Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

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bigjoec
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Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by bigjoec »

Prologue:

I'm a pension actuary, and my parents asked me to help a friend of theirs decide when to start her "deferred annuity" when I came to visit at Xmas. For a moment I thought "oh great, totally in my wheelhouse -- I can absolutely read a pension summary plan description and identify any subsidized form/timing of payment". So I asked if it was for a pension plan, and no it was for something she had purchased a few years ago. Immediately I got a sinking feeling -- I'm not familiar with any retail annuity products with a variable commencement date that does anything other than stuff $ in the pockets of the "adviser" and insurer.

When I got the contract docs and illustrations, I had a brief moment of hope as I read that it's an Allianz 360 "fixed index annuity" -- I thought, "oh, 'fixed annuity' -- that sounds like it has the potential to not be trash". But no, I opened the thing and am bombarded with a nearly indecipherable set of "point-to-point caps", "spreads", and two different kinds of "lifetime withdrawal options", both of which are different from the option to actually annuitize (!?). A quick google search revealed that "fixed index annuity" is just the new name for that reviled creature the "equity indexed annuity". Needs to dump this financial adviser like yesterday.

Actual question:
She is age 70 and put $100k* into an Allianz 360, three years ago, representing about 1/3 of her net worth (excluding her personal residence). Fortunately, my understanding is that she's living below her means and doesn't need access to the interest or principal.

So she's already locked in, the adviser made his money, and Allianz will make its money, one way or the other. I can't figure out how actual annuitization works (i.e. what annuity factor they would use, whether the withdrawal penalties apply to an annuity, etc), and frankly I'm not clear on what these "lifetime income" options are -- she can withdraw up to 7% of current value per year fixed and 6.2% variable guaranteed for life, I think, but what if she takes less- what's guaranteed then? Her surrender charge schedule started at 10% which it stays at through year 3 then grades down to zero by year 11.
She can take "free" partial surrenders with no surrender charge of up to 10% per year.

One other point -- my understanding is that there's a tax deferral benefit with this product. That's moot here because it was purchased with Roth IRA money.

So, any thoughts on how to best polish this turd? I'm thinking she should just wait it out, get out of it after 10 years, and perhaps pull out the 10% free per year each year. But I get the impression her hope was to start this annuity at some point. Any thoughts on that?

Thanks!

* $100k; s not the actual value because I don't want to share too many facts here. But it's well within one order of magnitude of the actual amount.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Dottie57 »

Is there sime goofiness going on with a real cash value versus an income base? How does taking 10% out affect the yearly income? When can she surrender the annuity?
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Stinky
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Stinky »

bigjoec wrote: Wed Dec 25, 2019 12:27 am
So, any thoughts on how to best polish this turd? I'm thinking she should just wait it out, get out of it after 10 years, and perhaps pull out the 10% free per year each year. But I get the impression her hope was to start this annuity at some point. Any thoughts on that?
I think that you've captured the essence of the product by calling it a "turd". I believe that it's wholly inappropriate to sell an annuity within an IRA of any type. In this case -
(a) the salesman made 6%-8% of the premium as a commission off the top
(b) the friend has a surrender charge of 10% for the first three years that won't fully go away until the 10th year
(c) the friend is presented with a bunch of impossible-to-understand accumulation parameters and annuitization options

Hopefully, her surrender value is now back up the original premium that she paid. So, if she surrenders now, it will be as if she didn't make (or lose) any money on her "investment" over the three year period.

If she wants to start taking monthly income, she could use the surrender value to purchase a SPIA using quotes from immediateannuities.com as a reference point. And in doing that, she could compare the monthly income from an external SPIA to the monthly income if she did a straight annuitization with Allianz. Your suggestion of taking out the 10% free withdrawals each year is not a bad option either.

I'm afraid that she lost about 10% of her money when she made the initial purchase, most of which went to the salesman. And that money is gone.
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David Jay
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by David Jay »

bigjoec wrote: Wed Dec 25, 2019 12:27 am...it was purchased with Roth IRA money.
I am not usually a vindictive person, but I think putting this sales person in stocks (no, the other kind of stocks) in the town square for a day might be appropriate.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by David Jay »

Seriously, the fees are normally about 2 1/2%, so it is probalby better to “tear the bandage off” and unload it rather than taking out 10% per year. The only thing I would look at is the anniversary date. If it goes to 9% in the next 3 months it is probably worth it to turn it in at that time.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Jazzysoon »

