All the upside of the S&P with 10% downside protection "Free"?

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TooLegit2Quit
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All the upside of the S&P with 10% downside protection "Free"?

Post by TooLegit2Quit »

Hey all, I've heard about the bogleheads for years and finally got around to registering as i'm doing due diligence for my father in law that is nearing retirement. He cashed out of the market around mid-March, but knows he has to get back in at some point. He asked me to look at the Lincoln Level Advantage - variable indexed annuity B-shares. https://fulfillment.lfg.com/CF/LFG/EF/1 ... 4_VIEW.PDF

Initially, based on the blanket advice from white coat investor's teachings, I told him to "run" when his advisor mentioned annuity. Two weeks go by and his advisor again implored him to really do his homework on this policy. He asked me to take a look as he was sold on it. After spending numerous hours digesting it all and even having a 45 minute conference call with the Financial Advisor and 2 associates from Lincoln FG, I am actually sold on this product for not only my father in law, but for myself. I will also mention that I did a search in the forum block for this product and saw a thread about this product from 2018, but the policy that a responder had a negative view of was not the same as what the poster asked about and the other comments were just general advice about annuities, not specific to this one.

So anyway, here goes. Annuities are a ticking time bomb due to their earnings being taxed at ordinary income and most are fee-laden. However, if using a Roth IRA, the ordinary income tax concerns are null and void. So that leaves fees to worry about.

The plan: Invest 25k (that's the minimum) into an S&P proxy that has completely zero expense ratio, and the account has zero fees for 6 years. elect for NO RIDERS whatsoever. There are actually 3 other proxys that you can invest in that also have zero fees.
He would get UNCAPPED (aka unlimited) point for point tracking and upside of the S&P 500 (SPX) and 10% downside protection. The money would be buy and hold the index for 6 years. The account value downside protection would be based off the final value on the account after 6 years. So if the S&P drops up to 10% on the 6 year anniversary from what the start value was, Lincoln absorbs the loss and your account is even. If the S&P is down more than 10% after 6 years, then you absorb the rest of the loss. You get the unlimited point for point gains of the S&P in your account.

I had a conference call with these guys and read about 25 pages on the SEC site trying to sniff out any fees. I even recorded the call. They said under my scenario, no riders, s&p fund, no early surrender aka I buy and hold the S&P for 6 years, there are literally zero fees, 100% point for point tracking of the s&p with uncapped upside and 10% downside protection. They said they make their money when people want to diversify from the straight index and opt to invest in sub-accounts with different funds that have fees of 1+% and add riders.
They also said at the end of the 6 years you can withdraw the money free and clear, no surrender fees, account closure fees, etc no requirement to annuitize. If this was held in a Roth IRA, can anyone tell me why a buy and hold index investor like myself wouldn't jump on this over something like VTI with a .03% expense ratio (and no downside protection)? It seems too good to be true and I've got written and audio confirmation over and over that there are no fees. I have no interest in annuitizing this at the end, i'd just either buy another term or move into something else...

Before I figure out what equities to sell in my self-directed trading account to free up 25k cash to get rolling on this, I just wanted to see if anyone has ever looked into this specific policy? They also have 20% downside protection but a 150% upside cap for a 6 year term which would offer a nice cushion with this volatility.

Thanks so much for sticking with me and I look forward to hearing any responses.
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FiveK
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by FiveK »

TooLegit2Quit wrote: Thu Apr 23, 2020 1:21 am [If i]t seems too good to be true....
Most can complete the sentence.
actuallyxy
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by actuallyxy »

When you say that it tracks the S&P500, is that with or without dividends? My understanding is that annuities often track the S&P500 but without dividends, and that's one of the ways they get you.

Dividends may represent 50% or more of your returns, and not only that but they are the least volatile portion of your returns. They are certainly worth a lot more than 10% downside protection on the capital gains.
German Expat
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by German Expat »

Looking at your information sheet it states:

The indices used are price indices and do not reflect dividends paid on the underlying stocks. The level of the index may
reflect the deduction of an annual fee. See prospectus for details.

So no dividends, that is already a 2% 'fee' per year. Do you have the full prospectus to see if there is another fee ('may')?

You stated yourself: it seems to be too good to true ...

Those companies are not charities and just add up the time they already spent on you selling you the product. I assume their advisors do not work for free so this money must come from the people that sign up for it :D
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by oldcomputerguy »

actuallyxy wrote: Thu Apr 23, 2020 3:00 am When you say that it tracks the S&P500, is that with or without dividends? My understanding is that annuities often track the S&P500 but without dividends, and that's one of the ways they get you.

Dividends may represent 50% or more of your returns, and not only that but they are the least volatile portion of your returns. They are certainly worth a lot more than 10% downside protection on the capital gains.

