Metlife Variable Annuity Qs

[jimcrawford01]

A friend is considering a Metlife PrimElite IV Variable Annuity.

The agent trying to sell this thing states that it has a guaranteed 5%, even in years of market downturn. I'm skeptical.

I had always thought that Variable Annuities were to be avoided due to excessive fees.

An SPIA is more my style but this agent has the ear of my inexperienced friend, hence my concern.

Anyone here have any experience with this?

[Mel Lindauer]

A friend is considering a Metlife PrimElite IV Variable Annuity.

The agent trying to sell this thing states that it has a guaranteed 5%, even in years of market downturn. I'm skeptical.

I had always thought that Variable Annuities were to be avoided due to excessive fees.

An SPIA is more my style but this agent has the ear of my inexperienced friend, hence my concern.

Anyone here have any experience with this?

The guaranteed 5% probably only comes into play if your friend annuitizes the annuity at an elderly age. And that 5% is the payout percentage which includes a return of your own money. The value of the annuity prior to annuitization would be based on the performance of the underlying sub-accounts chosen by the investor.

[Mel Lindauer]

Just googled the product.

1. It's high cost.
2. There's an 8 year surrender period that starts at 8%. Can't get his money back without paying a surrender fee until the 9th year.
3. The prospectus is 112 pages of legalese that I'm positive your friend won't read or understand. There's also a 276 page Statement of Additional Infomation.
4. As I guessed, the 5% appears to be the payout percentage of the value when the product is annuitized later in life and not the guaranteed minimum return.
5. The selling agent gets a nice 6% commission and that's about the only thing I saw that's guaranteed.

https://www.metlife-edelivery.com/summa ... 7648413D3D

[Oicuryy]

4. As I guessed, the 5% appears to be the payout percentage of the value when the product is annuitized later in life and not the guaranteed minimum return.

5% is the roll-up rate on the GLWB, see page 41 of the prospectus. 5% is also the annual withdrawal rate under the GLWB (page 40).

It is unlikely that 5% would be the annuity payout rate except by chance. The contract will have a table of minimum payout rates based on age, sex and annuity option. Actual payout rates may be higher at the time of annuitization (page 34).

"We do not guarantee the investment performance of the variable annuity portion. You bear the full investment risk for all amounts allocated to the variable annuity portion." (page 14)

Ron

[Frugal Al]

Variable annuities are expensive, misleading, and confusing. There were some very good deals on some of the rider guarantees a few years back--most of which the insurance companies have since squirmed out of. As Mel says, the high costs, surrender fees, and commissions make these a non starter as an investment. They are being sold as a "safe" harbor because people are frustrated by low interest rates and a volatile stock market. Tell your friend to beware the high cost of guarantees. Don't Be a Victim of Variable Annuities http://www.expertlaw.com/library/financ ... ities.html

[WHL]

My father was sold 500k of variable annuities. Bunch of garbage. I'm working through how to get out of them, but the real damage is done - he lost the huge market gains of the last three years

[nisiprius]

This sounds broadly similar to a product I looked at some time ago. I had called an agent asking about SPIAs. He blandly assured me he knew all about them and would be glad to send me a quote, but he didn't recommend them because "you understand that you don't own anything, all you get from them is (feh) income stream," and that he had something much better, and would I even be willing to consider it if he sent me details. Figuring you can always learn something I said "yes" and I received a half pound package that cost him $4.95 to mail. It was full of guarantees and language like "if the market does well you can give yourself a raise."

There was indeed an option that provided a "5% guarantee." It was a level dollar payout, not inflation adjusted. As nearly as I could tell, the whole thing was very similar to taking a traditional investment portfolio and using about 2/3 of it to purchase an SPIA. If the remaining 1/3 of it did well, you could in effect use the investment growth to make additional incremental SPIA purchases.

It was not at all like guaranteeing 5% return on the investment portfolio.

Ask your friend if they have the Prospectus and have actually read it through. I would also suggest, I am dead serious about this, I would have actually done this myself if I'd thought the product was interesting, to write down brief summaries of how they think the product works and what is actually being guaranteed, and ask the agent to write "this is correct," initial, and date it. If it's an important feature that is influencing their decision to buy the product, they should be sure they understand the feature, and the only way to be sure of this is for them to write down how they think it works and have the agent agree that what they've written down is correct. Human verbal communication being what it is, even in a completely honest situation this is a good technique for assuring understanding. It can also be a good way to smoke out handwaving BS.

Oh, that agent never did send me the SPIA quotation he'd promised to send.

[jimcrawford01]

Thanks to all. Your replies are appreciated.

You have confirmed my beliefs. Now, I will try to persuade my friend.

I have read the glossy pamphlets and the Prospectus but still didn't have a good command of the info. They certainly do not make it easy!

I do have a plan. We are to meet with the agent next week.

I also will meet with another agent on my own.

Mr Bogle taught me long ago that you should not invest in something you do not understand. While the annuity is an INSURANCE CONTRACT, the variable portion makes it an investment.

So, next week, we shall see how much I understand and how successful I am in turning my friend into a BogleHead.

I will report back. Thanks again!

Jim

[ResNullius]

I would not try to talk your friend into or out of the variable annuity or becomming a BH. The most I would say is that you don't personally care for variable annuities and that you are a BH. Leave the rest to him. As soon as you talk him into anything, something will happen to lower the value of his portfolio, and then he'll blame you. Most folks don't have a buy and hold mindset, more of an instant gratification point of view.

[nisiprius]

...I have read the glossy pamphlets and the Prospectus but still didn't have a good command of the info. They certainly do not make it easy!...