I had this exact product before I knew better. Had income and LTC rider so fees really bad and cap about 3%. Planner had that chunk of money growing at 8% on his projections. Once I realized what it and fees were, I pulled out during the surrender period. Call Allianz due to what I thought was significant misrepresentation esp with charts showing a growth rate that was over 2x cap. During my first review with planner after having the product I pointed out the low returns and the info on cap on like page 34 paragraph x of contract , his response was "No one reads the contract". He then changed subject to talk about his recent trip, and I again tried to talk about the caps and his charts. I had already called Allianz at this point so I now knew how blatantly he had lied to me.
I suffered the surrender charge and pulled my money. This planning company does a lot of seminars/radio shows, so I did put a review out on yelp, stating facts. I have actually heard from quite a few people thanking me for the review because they almost also got sucked in by this person and asked very detailed questions on fees/caps based on my review.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by KESP »

Is there any place that explains this product in the simplest of terms, if that’s even possible? It’s a product in a 403b plan that our union supports and I’d love to help people understand why they need to not touch it with a 10 foot pole.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by livesoft »

I think this thread might be worthy of becoming a "Sticky" thread even if folks never find sticky thread and read them. I'll put the following phrase here, so that I can find it with a simple search:

Pension actuary dismayed by rip-off Allianz indexed annuity bought in a Roth IRA by their parents.
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Stinky
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Stinky »

KESP wrote: Wed Dec 25, 2019 10:05 am Is there any place that explains this product in the simplest of terms, if that’s even possible? It’s a product in a 403b plan that our union supports and I’d love to help people understand why they need to not touch it with a 10 foot pole.
Product features vary greatly, but here's a general description:
1. You give the insurance company your hard-earned money in a lump sum up-front. Say, $100,000.

2. The insurance company instantly issues a check to the financial advisor salesman for about $6,000 to $8,000. (That's your money being paid out - see Step 4).

3. The insurance company issues you an annuity contract.

4. If you decide you made a massive mistake in buying the annuity in the first year after you buy it, you'll only get back $85,000-$90,000 (unless you get rid of it in the first 20 or so days after it's issued). After all, the commission must be paid to the financial advisor salesman. And the insurance company must make its profit.

5. That $10,000-$15,000 "haircut" on the premium you paid will gradually decline over time. You'll grow old watching the haircut slowly decline to zero over 10-15 years.

6. You'll earn whatever "return" on the annuity that the insurance company deigns to pay you. Many annuities tout that you can get "S&P 500" increase in value, with no risk of loss of principal. Watch for the fine print - because your upside is limited to 4-5% per year. That's especially hurtful in a year like 2019, when the S&P is up 30% and you're making your measly 4-5%.

7. Your financial advisor salesman may have loaded up your annuity with junk riders that will cost you another 1-3%.

8. Your financial advisor salesman may have talked up the "tax" benefit of the annuity. But that annuity tax benefit is entirely redundant when the money is coming from a tax deferred or sheltered plan (IRA, 401(k), Roth, etc.)

Is that simple (and colorful) enough?
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Kenkat
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Kenkat »

Stinky wrote: Wed Dec 25, 2019 10:37 am
KESP wrote: Wed Dec 25, 2019 10:05 am Is there any place that explains this product in the simplest of terms, if that’s even possible? It’s a product in a 403b plan that our union supports and I’d love to help people understand why they need to not touch it with a 10 foot pole.
Product features vary greatly, but here's a general description:
1. You give the insurance company your hard-earned money in a lump sum up-front. Say, $100,000.

2. The insurance company instantly issues a check to the financial advisor salesman for about $6,000 to $8,000. (That's your money being paid out - see Step 4).

3. The insurance company issues you an annuity contract.

4. If you decide you made a massive mistake in buying the annuity in the first year after you buy it, you'll only get back $85,000-$90,000 (unless you get rid of it in the first 20 or so days after it's issued). After all, the commission must be paid to the financial advisor salesman. And the insurance company must make its profit.

5. That $10,000-$15,000 "haircut" on the premium you paid will gradually decline over time. You'll grow old watching the haircut slowly decline to zero over 10-15 years.

6. You'll earn whatever "return" on the annuity that the insurance company deigns to pay you. Many annuities tout that you can get "S&P 500" increase in value, with no risk of loss of principal. Watch for the fine print - because your upside is limited to 4-5% per year. That's especially hurtful in a year like 2019, when the S&P is up 30% and you're making your measly 4-5%.

7. Your financial advisor salesman may have loaded up your annuity with junk riders that will cost you another 1-3%.

8. Your financial advisor salesman may have talked up the "tax" benefit of the annuity. But that annuity tax benefit is entirely redundant when the money is coming from a tax deferred or sheltered plan (IRA, 401(k), Roth, etc.)

