Please Help Me Explain an Equity Index Annuity to a Relative

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1210sda
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Please Help Me Explain an Equity Index Annuity to a Relative

Post by 1210sda »

I'm trying to explain how and Equity Index Annuity (now called Fixed Index Annuity) to a relative who is on the verge of buying one.
I know a bit about them, but I'm sure there are some details that I'm missing.

Here's what I know: (or think I do)
1. They track an equity index typically the SP 500 (but not the dividends)
2. They have a floor and a ceiling on what the account can earn (a Guarantee and a Cap)
3. They may have a participation rate and a spread
4. They have a "surrender" period during which they penalize you if you pull it out.

For Example, (as I understand it):
Someone invests $10,000 in the FIA. The cap is 5%, the guarantee is 0%, the participation rate is 90% and the spread is 4%. If the SP500 rose by 8% (w/o divs), they would get 8% times 90%= 7.2% less the spread of 4%.= 3.2% which is less than the cap, so they would get the full 3.2%

What I'm not sure of is, to what amount does the 3.2% get applied to....the original $10,000 amount, or is there some reduction in the "contract value" (as they call it) for commissions, admin expenses, mortality(?), etc. and this net amount is what the 3.2% gets applied to ??

His salesman is pretty slick !

1210
Grt2bOutdoors
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Grt2bOutdoors »

Allan Roth has a build your own equity index annuity. See if you can't do better than that "slick salesman" and save your relative a few bucks. :D http://www.cbsnews.com/news/build-your-own-annuity/

Here's another take on EIA's. http://www.advisorperspectives.com/news ... uities.pdf
Last edited by Grt2bOutdoors on Fri Feb 20, 2015 3:08 pm, edited 1 time in total.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by powermega »

You're mostly correct with your analysis. That 3.2% that you calculated would get applied to the account value at the time that the return was calculated, and a credit to the policy would show up for the amount. Those credits are paid on some kind of modal basis (quarterly, semi-annually, annually). Pay attention to the surrender charge rates. I bet they are pretty steep.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by nisiprius »

Print out and urge him to read the FINRA alert, Equity-Indexed Annuities—A Complex Choice. Point out that FINRA says:
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. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another.

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.
Say that she really does need to read through the alert or she will not even know what questions she needs to be asking. Tell her that if it sounded simple when it was explained to her, she should not trust the person who was explaining it, because FINRA says they are complex and that they are not easy to understand.

If he finds the alert too difficult to read through, he cannot understand the product and should not be buying it.
Last edited by nisiprius on Fri Feb 20, 2015 8:36 pm, edited 1 time in total.
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tedclu
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by tedclu »

You can build you own pretty easily.

Put 97% of the $$ in to a 10 year treasury. And use the 3% to buy futures on the spy.
The future can be rolled every year.

That's how the insurance co. does it.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Grt2bOutdoors »

1210sda wrote:I'm trying to explain how and Equity Index Annuity (now called Fixed Index Annuity) to a relative who is on the verge of buying one.
I know a bit about them, but I'm sure there are some details that I'm missing.

Here's what I know: (or think I do)
1. They track an equity index typically the SP 500 (but not the dividends)
2. They have a floor and a ceiling on what the account can earn (a Guarantee and a Cap)
3. They may have a participation rate and a spread
4. They have a "surrender" period during which they penalize you if you pull it out.

For Example, (as I understand it):
Someone invests $10,000 in the FIA. The cap is 5%, the guarantee is 0%, the participation rate is 90% and the spread is 4%. If the SP500 rose by 8% (w/o divs), they would get 8% times 90%= 7.2% less the spread of 4%.= 3.2% which is less than the cap, so they would get the full 3.2%

What I'm not sure of is, to what amount does the 3.2% get applied to....the original $10,000 amount, or is there some reduction in the "contract value" (as they call it) for commissions, admin expenses, mortality(?), etc. and this net amount is what the 3.2% gets applied to ??

His salesman is pretty slick !

1210
If the guarantee is zero, your relative would be "nuts" to lock up any money for a chance at Zero return! Instead, how about investing 90% of the value in an FDIC Insured CD for 5 years - you can find rates paying 2.25% and for 10 year terms find rates paying 3%. Then take 10% of the value and purchase VTI or hold the mutual fund equivalent. At the end of ten years, if the market went down by half, your relative would likely be still whole after accounting for dividends and interest, and if the market rose would capture all of the return.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Grt2bOutdoors »

tedclu wrote:You can build you own pretty easily.