Bingo. From the linked fact sheet:
The indices used are price indices and do not reflect dividends paid on the underlying stocks.
To see how big a deal this is, I did a rough back-of-the-envelope calculation using Portfolio Visualizer and looking at returns for VFIAX (Vanguard S&P 500 Index). The Portfolio Visualizer graph shows an initial investment of $10,000 growing to $28,582 over ten years, a total gain of 188%. Looking at just price appreciation of the S&P 500 index, on the other hand, shows that over the same period the price of the Index grew from approximately 1116 to 2799, a total gain of just 150%. In other words, by foregoing reinvestment of dividends you lose a total of 38% in gains, or as a proportion of total gains you give back one-fifth of your total return. Bear in mind that this was happening over an unprecedented bull market for stocks, which means the price return was unusually high. In other time periods, the calculation likely would be worse.

OP, have you obtained and read the Prospectus for this offering? That is where everything has to be disclosed. The PDF you link to is a fact sheet, and doesn't tell you everything. This is why they keep referring you to the Prospectus. There is a phone number on the last page where you can call to get a copy. I strongly suggest that you get a copy of the Prospectus, read through it, and understand it completely before you put any money into this plan.

Edited to add: I found a link to an online copy of the Prospectus.

https://vpx.broadridge.com/GetContract1 ... =53407L325

This jumped out at me:
We calculate an Interim Value in the event you take a withdrawal before the end of a term. The Interim Value calculation is not based on the value of the Index. This means that you could have a negative performance, even if the Index Value has increased.
So their claim that your product tracks the Index "point for point" is very misleading. It only does so at the end of a term; if you take a withdrawal mid-term, the value of your investment departs from the Index by a calculation they describe in the document. Please read over that, it's pretty enlightening.
Iridium
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Iridium »

From the top of the second page:
The indices used are price indices and do not reflect dividends paid on the underlying stocks.


So, you are losing the dividend of roughly 1.5-2% / year in order to get a one time 10% after six years, in the unlikely event the market is down over a six year period.

Why the excitement? Even if you weren't losing the dividend and this was free downside protection, the downside protection is so modest, it wouldn't change my decision making at all. I mean, having an extra 10% after 6 years is nice, but it would likely be tiny relative to the normal swings of the investment (note that 6 years at 7% expected return has your investment increasing by 60%). Honestly, when I first opened the document, I thought it would use a return index, and you were getting paid modest downside protection in return for accepting the credit risk that the insurance company would make good. Under those terms, I'd be neutral on the product. Giving up 9-15% of your return for 10% downside protection and to avoid paying 0.2% in ER makes no sense. How does the investment manager even sell that? What scenario did s/he put in front of your father that makes this sound like a good idea? Also, how is an illiquid equity analog a suitable investment for someone who has a history of panic selling equities?
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Alex Frakt »

They said they make their money when people want to diversify from the straight index and opt to invest in sub-accounts with different funds that have fees of 1+% and add riders.

They lied to you. They make the majority of their money by keeping the dividends.

IMO, that is reason enough to ignore everything else they say and walk away. I would not trust an advisor who wanted to sell you this thing either.
actuallyxy
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by actuallyxy »

Alex Frakt wrote: Thu Apr 23, 2020 3:38 am
They said they make their money when people want to diversify from the straight index and opt to invest in sub-accounts with different funds that have fees of 1+% and add riders.

They lied to you. They make the majority of their money by keeping the dividends.

IMO, that is reason enough to ignore everything else they say and walk away. I would not trust an advisor who wanted to sell you this thing either.
I would also urge your father in law to fire his advisor.
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TooLegit2Quit
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by TooLegit2Quit »

Hey guys, I had actually asked several of these questions to the Lincoln guy earlier this week and here was his response.

Regarding the interim value being calculated midterm- there are also surrender fees and no downside protection if not held the entire 6 years...so let’s just assume the product is held the entire 6 years to not incur a ton of charges.

On to the questions I posed to him and his answers:

Q: If you were to invest in the S&P Price return index and choose no riders, no guarantee of return of principal death benefit, would a hypothetical 50% S&P positive return correlate exactly to a 50% return in the account or how would the lack of dividends cause a lag in performance? Are there any administrative, management, or ANY other fees deducted in any of the main 4 indexes? –
A:There are no explicit fees for investing in the index account and include a death benefit at no additional charge. Yes, the Lincoln index is a perfect proxy or match to the S&P 500, including reinvested dividends (although Lincoln will not pay out dividends generated by index – they are reinvested).

So he explicitly states that the dividends are reinvested.


Q: One page 2 in the highlights it says "there are no explicit product charges on the money you invest in the indexed account, but on page 7 under index options it says "the level of the index may reflect the deduction of an annual fee". See prospectus for details. What is the annual fee or other fees? -
A: The annual fee referenced is a standard Mortality & Expense charge for annuity contract and is only applied if the funds are invested in VARIABLE subaccounts. Otherwise, there are no explicit fees for investing in index accounts.

