annuitize something I'm going to use a SPIA, not a VA. If you are going to annuitize something TODAY you are going to use a SPIA and not a VA. None of the VAs I use with my clients, mostly with 401K rollovers like you do, are going to be annuitized. Why not? Ex. You have a 60 year old married client. He doesn't need income today. He buys a VA. His goal is simply to have enough money so that he and his wife can live happily ever after. His wife dies in 5 years years. At age 70, he wants to start taking money. His goal is to have the biggest possible guaranteed income stream and he doesn't have a desire to leave money behind. Annuitization may make lots of sense. My point is that the product may not be bought with the specific intent of annuitization, but we don't have a crystal ball. In fact I don't know that I've ever even spoken with the wholesaler about annuitization. So, I guess you're right in what you said. Wholesalers usually understand the product. They intentionally don't talk about the annuitization rates. Look at the marketing material. There is no mention of annuitization rates. Look at a prospectus. Again, there is no mention of annuitization rates. The only way to find the annuitization rates is to look in an actual contract. Heck, I just received some producer only marketing material from an insurer and in small print it mentioned a "change" in the annuitization rates. They couldn't even bring themselves to say that they lowered the rates. The insurance company has to be profitable. They won't give a benefit that causes them to make less money. If they can, they want to give a benefit that will allow them to be more profitable. A selling point of VA's should be guaranteed annuitization rates. In other words, if you buy a policy today and annuitize it 25 years from now, the annuitization factors are guaranteed in the contract. So, if people start living to be 125 or if interest rates are 1%, that won't negatively impact someone who buys a contract today. Instead, what has happened is that everytime that the living benefits have been "enhanced", the annuitization rates get worse. What this does is increases the chance that if the client is taking their 5% (or whatever else based upon the contract), they have a greatly increased chance of only being able to get this amount. Let me give a made-up example. (Don't anyone bother telling me how wrong the numbers happen to be.) A SPIA for a 72 year old man has a annuity factor of 9.8. This means that $100,000 would pay $980/month. In older VA products, the annuity factor was 8.8. This means that age 72, the insured could annuitize and get $880/month (for every $100,000). Then VA's started having living benefits. With each improvement, the annuitization factor has dropped. Maybe at first, it was 7.5, and then it was 6.5, and now it is 4.6. Why is this so important? Your 62 year old client buys some sort of VA with a fancy GMIB. It guarantees that the client can always take 5% a year and their GMIB value will stay the same. We should be able to agree that in doing this, the contract value has an excellent chance of decreasing since we are talking about a product that costs 3%. 10 years later, the client is still taking out 5% and the GMIB value is still $100,000. The contract value has dropped to $60,000. If your now 72 year old client needs income, he only has 4 real choices. 1) Continue taking the $5000/year 2)take the $100,000 GMIB value and annuitize it 3)Take the $50,000 and run. 4)Take the $50,000 and annuitize it. If the annuitization rates in the contract were based upon mortality experience like SPIA rates, the payout (using my wrong numbers) would be in the neighborhood of $11,000 + a year. Instead, they artifically lower them. Therefore, the client is only going to get in the neighborhood of $5000 if it gets annuitized. It is very possible that he'd get more money if he took his $50,000 contract value and bought a SPIA. The insurance company is giving with one hand and taking away with the other. Nobody knows this because nobody bothers to read the actual contracts!Let me try a much simpler response on this. If someone has a GMIB type living benefit and the investments are really poor, the worst case scenario is to either take the 5% (or whatever is guaranteed) or to annuitize the contract.
Ex. Contract starts at $100,000. Client keeps taking out $5000 and the investments suck causing the contract value to go all the way to zero. However, the GMIB stays at $100,000. The client can do whatever is better. 1)Annuitize the $100,000 using the rates guaranteed in the contract or 2) Keep taking the $5000. (There is another company that does the same thing, but they allow 6% instead of 5%. So we assume, that this contract must be better since the client can take $6000 and the GMIB value will stay at $100,000.) Sometimes, choice 1 will be better. Sometimes choice 2 will be better. Choice 1 is roughly the equivalent of having an annuity payout factor of 4.0. If the company at a certain age has a payout factor of 5.2, the client will take this option instead and get $520/month. With the company with the "better" GMIB, they will have worse annuity factors. Choice 1 will be roughly the equivalent of having an annuity payout factor of 4.9. But at the same age, the payout factor of their annuitization tables may be 5.1 instead of 5.2. This means that if the client takes this option they'll get $510/month. The worst case scenario with the "better" GMIB is actually worse! Don't sell GMIB benefits without understanding annuitization factors. GMIBs sound good, but often, making them "better" does nothing to improve the worst case scenario for the client. We are not helping our clients by allowing the wholesalers and the insurance companies to keep us in the dark. We're being kept in the dark intentionally.[quote=anonymous]Let me try a much simpler response on this. If someone has a GMIB type living benefit and the investments are really poor, the worst case scenario is to either take the 5% (or whatever is guaranteed) or to annuitize the contract.