I would emphasize that to your friend, who will probably be asked at some point to sign their name to a statement that they have read and understood the Prospectus. Ask your friend whether they are prepared to sign their name to that if all they have actually done is listen to a verbal summary from an agent. And ask how sure they are that they actually heard and understood everything the agent said. Oh, and there is probably something to sign that says that nothing the agent says actually matters anyway, that the agreement is what's printed in the forty-page fine-print onionskin booklet. If the prospectus says "black" and the agent says "white," it doesn't matter whether the agent meant to mislead or was honestly mistaken... it's black, and nothing can be done about it.

[Mel Lindauer]

...I have read the glossy pamphlets and the Prospectus but still didn't have a good command of the info. They certainly do not make it easy!...

I would emphasize that to your friend, who will probably be asked at some point to sign their name to a statement that they have read and understood the Prospectus. Ask your friend whether they are prepared to sign their name to that if all they have actually done is listen to a verbal summary from an agent. And ask how sure they are that they actually heard and understood everything the agent said. Oh, and there is probably something to sign that says that nothing the agent says actually matters anyway, that the agreement is what's printed in the forty-page fine-print onionskin booklet. If the prospectus says "black" and the agent says "white," it doesn't matter whether the agent meant to mislead or was honestly mistaken... it's black, and nothing can be done about it.

I don't think that can be emphasized too much. It's the legal contract you sign that matters, not what the agent said.

[jimcrawford01]

I would not try to talk your friend into or out of the variable annuity or becomming a BH. The most I would say is that you don't personally care for variable annuities and that you are a BH. Leave the rest to him. As soon as you talk him into anything, something will happen to lower the value of his portfolio, and then he'll blame you. Most folks don't have a buy and hold mindset, more of an instant gratification point of view.

ResNullius

I have to disagree.

Helping friends is what friends do, despite the risk.

Proselytizing BH is also what friends do, despite the risk.

You are correct that there is a risk.

Jim

[jimcrawford01]

Thanks to all who responded.

My friend and I met with the Primerica rep who was selling the MetLife Primelite IV Variable Annuity. I was NOT impressed. At times, it seemed that I might know more than she did. THAT is a scary thought. The first five minutes did not go well so she called her boss and put him on speakerphone. He was more knowledgeable. Still not impressive.

The most telling response was to the question, "What happens if MetLife goes out of business?" They stated that the $$ may be at risk but were not certain but would get back to me on that while mumbling something about "reinsurance" and the fact that no one ever asks that question and that such a thing would never happen. I'm sure ratings companies were bandied about. NOT so much.

I met, independently, with a different financial planner type a few days later. He told me to forget the Variable Annuity. He pushed an Indexed Income Annuity.

You can guess where this is going. Fortunately, my friend has been forced to read and learn. If her decision is to purchase a VA, so be it. There is only so much you can do.

I, too, have learned a lot. And I have reinforced the belief in the virtue of an SPIA.

Jim

[KirkSpano]

The 5% rate is attached to a guaranteed minimum withdrawal benefit. In short, most variable annuities (and equity indexed annuities now) offer a "shadow" account which is used to generate income at some point in the future. The 5% does not apply to account value. How could it, 10 year treasuries, a large portion of insurance company portfolios, are not close to that.

There are a handful of well-priced variable annuities out there that allow people to be invested in the stock and bond markets while knowing there is a minimum return on the income value of the annuity. Most VAs however, are priced at about 3-3.5% all in, which virtually negates any benefit from the income rider. A few years ago the income guarantees were based on 7%, however, with lower interest rates today, there is little benefit available from income riders. Also, since 2008, very few companies actually provide much investment flexibility anymore, instead forcing money into mediocre asset allocation programs. To my knowledge, only Jackson National still gives the investor much fund flexibility.

A VA or EIA is never a good solution for an entire portfolio. The VAs and EIAs with income riders theoretically can work for a small portion of a portfolio that is supposed to generate base income. With interest rates so low though, the same logic applies to annuities as to bonds. Low interest rates, stay shorter duration, i.e. not annuities that lock you in for a very long time. The "lifetime" income riders are a play on fear at this point and an inflation trap as people are getting locked into the lower corresponding rates.

To be clear, because long-term interest rates are so low, using annuities that are supposed to be kept for life is a bad deal as you are locking in the low interest rates and will assuredly lose to inflation over time that way. For most people, an annuity only works for intermediate term income needs. What I will use an annuity for is to provide income for a period of time - never for life - which allows my security investments time to grow. For example, I might use a SPIA with a ten year period certain which allows my stock market investments ten years to sit and grow. Or, I might use an equity index annuity that is deferred from 3 to 5 years and then provides ten years of income. Once again creating a laddering effect so that stock market investments can sit and grow undisturbed.

For most people, using an annuity boils down to comfort with the stock and bond markets. Can they sleep at night with all of their money in the markets? If not, then an annuity has a small bridging role due to the guarantees. Right now, SPIA and EIA are the way to go. VAs are not working due to low interest rates and investment restrictions.

As for the safety question re insurance companies, it is important to know that insurance companies have actually been remarkably safe. Even during the great depression there was never a claim that wasn't paid for financial reasons. AIG paid all of their claims after 2008 collapse. The industry is proportionally self-insured in most states and there is also reinsurance on top of reserve requirements that are far in excess of what banks have to abide. So, the safety question really is a non-issue in most cases for absolute return of dollars. Companies that go under will generally be paid out at contractual minimums however, thus, it is important to know what those contractual minimums are. Stick with "A" rated or better companies and there is rarely a problem. It is far more likely to lose money in the markets than due to the insurance company going bust.

I have not sold a variable annuity in 3 years since the benefits have been watered down due to the low interest rate environment and the investment flexibility being taken away.

Kirk Spano
Owner Bluemound Asset Management
Owner Wisquote Insurance Services
Columnist MarketWatch.com

[EternalOptimist]

I would go broke before I ever bought an annuity