Keep in mind, he would not be investing in a sub account, only an index account.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by fire5soon »

I don't have a lot of time to respond so I'll keep it short: Run away as fast as you can.

These are considered alternative structured products and have even more supervision and scrutiny over them than even the run of the mill bad idea annuities. There are many reasons not to buy them and several have already been mentioned.

Another reason I'll mention briefly is their crediting strategies. If you try to withdraw any or some if the money within those first six years you not only pay penalties but they also withhold a percentage of the "earnings" you've made as well since you didn't hold to term. If you ask the advisor to explain the mechanics of this in detail to you they will either lie or stutter their way through it.

It's been said that annuities are sold, not bought. Structured annuities are designed to fleece you and protect the insurance company, not make you money.

Run.
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TooLegit2Quit
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by TooLegit2Quit »

What scenario did s/he put in front of your father that makes this sound like a good idea? Also, how is an illiquid equity analog a suitable investment for someone who has a history of panic selling equities?
[/quote]

Father in law is petrified of the Bear market and continued losses. He was a victim of the early 2000s bubble burst and lost most of his portfolio being way overweight in dot com stuff. He had a former advisor that shined when that market was hot but didn’t have him invested appropriately for his risk tolerance.

He is actually primarily interested in the 20% downside protection and 150% capped upside in this fund which clearly has room for Lincoln to make money when the upside is capped. He is primarily worried about principal protection but wants to have the upside of a nice s&p return in excess of what a bond fund would bring. Growth isn’t the only objective. That’s why this product seems appealing.

For myself, I was looking at the 10% protection and uncapped upside because I’ve been unable to identify the negative of doing so since they explicitly state there is no fees, dividends are reinvested, and the plan would be buy and hold for 6 years in the Roth (for the tax treatment) and have absolutely no plan to withdraw the money early. No subaccounts, no riders.


Also, nisperus I have it in email writing about the dividends as I copy/pasted the email and I had also recorded the conference call where it is explicitly stated the tracking is exact including dividends reinvested.
actuallyxy
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by actuallyxy »

These companies are forced by regulators to produce a prospectus in order to protect consumers.

Trust what the prospectus states, not whatever drivel their salesmen spout.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by bottlecap »

TooLegit2Quit wrote: Thu Apr 23, 2020 6:14 am
A:There are no explicit fees for investing in the index account and include a death benefit at no additional charge. Yes, the Lincoln index is a perfect proxy or match to the S&P 500, including reinvested dividends (although Lincoln will not pay out dividends generated by index – they are reinvested).

So he explicitly states that the dividends are reinvested.
He explicitly lied. A Price Return Index does not include dividends. The link you provide states it is an S&P 500 Price Return Index, not a total return index.

JT
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TooLegit2Quit
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by TooLegit2Quit »

I just re-read the prospectus for the b-class shares
Indices.

Each Indexed Account references an index that determines the performance of its associated Indexed Segments. These indices are not funds and are not available for direct investment. We currently offer Indexed Accounts based on the performance of the following securities indices:
S&P 500® Price Return Index (SPX). The S&P 500® Index is comprised of 500 stocks considered representative of the overall market. An index is unmanaged and not available for direct investment.


The indices used are price indices and do not reflect dividends paid on the underlying stocks. <—— this.

So, it looks like the prospectus says the Price indices do not reflect dividends paid. If that’s what he’s invested in, then lincoln would have to manually reinvest the dividend and the account value would not be exactly in line with the price index (spx),it would actually be higher?
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by magicrat »

TooLegit2Quit wrote: Thu Apr 23, 2020 7:04 am I just re-read the prospectus for the b-class shares
Indices.

Each Indexed Account references an index that determines the performance of its associated Indexed Segments. These indices are not funds and are not available for direct investment. We currently offer Indexed Accounts based on the performance of the following securities indices:
S&P 500® Price Return Index (SPX). The S&P 500® Index is comprised of 500 stocks considered representative of the overall market. An index is unmanaged and not available for direct investment.


The indices used are price indices and do not reflect dividends paid on the underlying stocks. <—— this.

So, it looks like the prospectus says the Price indices do not reflect dividends paid. If that’s what he’s invested in, then lincoln would have to manually reinvest the dividend and the account value would not be exactly in line with the price index (spx),it would actually be higher?
Lincoln is getting the dividends. You are not.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by FoolMeOnce »

bottlecap wrote: Thu Apr 23, 2020 6:51 am
TooLegit2Quit wrote: Thu Apr 23, 2020 6:14 am
A:There are no explicit fees for investing in the index account and include a death benefit at no additional charge. Yes, the Lincoln index is a perfect proxy or match to the S&P 500, including reinvested dividends (although Lincoln will not pay out dividends generated by index – they are reinvested).