Ex. Contract starts at $100,000. Client keeps taking out $5000 and the investments suck causing the contract value to go all the way to zero. However, the GMIB stays at $100,000. The client can do whatever is better. 1)Annuitize the $100,000 using the rates guaranteed in the contract or 2) Keep taking the $5000. (There is another company that does the same thing, but they allow 6% instead of 5%. So we assume, that this contract must be better since the client can take $6000 and the GMIB value will stay at $100,000.) Sometimes, choice 1 will be better. Sometimes choice 2 will be better. Choice 1 is roughly the equivalent of having an annuity payout factor of 4.0. If the company at a certain age has a payout factor of 5.2, the client will take this option instead and get $520/month. With the company with the "better" GMIB, they will have worse annuity factors. Choice 1 will be roughly the equivalent of having an annuity payout factor of 4.9. But at the same age, the payout factor of their annuitization tables may be 5.1 instead of 5.2. This means that if the client takes this option they'll get $510/month. The worst case scenario with the "better" GMIB is actually worse! Don't sell GMIB benefits without understanding annuitization factors. GMIBs sound good, but often, making them "better" does nothing to improve the worst case scenario for the client. We are not helping our clients by allowing the wholesalers and the insurance companies to keep us in the dark. We're being kept in the dark intentionally.[/quote] Excellent post! Out of curiosity, which VA and which income/withdraw rider do you use? And why? Thanks!I’m going to stay mum on the specific VA. My only reason is that I feel that talking company specifics could compromise my anonymity. Let me just say that since the guarantees are only as good as the claims paying ability of the insurance company, I do believe that company strength matters if one is using a guarantee.
I use a GMAB more often than a GMIB or GMWB rider. A GMAB is less expensive so it will always give the client a greater contract value. Based upon the low guaranteed annuitization rates in the contracts and looking at current SPIA rates, A GMIB will only give more future income than a GMAB if the contract averages a rate of return of less about 3%. If SPIA rates increase, and they will if interest rates increase, it is possible that a GMAB will give more income than a SPIA regardless of contract performance. The only time that I think that a GMIB makes more sense than a GMAB is if someone wants income now. However, I think that if someone wants income now, a VA is not a good choice for them.[quote=the word]
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]
First of all, I am a VA guy. My basic business model is to rollover 401(k)'s into VA's. That shit is easy and it pays well. I struggle with my income now clients, like it seems most here do.
That being said, i was interested in your comments about the Polaris annuity because that sounds like a pretty strong income story. An income story better than i have seen on any other VA. It sounded to good to be true. Upon further research it was to good to be true.
As with most VA's, the income credit is turned of once you take a w/d. So, you are not going to be taking a 5% w/d and be credited with 2%. You are going to be taking a 5% w/d and get what your subs give you. If you have been selling this product as you described above, you may need to do some ass covering right now. That is a total misrepresentaion of that product, and quite frankly a slam dunk lawsuit. Now, i did do some quick research, so i may be off base. But i believe i am correct. Not trying to bash, just inform. [/quote] So if the annuity guarantees are only as good as the company issuing them, how do you feel about this product given AIG's current state? Apparently, tThe private funders have left the table...anon - great post. It's still early and the caffeine and sugar from my Coke haven't quite hit the system yet, so I'm still digesting everything you said. I will agree wholeheartedly with you that for income now clients, VAs are not the best alternative. I don't typically use them for that. It's usually income later clients who hear about them.
Now, to snagg's comment about AIG. If my client's money was invested directly with AIG, like some of my GMAC or LEH bond holders, I'd be more upset. However, SunAmerica is the company making good on the Polaris contract's guarantees, not the parent company AIG. AIG is undoubtedly struggling right now, but SunAmerica is not. In fact they are the most profitable part of AIG. The only issue I see is who is going to own SunAmerica a year from now. It may or may not be AIG. I'm not concerned at all about SunAmerica and therefore not concerned at all about the annuity and it's guarantees.You're welcome. I really want to make this as easy as possible to understand, but I'm struggling a little bit. Let me make a third run at this. For "income later" clients, the maximum amount of guaranteed minimum income is going to be based upon two factors.