Is that simple (and colorful) enough?
I think a major problem with these things is that people don’t realize they are being sold something and somebody has to make sure the item being sold is suitable. We are all trained to “look out” when buying a car, because it’s not much different than the above:

1. You give the car dealer your hard-earned money in a lump sum up-front. Say, $50,000.

2. The dealer instantly issues a check to the sales advisor salesman for about $3,000 to $4,000. (probably less but you get the point).

3. The dealer transfers the title to you.

4. If you decide you made a massive mistake in buying the car in the first year after you buy it, you'll only get back $40,000 - $45,000. After all, the commission must be paid to the sales advisor salesman. And the dealer must make its profit.

5. That $5,000-10,000 "initial depreciation" you paid will gradually decline over time but eventually the car will be worthless.

6. You'll get to drive the car. After the warranty expires, hopefully the car is not junk because if the transmission fails or the engine blows up after the warranty period, repair costs fall on you.

7. Your sales advisor salesman may have loaded up your car purchase with junk rustproofing, extended warranties, gap insurance, etc. that will cost you another few grand.

8. Yeah, number 8 is particularly bad in the original example.

It’s not that different. Substitute any number of products - your wallet is in peril when you walk into the vipers den.

I guess I am on the fence with how much this stuff should be regulated in a free economy where we each make our own decisions vs. situations where people are taken advantage of. Education is key to avoiding bad decisions. My parents bought an annuity. I tried to talk them out of it. They later said maybe we should have listened to you, although my dad likes the feature where the annuity will never be less than what they paid in. They both were raised in the Great Depression and I think that feature resonates with them. At this point, it is what it is - the product has done ok, not as good as it would have if invested at Vanguard (as I advised) but it was their decision to make and if the market had cratered as it sometimes does, maybe my advice would have been looked on as not so good either.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by KESP »

Thank you Stinky!
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stockpickerted
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by stockpickerted »

So are there any 'good' annuities for a retired person?
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David Jay
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by David Jay »

stockpickerted wrote: Wed Dec 25, 2019 12:13 pm So are there any 'good' annuities for a retired person?
Single Premium Immediate Annuities (SPIA) can make sense to create an income stream for an older retiree (after age 70). By pooling assets of many people, they can continue to pay the longer lived from the resources of those that pass earlier.

They are also easy to understand: I give you $XXX,XXX and you will pay me $XXXX a month for the rest of my life.

By comparison, the Allianz annuity in the original post will have a prospectus that is 80-120 pages long!
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Stinky
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Stinky »

David Jay wrote: Wed Dec 25, 2019 12:22 pm
stockpickerted wrote: Wed Dec 25, 2019 12:13 pm So are there any 'good' annuities for a retired person?
Single Premium Immediate Annuities (SPIA) can make sense to create an income stream for an older retiree (after age 70). By pooling assets of many people, they can continue to pay the longer lived from the resources of those that pass earlier.

They are also easy to understand: I give you $XXX,XXX and you will pay me $XXXX a month for the rest of my life.

By comparison, the Allianz annuity in the original post will have a prospectus that is 80-120 pages long!
I agree with David Jay on SPIAs being a good annuity for those who want lifetime income. Very straightforward and easy to understand.

One other type of annuity that could be considered in a limited situation would be a “CD” or “rate for term” annuity. This is another straightforward annuity, where the person deposits $X at time zero, and is guaranteed an interest rate of Y% for a fixed term of Z years. At the end of Z years, the accumulated deposit is available with no surrender charge.

The interest rate on such an annuity could be pretty directly compared to a bank CD of the same maturity. Realize that liquidity before the end of Z years might be less on the annuity, because the annuity may have a surrender charge larger than the early withdrawal penalty on a CD. A benefit of that kind of annuity could be that the interest is taxed only when the annuity is surrendered, not annually like a CD.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by FoolStreet »

bigjoec wrote: Wed Dec 25, 2019 12:27 am Prologue:

I'm a pension actuary, and my parents asked me to help a friend of theirs decide when to start her "deferred annuity" when I came to visit at Xmas. For a moment I thought "oh great, totally in my wheelhouse -- I can absolutely read a pension summary plan description and identify any subsidized form/timing of payment". So I asked if it was for a pension plan, and no it was for something she had purchased a few years ago. Immediately I got a sinking feeling -- I'm not familiar with any retail annuity products with a variable commencement date that does anything other than stuff $ in the pockets of the "adviser" and insurer.

When I got the contract docs and illustrations, I had a brief moment of hope as I read that it's an Allianz 360 "fixed index annuity" -- I thought, "oh, 'fixed annuity' -- that sounds like it has the potential to not be trash". But no, I opened the thing and am bombarded with a nearly indecipherable set of "point-to-point caps", "spreads", and two different kinds of "lifetime withdrawal options", both of which are different from the option to actually annuitize (!?). A quick google search revealed that "fixed index annuity" is just the new name for that reviled creature the "equity indexed annuity". Needs to dump this financial adviser like yesterday.