So he explicitly states that the dividends are reinvested.
He explicitly lied. A Price Return Index does not include dividends. The link you provide states it is an S&P 500 Price Return Index, not a total return index.

JT
+1

Ask him again, quoting the price index language in the prospectus. Let us know what he says.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by AlexanderTheMediocre »

TooLegit2Quit wrote: Thu Apr 23, 2020 7:04 am I just re-read the prospectus for the b-class shares
Indices.

Each Indexed Account references an index that determines the performance of its associated Indexed Segments. These indices are not funds and are not available for direct investment. We currently offer Indexed Accounts based on the performance of the following securities indices:
S&P 500® Price Return Index (SPX). The S&P 500® Index is comprised of 500 stocks considered representative of the overall market. An index is unmanaged and not available for direct investment.


The indices used are price indices and do not reflect dividends paid on the underlying stocks. <—— this.

So, it looks like the prospectus says the Price indices do not reflect dividends paid. If that’s what he’s invested in, then lincoln would have to manually reinvest the dividend and the account value would not be exactly in line with the price index (spx),it would actually be higher?
Listen to what everyone is saying and don't invest in sales driven products that are difficult to understand.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by CardioMD »

It seems your position will not be swayed. The advice you’ve been given is sound. Best of luck.

Edit: For clarity, I’m referring to the advice in this forum, not the salesman.
“The stock market is a giant distraction from the business of investing.” -Jack Bogle
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FiveK
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by FiveK »

TooLegit2Quit wrote: Thu Apr 23, 2020 7:04 am So, it looks like the prospectus says the Price indices do not reflect dividends paid. If that’s what he’s invested in, then lincoln would have to manually reinvest the dividend....
No, Lincoln would have to do no more than what they say in the prospectus: credit the account based on the price index only.

Condolences if all these replies are causing cognitive dissonance for you. It's better, however, to recognize now that you were lied to and decide whether you still want to go ahead, vs. realizing six years from now that you were verbally lied to and have no recourse because of what you signed in writing.
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neurosphere
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by neurosphere »

TooLegit2Quit wrote: Thu Apr 23, 2020 7:04 am I just re-read the prospectus for the b-class shares...
Ok, so did I. Or at least, the relevant parts.

And there is no mention of dividends, other than to say they are neither paid to you nor reinvested nor credited to you if you choose the SP500 price index to track.

Just pull up the linked prospectus and "control-F" for the words dividend or dividends.

One option for you is to hire a lawyer to review the prospectus and also the written comments which appear to contradict the prospectus, and get an advance idea of the strength of your case should you wish to sue in 6 years when you find out the prospectus was adhered to. But a better option to realize that you've been given very good, accurate advice here, from people who don't know you and aren't trying to profit off of you.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
actuallyxy
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by actuallyxy »

FiveK wrote: Thu Apr 23, 2020 7:22 am
TooLegit2Quit wrote: Thu Apr 23, 2020 7:04 am So, it looks like the prospectus says the Price indices do not reflect dividends paid. If that’s what he’s invested in, then lincoln would have to manually reinvest the dividend....
No, Lincoln would have to do no more than what they say in the prospectus: credit the account based on the price index only.

Condolences if all these replies are causing cognitive dissonance for you. It's better, however, to recognize now that you were lied to and decide whether you still want to go ahead, vs. realizing six years from now that you were verbally lied to and have no recourse because of what you signed in writing.
Also the amounts you are investing will not make it worth your while to sue.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by cheese_breath »

You stress no fees and zero fees over and over again. No fees doesn't mean free. It just means the salesman is getting his cut somewhere else. In this case it's from the dividends you don't get.
The surest way to know the future is when it becomes the past.
CheckMate404
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by CheckMate404 »

Sounds like a used car salesman.

I’ve seen this go poorly time and time again. All that matters is what’s written down in the contract. Knowing this, it’s up to you if you feel comfortable investing with someone who is explicitly giving you information that’s directly contradictory to the contract you’ll be signing.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by yohac »

TooLegit2Quit wrote: Thu Apr 23, 2020 1:21 am They also have 20% downside protection but a 150% upside cap for a 6 year term which would offer a nice cushion with this volatility.
If I was inclined to look at this sort of thing at all, which I definitely am not, I would find this version more appealing. About the only time in history where the S&P 500 index went up more than 150% in exactly six years was 1994 - 2000, and even then just barely. The only conceivable reason for buying something like this is for nominal protection against a Great Depression-like bear market. But a conservative allocation, heavy in bonds, would almost certainly work better.
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TooLegit2Quit
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by TooLegit2Quit »

I appreciate everyone that took the time to digest this product and what I was told vs what was in the prospectus and the implications of a price return index vs total return index.