Factor #1: How is the income based determined? Factor #2: How much income can be taken from this income base? With Factor #2: The greatest amount of guaranteed income that can be taken is the larger of either what can be received by annuitizing the income base or some set guaranteed %. The annuitization usually leads to more money. The more that Factor #1 is guaranteed to grow, the worse that the company makes the annuitization rates. Since the annuitization rates is usually what governs the worst case scenario because annuitization rates are usually higher than the guaranteed %, the increasing of the guaranteed % that one can remove actually causes the worst case scenario to get worse instead of getting better. Ex. (again ignore whether the numbers are correct) Product A: Older 5% GMIB where one couldn't remove money and keep GMIB base the same versus Product B: New GMIB for 6% where one can remove money and keep GMIB base the same or even have it grow and if nothing is touched after 10 years, they'll make it 7%. First of all, if the market is good, Product A will be better because it is less costly and the guarantee, in hindsite, doesn't matter. If we start with 100,000 and if the market sucks, in 10 years, product A has a contract value of $50,000 and a GMIB value of $163,000 Product B has a contract value of $48,000 (greater fees) and an GMIB value of $200,000. What's better? We don't have enough info. It depends on the annuitization rates. I guarantee that Product A has better annuitization rates. Let's say that the guy is now 75 years old and the annuitization rates in Product A for a 75 year old are 8.1. This means that if he annuitizes, he has a guaranteed monthly income of $163 (GMIB value in thousands) x 8.1 (annuitization rate) = $1320 In Product B the annuitization rates are 6.5. $200(GMIB value) x 6.5 (annuitization rate) =$1300 or alternatively, he can keep taking 6% and get $1200/month of income.[quote=anonymous]I’m going to stay mum on the specific VA. My only reason is that I feel that talking company specifics could compromise my anonymity. Let me just say that since the guarantees are only as good as the claims paying ability of the insurance company, I do believe that company strength matters if one is using a guarantee.
I use a GMAB more often than a GMIB or GMWB rider. A GMAB is less expensive so it will always give the client a greater contract value. Based upon the low guaranteed annuitization rates in the contracts and looking at current SPIA rates, A GMIB will only give more future income than a GMAB if the contract averages a rate of return of less about 3%. If SPIA rates increase, and they will if interest rates increase, it is possible that a GMAB will give more income than a SPIA regardless of contract performance. The only time that I think that a GMIB makes more sense than a GMAB is if someone wants income now. However, I think that if someone wants income now, a VA is not a good choice for them.[/quote] Hey anonymous, I just ran the numbers and you're completely correct. I use a worst case and best case scenario with both the GMAB/SPIA vs the GMIB+ and the SPIA would beat the GMIB+ annuitization in either outcome. The only time that I think that a GMIB makes more sense than a GMAB is if someone wants income now. However, I think that if someone wants income now, a VA is not a good choice for them. Can you explain that to me? Cause I figured if the client wants income now, they would be stuck with the guarantee of 5/6% since there is no more upside potential. Wouldnt' a SPIA give a higher payout starting Day 1?Can you explain that to me? Cause I figured if the client wants income now, they would be stuck with the guarantee of 5/6% since there is no more upside potential. Wouldnt' a SPIA give a higher payout starting Day 1?
Well, first of all, a GMAB is useless for a client who wants income now. If we compare a SPIA to a GMIB for income, it depends. (Of course, there is a big difference whether we are talking about a 70 year old man vs. a 60 year old woman.) The GMIB still has lots more upside potential.
Ex. 60 year old female; $100,000 investment; SPIA pays $X; GMIB allows her to take $6000/year and GMIB stays at $100,000.
What happens in 10 years? The SPIA will continue to pay $X. The GMIB can continue to pay $6000 or it can be annuitized based upon the guaranteed contractual values which may or may not be more than $6000 or the contract vaue can be used to purchase a SPIA which may pay more or less than annuitizing the GMIB and will be more or less than the $6000. If the investments do well and the contract value doesn't lose too much, it is very possible that the GMIB + future annuitization will lead to the most income. It's just that the $5000/$6000 is a very real possibility.
[quote=anonymous]
Can you explain that to me? Cause I figured if the client wants income now, they would be stuck with the guarantee of 5/6% since there is no more upside potential. Wouldnt' a SPIA give a higher payout starting Day 1? Well, first of all, a GMAB is useless for a client who wants income now. If we compare a SPIA to a GMIB for income, it depends. (Of course, there is a big difference whether we are talking about a 70 year old man vs. a 60 year old woman.) The GMIB still has lots more upside potential. Ex. 60 year old female; $100,000 investment; SPIA pays $X; GMIB allows her to take $6000/year and GMIB stays at $100,000. What happens in 10 years? The SPIA will continue to pay $X. The GMIB can continue to pay $6000 or it can be annuitized based upon the guaranteed contractual values which may or may not be more than $6000 or the contract vaue can be used to purchase a SPIA which may pay more or less than annuitizing the GMIB and will be more or less than the $6000. If the investments do well and the contract value doesn't lose too much, it is very possible that the GMIB + future annuitization will lead to the most income. It's just that the $5000/$6000 is a very real possibility.[/quote] I agree, for younger clients that want income right away, I would probably have to go with the GMIB. Btw, I did run some numbers across the board and it seems that SPIAs would beat the GMIB payout in worst case scenarios and realistic case scenarios. However in extreme bullish markets (and I say this because performance has to be so aggressive that it beats out the fees and still comes on top 10-15%), the GMIB would be better for younger clients that take income right away. Why not then just buy a fixed annuity instead of a GMAB and then exchange it for a SPIA when the client is ready to take income? GMAB riders limit the VA into very conservative models, therefore killing ANY upside potential. Buy a fixed annuity for 5% and then exchange it for a SPIA to begin an income stream? Thanks for the talk anon, I really appreciate it.