Put 97% of the $$ in to a 10 year treasury. And use the 3% to buy futures on the spy.
The future can be rolled every year.

That's how the insurance co. does it.
10 year CD offers a better rate. What is the cost to purchase SPY futures?
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by tedclu »

Depending on how much growth of the spy you want.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Grt2bOutdoors »

tedclu wrote:Depending on how much growth of the spy you want.
Educate us please, most of us don't play in the options market.
If you were to try and set up a do it yourself 10 year EIA, how much would a SPY future cost for a $30K allocation?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by 1210sda »

powermega wrote:You're mostly correct with your analysis. That 3.2% that you calculated would get applied to the account value at the time that the return was calculated, and a credit to the policy would show up for the amount. Those credits are paid on some kind of modal basis (quarterly, semi-annually, annually). Pay attention to the surrender charge rates. I bet they are pretty steep.
Thank you powermega. Is the "account value" the $10,000 that was originally paid to the insurance company, or is it reduced by commissions, admin expenses and the like??

1210

and yes, the surrender charge is high. 7% the first year/
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gasdoc
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by gasdoc »

What is the purpose of this annuity (in the mind of this relative)? Certainly you can find a better way to achieve whatever goal he is trying to reach....
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Mel Lindauer »

1210sda wrote:I'm trying to explain how and Equity Index Annuity (now called Fixed Index Annuity) to a relative who is on the verge of buying one.
I know a bit about them, but I'm sure there are some details that I'm missing.

Here's what I know: (or think I do)
1. They track an equity index typically the SP 500 (but not the dividends)
2. They have a floor and a ceiling on what the account can earn (a Guarantee and a Cap)
3. They may have a participation rate and a spread
4. They have a "surrender" period during which they penalize you if you pull it out.

For Example, (as I understand it):
Someone invests $10,000 in the FIA. The cap is 5%, the guarantee is 0%, the participation rate is 90% and the spread is 4%. If the SP500 rose by 8% (w/o divs), they would get 8% times 90%= 7.2% less the spread of 4%.= 3.2% which is less than the cap, so they would get the full 3.2%

What I'm not sure of is, to what amount does the 3.2% get applied to....the original $10,000 amount, or is there some reduction in the "contract value" (as they call it) for commissions, admin expenses, mortality(?), etc. and this net amount is what the 3.2% gets applied to ??

His salesman is pretty slick !

1210
Here's a Forbes column I did some time back on these (IMO) horrible things.

http://www.forbes.com/2010/08/10/truth- ... dauer.html
Best Regards - Mel | | Semper Fi
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by 1210sda »

bkinder wrote:What is the purpose of this annuity (in the mind of this relative)? Certainly you can find a better way to achieve whatever goal he is trying to reach....
Who knows. He just went to his friendly personal banker recently complaining about the low CD rates and he was referred to the "investment guy" who comes to the branch once a week. I'm just trying to help him make a well thought out decision and not a knee-jerk reaction to the possibility of a higher rate without regard to the vehicle been used to try to claim that higher rate.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by dhodson »

These are deferred annuities and will perform very similar to "standard" deferred annuities bc 95-98% of the investment is the same. They take the money and invest 95+% in their general accounts which is mostly bonds and use a small % in options. The caps and participation rates can be changed by the insurance company so don't get caught up in worrying about them. You also need to consider the huge commissions/fees. It will perform slightly better or worse than standard deferred annuities. Don't get fooled into market like returns.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by gasdoc »

dhodson wrote: Don't get fooled into market like returns.
And realize the "returns" are not analagous to market returns as the return quoted for an annuity is composed partly of return of principal.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Anon1234 »

Clark Howard says "Index annuities are poison for your pocketbook"
http://www.clarkhoward.com/news/clark-h ... book/nFnw/
Of all the things you could for your wallet, buying an index annuity at any age is just about the worst thought possible.
In your example, the index annuity returned only 3.2% of an 10% market return (including dividends). When the insurance company takes 6.8% fees in a single year, do you really need to ask about Expense ratios? That's horrendous! The alternative is CDs and a conservatively allocated diversified portfolio like VTINX. Use one or a combination of both.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by itstoomuch »

Why are you trying to explain? Doesn't the sales literature work well enough? :idea:

We have 2 FIA with GLWB. It took me months and many visitations to the sales agent to understand this product. I am not enamored with the method of growth calculation. I was more interested in the various feature guarantees and the benefit payout rate. :D

I view this type of annuity as a better yield-risk than medium to long bond funds but less so than a balanced equity-bond fund.
We are "in-the-money" for the income account and will continue to accrue the guaranteed rate even in a market crash. This bucket, is the most conservative of our portfolio buckets but has the highest SWR.
As I said before in other annuity threads, this is an derivative product for which we purchased for 1) Income guarantees; 2) Insurances; 3) Investment.