To anyone that commented that my position will not be swayed, that’s unfair. In reading everyone’s comments, not every comment was specific to the details of this product. Some comments or hypotheticals were not directly on-point and had to be clarified.

I just emailed their advisor and cc’d my relatives with what the email answer says vs what the prospectus says with regard to dividend treatment and asked them to explain. I will let you know his answer.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by TooLegit2Quit »

cheese_breath wrote: Thu Apr 23, 2020 7:33 am You stress no fees and zero fees over and over again. No fees doesn't mean free. It just means the salesman is getting his cut somewhere else. In this case it's from the dividends you don't get.
You are right. “Free” is not the correct verbiage...it should be “for no fee”. Kind of click-Baitish on my part. I apologize and will try to edit the post header.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by neurosphere »

yohac wrote: Thu Apr 23, 2020 7:44 am
TooLegit2Quit wrote: Thu Apr 23, 2020 1:21 am They also have 20% downside protection but a 150% upside cap for a 6 year term which would offer a nice cushion with this volatility.
If I was inclined to look at this sort of thing at all, which I definitely am not, I would find this version more appealing. About the only time in history where the S&P 500 index went up more than 150% in exactly six years was 1994 - 2000, and even then just barely. The only conceivable reason for buying something like this is for nominal protection against a Great Depression-like bear market. But a conservative allocation, heavy in bonds, would almost certainly work better.
Agreed.

It would be cool if there were a portfolio visualizer like tool that allowed one to model this. For example, find me a stock/bond ratio which never lost more than X% but which returned the highest amount over period Y.
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neurosphere
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by neurosphere »

TooLegit2Quit wrote: Thu Apr 23, 2020 7:49 am I just emailed their advisor and cc’d my relatives with what the email answer says vs what the prospectus says with regard to dividend treatment and asked them to explain. I will let you know his answer.
Note that dividends ARE reinvested for those options which INCLUDE dividends. So don't get fooled by a footnote which says anything about reinvesting dividends. One only gets the dividends if the underlying tracked index/fund includes dividends. Keep us posted!

I'll make a prediction, just for fun. The insurance salesman will make a "yes you are right, but..." kind of comment. Alternately, they'll answer the question like "all dividends are indeed reinvested" without specifying whether the specific index you might choose has any dividends to reinvest. E.g. "all dividends (if any) are indeed reinvested", while leaving out the "if any". :D
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Nate79 »

Strange that there has been a large number of threads on these and similar products all in the last few days. Insurance agents must really be pushing them hard.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by actuallyxy »

Nate79 wrote: Thu Apr 23, 2020 8:03 am Strange that there has been a large number of threads on these and similar products all in the last few days. Insurance agents must really be pushing them hard.
Prices going down, dividends going (relatively) up. Best time to sell them!
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by aristotelian »

I don't understand the appeal. Don't you want downside protection for the drops of *more* than 10%? Why would this be better than a 90/10 allocation with dividends and no cap?
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by nisiprius »

TooLegit2Quit wrote: Thu Apr 23, 2020 6:36 am...Also, nisperus I have it in email writing about the dividends as I copy/pasted the email and I had also recorded the conference call where it is explicitly stated the tracking is exact including dividends reinvested...
Yes, I saw that. I apologize. That's why I deleted the posting I made about it. You must have seen it before I deleted it.

And it is always an awful position when there is a scam artist in between you and a relative, because, yes, the scam artist might well be more persuasive than you. But something good that can be said about this is that at least this is a legitimate product, not a Madoff scheme. Your father-in-law is not likely to lose all his money in it. Your father-in-law is likely to make money in it. Your father-in-law has a decent chance of making more money than he would have made by putting it in the bank, because he is taking some moderate risks. The risks are small, but bigger than he thinks they are. He will likely be compensated for taking those risks, but by less than he should be compensated.

One last-ditch effort. See if you can convince your father-in-law to read the FINRA alert, Equity-Indexed Annuities: A Complex Choice. My boldfacing:
Sales of equity-indexed annuities (EIAs)—also known as "fixed-indexed insurance products" and "indexed annuities"—have grown considerably in recent years. Although one insurance company at one time included the word "simple" in the name of its product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked....

Before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner or other financial professional lots of questions about whether an EIA is right for you.
If you want to be pushy about it, ask the salesman "Please send my father a copy of the FINRA alert, 'Equity-Indexed Annuities: A Complex Choice,' and let's go over it in a conference call." It probably won't work, but your father-in-law should be aware that the industry's own self-regulating body is warning people to be careful.

