Index annuity

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Stinky
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Re: Index annuity

Post by Stinky »

BeachPerson wrote: Sun Aug 16, 2020 1:50 pm Do the Indexed Annuities also have expense ratios? The Vanguard S&P 500 index is three or so basis points. Would the insurance company charge 50 or 100 basis points?
There are no “explicit” expense ratios on indexed annuities. That is, your annual statement from the annuity company won’t show any expense charges.

But the charges internal to the policy are 2+% per year. That’s how much the insurance company is earning on its investments, minus what’s passed on to you n
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Rex66
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Re: Index annuity

Post by Rex66 »

They might be “Charging” 1-2% but it depends on how the regular Investment portfolio which is mostly bonds/treasuries and the small slice of options performs compared to the costs of business and what they pay you.

They definitely created the product to produce at least this performance under the majority of economic conditions. I doubt they projected 1%. I also doubt they planned initially for a very sustained low interest rate environment.

It is also not detailed what exactly they are making or “charging you” in the contract. They don’t have to. They guarantee a floor which at this time is typically zero gain but no loss but might give you more depending on how the above investment pans out. The reason they put in the contract the ability to change caps and participation rates is they don’t have the ability to match the options performance (even without dividends) under all conditions (like currently where they keep lowering them on current customers even though they frequently advertise initial higher values). It should be noted that index products have been required to reduce their rosey illustrations a little. They are not required to disclose what they make or how they make it.
SlowMovingInvestor
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Re: Index annuity

Post by SlowMovingInvestor »

Rex66 wrote: Fri Aug 14, 2020 8:33 pm They will perform slightly better or slightly worse than bonds. They are also very correlated with interest rates and bonds bc that’s a big part of the insurance company’s investment. All products have shown decreasing caps and participation rates bc of this and bc costs of options has increased for them. You will also notice the caps/participation rates are higher with index life insurance. This is bc they can “get you” on the insurance costs factors which they can’t with annuities.
I'm guessing that insurance companies implement index annuties buy call options on the appropriate price return index for the appropriate period (say 1 year) and put the remainder in bonds -- either Treasuries or maybe high rated corporate bonds. Is that correct ?
Rex66
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Re: Index annuity

Post by Rex66 »

Something along those lines.

Let’s just pretend that insurance companies didn’t make any profit or have any internal costs for just a second.

Let’s pretend you invest 100 dollars.

If their regular portfolio is returning 5% which yes is mostly although not exclusively bonds/treasuries then that would means (using finger tip math) that they would invest 95 dollars in that portfolio to guarantee no loss. They would have 5 dollars to purchase options and which options they chose would mirror the index option you chose.

As interest rates decrease they need to put more of that 100 bucks in the general fund to meet their guarantee bc that’s what “they have to” meet. That hurst the amount of options they could purchase. Thus even if the market does great, they can’t match the high end of the non guaranteed index associated return No matter what one is chosen and they thus reduce caps and participation rates. They need to do that too if the price of options goes up for them.

At some point, a “regular” fixed annuity actually out performs an index one regardless of stock market performance. I believe most people don’t think that will happen over the long run but the insurance companies must not be 100% convinced since if such a strategy always performed better, likely they could just make their “regular” portfolio the same without much squawking from regulators since it’s such a small percentage of their overall investments.
Deblog
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Re: Index annuity

Post by Deblog »

So I bought one of these in 2008. Did not know much and was not reading this forum. It sounded good. 4% min return or what the market was with the funds they offered. Problem is the 4% guaranteed was only if I Annuitized. I did not understand that part. I was 48 and 58 when it ended and no penalities. Agent said best thing was to take the income for life but I wanted to do Roth conversions etc and did not want income I could not control. I rolled it out and calculated I got a 2% return 2008 to 2018. 😂
Rex66
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Re: Index annuity

Post by Rex66 »

That was also likely a variable annuity and not an index annuity.

Just bc one of the investment options may have been an index, doesn’t male it an index annuity.

Some words just have different meanings when you deal with insurance. Likely this isn’t accidental...
RocketShipTech
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Re: Index annuity

Post by RocketShipTech »

Deblog wrote: Sun Aug 16, 2020 5:48 pm So I bought one of these in 2008. Did not know much and was not reading this forum. It sounded good. 4% min return or what the market was with the funds they offered. Problem is the 4% guaranteed was only if I Annuitized. I did not understand that part. I was 48 and 58 when it ended and no penalities. Agent said best thing was to take the income for life but I wanted to do Roth conversions etc and did not want income I could not control. I rolled it out and calculated I got a 2% return 2008 to 2018. 😂
This is what people complain about when they complain about variable annuities.

But for someone who could actually use an annuity (more people do than they think), these can be a great option. For example if you did annuitize, you would have a safe base of income for the rest of your life. You could then load up on equities in your AA and probably come out ahead at the end of the day.
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ruralavalon
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Re: Index annuity

Post by ruralavalon »

Rex66 wrote: Sun Aug 16, 2020 6:26 pm That was also likely a variable annuity and not an index annuity.

Just bc one of the investment options may have been an index, doesn’t male it an index annuity.

Some words just have different meanings when you deal with insurance. Likely this isn’t accidental...
For example the "fixed indexed annuity", a type of variable annuity, probably meant to be confused with a simple fixed annuity.
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Stinky
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Re: Index annuity

Post by Stinky »

It appears that OP "Eltron" hasn't responded to any comments yet.

So we'll just need to wait to see exactly what type of annuity was pitched.
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Rex66
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Re: Index annuity

Post by Rex66 »

RocketShipTech wrote: Sun Aug 16, 2020 9:10 pm
Deblog wrote: Sun Aug 16, 2020 5:48 pm So I bought one of these in 2008. Did not know much and was not reading this forum. It sounded good. 4% min return or what the market was with the funds they offered. Problem is the 4% guaranteed was only if I Annuitized. I did not understand that part. I was 48 and 58 when it ended and no penalities. Agent said best thing was to take the income for life but I wanted to do Roth conversions etc and did not want income I could not control. I rolled it out and calculated I got a 2% return 2008 to 2018. 😂
This is what people complain about when they complain about variable annuities.

But for someone who could actually use an annuity (more people do than they think), these can be a great option. For example if you did annuitize, you would have a safe base of income for the rest of your life. You could then load up on equities in your AA and probably come out ahead at the end of the day.
That’s actually a bad idea especially today. Much better to just purchase a spia if wanted at a later date. A new contract today would have poor annuitization features bc of the low interest rate. So you pay more in fees, lose step up in basis, convert all gains to income, and purchased a contract pretty much at all time low interest rates. You very likely even if u did purchase it want to 1035 to a new spia later on.

The possible “good” reasons at this time would be you just want to purchase tax inefficient stuff like reits (assuming costs within the annuity are not crazy high) or you want to trade frequently and the annuity allows this(thus unable to get capital gains rates). Not that either is actually a good strategy but if u wanted to do that.
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Re: Index annuity

Post by mickeyd »

I have always considered EIA as a substitute product that insurance agents without a securities licence (NASD) to tip-toe around the laws that only allow certain folks to sell wall street products. It is kinda like a VA, but it is not (as we all understand).
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