Actual question:
She is age 70 and put $100k* into an Allianz 360, three years ago, representing about 1/3 of her net worth (excluding her personal residence). Fortunately, my understanding is that she's living below her means and doesn't need access to the interest or principal.

So she's already locked in, the adviser made his money, and Allianz will make its money, one way or the other. I can't figure out how actual annuitization works (i.e. what annuity factor they would use, whether the withdrawal penalties apply to an annuity, etc), and frankly I'm not clear on what these "lifetime income" options are -- she can withdraw up to 7% of current value per year fixed and 6.2% variable guaranteed for life, I think, but what if she takes less- what's guaranteed then? Her surrender charge schedule started at 10% which it stays at through year 3 then grades down to zero by year 11.
She can take "free" partial surrenders with no surrender charge of up to 10% per year.

One other point -- my understanding is that there's a tax deferral benefit with this product. That's moot here because it was purchased with Roth IRA money.

So, any thoughts on how to best polish this turd? I'm thinking she should just wait it out, get out of it after 10 years, and perhaps pull out the 10% free per year each year. But I get the impression her hope was to start this annuity at some point. Any thoughts on that?

Thanks!

* $100k; s not the actual value because I don't want to share too many facts here. But it's well within one order of magnitude of the actual amount.
Stinky’s 8 point summary was good, but misses 2 things (based on what i think I understand...)

9. The buyer can annuitize in order to effectively turn it into a SPIA. So, if the buyer needs stable guaranteed income, then annuitizing it might be a good option. The question is when. I think that was what Mom’s friend was asking.

9a. I think that these kinds of products have two phantom accounts. One for the value that can be withdrawn. Another for the value that can be annuitized. Many of the indexing applies to growth on the annuitizable value account, which is pretty cerebral. As that value grows, then the annuity stream has the potential to grow. But the account that tracks the withdrawable value really won’t grow much at all. To be clear, buyers can choose one of the two options: withdrawal based on the withdrawal phantom account OR annuitization based on the annuitization phantom account value used to effectively buy a SPIA.

10. When comparing options between investing the money or buying an annuity product, Stinky assumes the monies came from a tax deferred account. If the monies come from a taxable account, or at least in comparison to a taxable account, annuity proceeds come out as taxable income, whereas the taxable account gets the benefit of capital gains tax rates, which are usually lower.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Retired1809 »

On the Wealthtrack TV show that aired on Friday, the 13th of December 2019, Jamie Hopkins appeared as a guest discussing ways to "fail retirement," and when asked his "Number 1 idea for long term retirement investing," he replied "Fixed indexed annuities with an income rider."

Friday the 13th will definitely live up to its reputation for anyone who acts on his recommendation.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Stinky »

Bigjoec,

Please post back on the Forum when you decide what to do.
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by capjak »

Annuities are not "good" or "bad" they are just financial tools. Fixed Index Annuity are sold as an investment vs stock market but are really insurance products that are designed to compete with CD like returns not compete with stock market. Some people like the idea of having an income rider because the know they will need an income stream but not sure when or how much so being able to later choose income or keeping the accumulation value after x years vs a SPIA . If you need stock market returns with the money than it should be in an index of the stock market. For a CD alternative is where the FIA may have valuefor a few people or as a deferred SPIA for income.

When a rider is included you have two accounts: 1 account is real money that you can take out (sometimes call accumulation value) and the other is the income account which is used as a value to calculate the income at a later date (this is the fake account). For income all that matters is what the "guaranteed payout value is" the rest is stuff that might happen if the planets are aligned and xxxxxx happens. Just focus on "guaranteed payout" as that is what you can count on being delivered.

To give a recommendation you will need to get all the details, it may be "better" (no one knows the future) to surrender, keep as is, 1035 exchange into a MYGA or SPIA or something else or some other option.

If the person does not desire an guaranteed income stream for longevity insurance then the rider was not needed.

Independent review of Allianz 360:
http://blog.runnymede.com/an-impartial- ... efit-rider
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Re: Disentangle from a "fixed indexed annuity" (equity indexed annuity)?

Post by Nate79 »

It is really sad that these products are even allowed to be sold considering how complicated and their sale is usually done with lies, obfuscation, etc. The insurance industry should be ashamed of themselves for pushing these products but considering the insurance industry also brought us the near scam products like whole life and universal life as well and annuity variants it's not surprising.
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