So we are down to the question of "does the salesman know he is lying?"
WINTHROP: Are you a big liar?
HAROLD: Yes.
WINTHROP: Leave me go, you big liar!
HAROLD: What's the matter? You wanted the truth, didn't you? There's two things you're entitled to know. One, you're a wonderful kid. I thought so from the first. That's why I wanted you in the band.
WINTHROP: What band?
HAROLD: I always think there's a band, kid.
Last edited by nisiprius on Thu Apr 23, 2020 8:23 am, edited 1 time in total.
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HueyLD
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by HueyLD »

Nate79 wrote: Thu Apr 23, 2020 8:03 am Strange that there has been a large number of threads on these and similar products all in the last few days. Insurance agents must really be pushing them hard.
+1.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by FoolMeOnce »

aristotelian wrote: Thu Apr 23, 2020 8:10 am I don't understand the appeal. Don't you want downside protection for the drops of *more* than 10%? Why would this be better than a 90/10 allocation with dividends and no cap?
Exactly. I'm not sure if 90/10 would do it, but protection against only the first 10% of a negative return isn't all that safe, and safety seems to be this relative's primary concern. And that's after you lose all the dividend portion of the return along the way.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by nisiprius »

HueyLD wrote: Thu Apr 23, 2020 8:23 am
Nate79 wrote: Thu Apr 23, 2020 8:03 am Strange that there has been a large number of threads on these and similar products all in the last few days. Insurance agents must really be pushing them hard.
+1.
Any salesperson worth their salt would recognize a stock market crash as an opportunity to sell things that offer "downside protection."

Also, an opportunity to sell "any weird stuff, just as long as it isn't stocks," which I think we are also seeing.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by NotWhoYouThink »

And it is always an awful position when there is a scam artist in between you and a relative, because, yes, the scam artist might well be more persuasive than you. But something good that can be said about this is that at least this is a legitimate product, not a Madoff scheme. Your father-in-law is not likely to lose all his money in it. Your father-in-law is likely to make money in it. Your father-in-law has a decent chance of making more money than he would have made by putting it in the bank, because he is taking some moderate risks. The risks are small, but bigger than he thinks they are. He will likely be compensated for taking those risks, but by less than he should be compensated.
This quote from nisiprius is important, and often ignored by posters on this board giving advice. This is a legitimate product that will perform better than a lot of things your FIL could do. Better than putting the money in a money market account and leaving it there out of fear. Better than trying to time the market. Better than investing in crude oil futures. Better than investing in his brother-in-law's Covid 19 alternative medicine cure.

You don't want to underestimate people's willingness and ability to make abysmal investing decisions, nor do you want to underestimate the amount of conviction and discipline it takes to stick to a 3 fund portfolio. This turkey will surely make money for the salesman, but it's not the worst thing your FIL could do, by far. The math is only part of the equation, the behavioral psychology is important, too.

You mentioned your FIL has already "cashed out of the market," so discipline is going to be an issue. But you also mentioned that this investment is in a Roth IRA, correct? So tax considerations are not an issue. An all-in-one balanced index fund would be a good choice for him if he can get past his fear. If not, he'll probably buy the annuity.

What you should do depends on your conviction and discipline with your own investment.


edited to add:
Also, consider that his "advisor" is in fact an experienced sales professional who has had training from his company on how to sell this specific product to people exactly like your FIL. And you are just a guy that married FIL's daughter. So who is your FIL going to listen to? Don't be angry or resentful is he listens to the professional. It's not your fault, and not worth creating a family issue over.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by diy60 »

Advisor has many strikes:
- Letting his client panic (cashed out in March)
- Actually selling client's holdings low
- Playing on clients fears
- Offering a ridiculously complex and expensive product
- Using tax advantaged Roth funds for an annuity
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by MotoTrojan »

This should be illegal, what a terrible product. You are losing more than 10% in dividends right off the back, and then they’ll let you have up to 10% of a decline offset?!? It doesn’t seem like there is a single instance you come out ahead.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Stinky »

TooLegit2Quit wrote: Thu Apr 23, 2020 6:14 am Hey guys, I had actually asked several of these questions to the Lincoln guy earlier this week and here was his response.

Q: If you were to invest in the S&P Price return index and choose no riders, no guarantee of return of principal death benefit, would a hypothetical 50% S&P positive return correlate exactly to a 50% return in the account or how would the lack of dividends cause a lag in performance? Are there any administrative, management, or ANY other fees deducted in any of the main 4 indexes? –
A:There are no explicit fees for investing in the index account and include a death benefit at no additional charge. Yes, the Lincoln index is a perfect proxy or match to the S&P 500, including reinvested dividends (although Lincoln will not pay out dividends generated by index – they are reinvested).

So he explicitly states that the dividends are reinvested.
This is explicit proof that if your advisors' mouth is moving, he is lying.

Walk away from him. No, run away from him! He's a salesman looking to make a fat commission, and he's not above lying to get his commission.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by warowits »

Even if they convinced me it did return the same as the S&P 500 with dividends reinvested and there were no fees, I would have to discount the value of the promised downside protection to account for how bad at business this company was. Could they be solvent if they had to actually pay up on these guarantees?

The reality of course is 6 years of dividends (what they are being paid at a minimum) is likely going to be worth more than 10%.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by justsomeguy2018 »

Informative thread, keep me posted. My father is always asking me about these and I never have a great answer other than fees are high. My grandparents had these things as well, I wonder how much money they lost using them. The worst was the advisor that had grandma sell all her stocks at bottom of the financial crisis and instead put her in a 7 year annuity paying 0.5%. Could punch that woman. Grandma never shared any of this info so only found out many years later.....
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Jack FFR1846 »

Read the prospectus. Anything told to you that is not in the prospectus is an out and out lie.

Questions to ask the advisor.

1: What is your commission (or any pay) when the policy is sold? (expect this to be 8-10%)
2: What is the ongoing commission by year? (Figure 1% per year for 5 years)
3: If your father changes his mind after one year, will he get all of his money back? (the answer will be "no, you get nothing"). How about 2 years? (likely nothing) How about 5 years? (maybe 10% of what he's paid)
4: If this policy does all of these risk avoiding things and gives the policy holder the total return of the S&P 500, then how does the insurance company make money and pay the exhorbinent fees to the sales person? The answer is that it doesn't. Your father is going to either be soaked with fees or is going to have some loophole in there that he didn't understand on page 395 of the prospectus showing how in his case, he owes $100k or something.

If it seems to good to be true, it is.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Taylor Larimore »

Bogleheads:

I spent 5-years as a life insurance salesman with a license to sell annuities. I own two Single Premium Immediate Annuities. I have some experience with these products.

I am always suspicious that we are dealing with an annuity salesperson when an anonymous poster comes on the Bogleheads Forum and their first post lists all the advantages of a particular annuity. Let's give this first time poster the benefit of the doubt.

Most annuities are VERY complicated products (Single Premium Lifetime Annuities (SPIA's) are an exception). Few annuity salesperson really understand their product. The Prospectus for the similar annuity mentioned contains 51 pages of small-print legalize -- mostly designed to favor the annuity company. This may be the most important part:
General Risks

1. We reserve the right, within the law, to make certain changes to the structure and operation of the VAA or Indexed Accounts at our discretion and without your consent. We reserve the right to limit Purchase Payments into the contract. We may add, delete, or substitute funds for all Contractowners or only for certain classes of Contractowners. We may add to or delete Indexed Accounts currently available. We do not guarantee that an Indexed Account option will always be available.

2. Any telephone, fax machine or other electronic device, whether it is yours, your service provider’s, or your agent’s can experience outages or slowdowns for a variety of reasons and may not always be available. These outages or slowdowns may delay or prevent our processing your surrender, withdrawal, or transfer request.

Risks of Investing in the Indexed Accounts

1. There is a risk of loss of your investment in the Indexed Segments since the performance tracks a market index. You are responsible for all losses in excess of the Protection Level you choose. The Protection Level exists for the full term of the Indexed Segment including Segments with Annual Locks. When you move into a new Indexed Segment after the end of an Indexed Term the performance will be calculated for the new Segment, which may have a new Protection Level, which could also result in a loss. There is also a risk of loss upon an early withdrawal. For Annual Lock accounts, since the gain or loss is established each year, losses can accumulate so that you could actually lose more than the percentage amount in excess of the Protection Level percent. For example, if you chose a 10% Protection Level, you could lose more than 90% of your principal in an Annual Lock account.

2. Gains in your Indexed Segments are limited by any applicable Performance Cap, which means that your return could be lower than if you had invested directly in a fund based on the applicable Index. The Performance Cap exists for the full term of the Indexed Segment. The Performance Cap rate is lower for contracts with the Guarantee of Principal Death Benefit. Generally, Indexed Segments with greater Protection Levels have lower Performance Caps. Performance Caps for new Segments will be declared 5 business days in advance of the beginning of a Segment.

3. To determine the Interim Value, we apply a formula which does not reflect the actual performance of the applicable Index, but rather a determination of the value of hypothetical underlying investments at the time of the Interim Value calculation. This amount could be less than if you had held the Indexed Segment for the full Indexed Term. It also means that you could have a negative performance, even if the value of the Index has increased during the calculation period. All withdrawals from the Indexed Segment, including Death Benefits paid during the Indexed Term, will be based on the Interim Value.

4. If you withdraw Contract Value allocated to an Indexed Account, the withdrawal will cause an immediate reduction to your Indexed Crediting Base in a proportion equal to the reduction in your Interim Value. A proportional reduction could be larger than the dollar amount of your withdrawal. Reductions to your Indexed Crediting Base will negatively impact your Interim Value for the remainder of the Indexed Term and will result in a lower Indexed Segment Maturity Value at the end of the Indexed Term. Once your Indexed Crediting Base is reduced due to a withdrawal during any Indexed Term, you cannot increase it during the remainder of the Indexed Term.
Best wishes.
Taylor
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by KSActuary »

Aaaaarrghhh!

This is a variable annuity with many of the qualities of a fixed index annuity that does not invest in the S&P 500 (price or total). Rather, it credits interest based on a point to point rule that the prospectus describes as a Price rule, not a total return rule. This is very similar to a bank structured product with very little difference.

The big pain comes if you need any money early and must be paid out using the Interim Value which is determined based on the actual instruments used in the product. These can include a fixed component and a derivatives component.

In the end, Lincoln gets your money for free and you pay them the dividends. If you freak, which is most of their clients or they wouldn't be talking to them in the first place, then you probably pay dearly.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by MathIsMyWayr »

Why doesn't OP invest $25k in this annuity and another $25k in a plain old S&P 500 such as VFIAX, and come back in 6 years to compare the two?
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by rgs92 »

While I have no interest in buying anything like this, I always thought the attraction of these complex products is that they put a solid floor under your losses in return for a ceiling on gains (and embedded expenses of all types including forfeiture of dividends, but that's the price you pay for avoiding risk of a major collapse in the markets).

And the formulas are so complicated and opaque that nobody can understand them and they are certainly not in your favor.

But again, the main thing you are getting is a limited downside. That's the insurance component, and why they are offered by insurance companies.

But this product DOES NOT EVEN OFFER THAT. It says you absorb losses beyond 10%. So this product doesn't even have that level of total-collapse-protection that can be unique to these agreements.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Tamarind »

If he wants a real 10% downside limit without fees, he could also adopt a 20/80 portfolio - ie 80% bonds. In the event the
Great Depression repeated itself, he'd only lose 10%. Of course he would also lose out on all the gains of having a higher stock allocation the rest of the time.

There is no free lunch with risk and reward, and someone who claims to have one is a liar.

That said, it sounds like OPs FIL has never had an appropriate asset allocation. He's been driven by greed, ignorance, and bad advisors to invest in a way that is much riskier than suits him. Adding insurance on top of risk is not the way. Instead he needs to actually reduce his expected risk. This might give him a lot of peace of mind.

It might be a big deal for him to look at the expected behavior in a crash of a plain old 50/50 portfolio. This is the portfolio behind all the studies on "safe withdrawal rates" for 30-year retirements. It has neither fees nor hidden costs, and an expected max drawdown of 25%.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by KSActuary »

This is a combo fixed index and variable annuity. Fixed index annuities usually scrape fees by applying odd participation rates and caps to the complex formulas while variable annuities makes their money through high fees and terrible annuitization rates.
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by NYCPete »

TooLegit2Quit wrote: Thu Apr 23, 2020 1:21 am
I had a conference call with these guys and read about 25 pages on the SEC site trying to sniff out any fees. I even recorded the call. They said under my scenario, no riders, s&p fund, no early surrender aka I buy and hold the S&P for 6 years, there are literally zero fees,
Not true.

From the prospectus (it's on page 11):

Total Annual Fund Operating Expenses (expenses that are deducted from fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses)
Minimum - 0.49%
Maximum - 1.22%

No ifs, ands, or buts about it. There are not "zero fees." This is EXPENSIVE.

It doesn't matter what the sales people say in their email to your questions. It matters what's in the contract. They'll say whatever they can to get you to buy the product. What are you going to do if later you find out they were lying? Sue them? Not likely. Report them to FINRA? FINRA will just say "hey, it's your responsibility to read the prospectus and contract. Your product has performed as the contract and prospectus promised it would."

Best,
Peter

P.S. Why bother with 25 pages of the SEC site when you've got a prospectus for the actual product???
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Re: All the upside of the S&P with 10% downside protection "Free"?

Post by Oicuryy »

Are you up for a little backtesting? Yahoo has downloadable daily closing values for the S&P price index and adjusted closing prices for VFINX, Vanguard's S&P 500 index fund. The adjusted prices account for the reinvestment of distributions from the fund.
https://finance.yahoo.com/quote/%5EGSPC ... equency=1d
https://finance.yahoo.com/quote/VFINX/h ... equency=1d

Divide the value for a date by the value on the same day six years earlier. The result is the amount $1 invested at the beginning of the period would be worth at the end. If the result for the price index is between 0.9 and 1 set it to 1. If it is less than 0.9 add 0.1.

See how many six year periods you can find where the annuity would have beaten the fund. Here are a couple to get you started. I picked 3/9/09 because the S&P 500 was at a bit of a low that day.

Image

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