:beer
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by black jack »

To OP: here's a data point for your friend about how equity index annuities work.

My mom, an unsophisticated and trusting soul, was sold a deferred equity index annuity (at age 77) after attending one of those "free financial planning information for seniors" presentations many years ago.

The money in the annuity grows based on the movement in the S%P 500 Index, as calculated on the month-to-month change in the Index with a 1.5% cap rate per month. It's guaranteed not to lose money (ie minimum return is 0%).

(Her annuity was purchased on April 1 -appropriately, April Fool's Day - so its annual return is figured from April to April)

Looking at the last two year's statements:

During the 4/2012-4/2013 year, the S&P500 Index rose 13.3% (ex dividends); her index-linked annuity value increased by 0% (zero).
During the 4/2013-4/2014 year, the S%P500 Index rose 18.7% (ex dividends); her index-linked annuity value increased by 3%.

I would like to torch the car of the salesman who sold this to her (and doubtless to many other elderly people).
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by 1210sda »

black jack wrote:To OP: here's a data point for your friend about how equity index annuities work.

My mom, an unsophisticated and trusting soul, was sold a deferred equity index annuity (at age 77) after attending one of those "free financial planning information for seniors" presentations many years ago.

The money in the annuity grows based on the movement in the S%P 500 Index, as calculated on the month-to-month change in the Index with a 1.5% cap rate per month. It's guaranteed not to lose money (ie minimum return is 0%).

(Her annuity was purchased on April 1 -appropriately, April Fool's Day - so its annual return is figured from April to April)

Looking at the last two year's statements:

During the 4/2012-4/2013 year, the S&P500 Index rose 13.3% (ex dividends); her index-linked annuity value increased by 0% (zero).
During the 4/2013-4/2014 year, the S%P500 Index rose 18.7% (ex dividends); her index-linked annuity value increased by 3%.


I would like to torch the car of the salesman who sold this to her (and doubtless to many other elderly people).
Wow Black Jack, that is quite a difference. I too have been at a "free" dinner where they pitched equity index annuities. There is very strong suggestion that you will earn close to the market (S&P500) return, maybe just a little bit less.......as per your example, not even close.

Thanks for providing this info. I hope all BH who may be considering one of these products give it a lot of thought before committing.
1210
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by bsteiner »

1210sda wrote:... I too have been at a "free" dinner where they pitched equity index annuities. ...
If you go to the free dinner seminar, and you're the one who buys the annuity, the living trust, the timeshare, or the bridge, not only did you pay for your free dinner, but you paid for the free dinners for everyone else in the room.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by 1210sda »

bsteiner wrote:
1210sda wrote:... I too have been at a "free" dinner where they pitched equity index annuities. ...
If you go to the free dinner seminar, and you're the one who buys the annuity, the living trust, the timeshare, or the bridge, not only did you pay for your free dinner, but you paid for the free dinners for everyone else in the room.
+1 lol :-D
1210
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by itstoomuch »

Most(?) people will buy annuities for their guarantees, not for their investment possibilities. The guarantees are substantial for some people.

Again, the order of our dFIA purchase was for: 1) Income; 2) Insurance; 3) Investment.
We were then 62/65 at purchase, 2012.

1) Income: Our "Income Acct" growth has been the guaranteed minimum step-up amount of 5%, annual compounding, upto 15 years vs market as cited. The withdrawal guarantee is 6.5% at 70yrs (2018) and if held for 5yrs, with remainder, single life, period certain discount does not apply because of the remainder.
2) Insurances. Regardless of the market performance, the 5% step-up and withdrawal guarantees hold. A steady market or a falling market guarantees a 5% account increase. You lose if the market returns does not increase the "account value". You gain in the "Income Acct" at withdrawal.
3) Investment: Not a good choice for the "market account" but pretty good "income Acct", better than long CDs and medium term bonds but less so than a stock-bond portfolio.

YMMV
this is a product targeted to those who is close to their Number.
Want to protect their Number prior to and after withdrawal phase
Want to leave a remainder to heirs either in this program or in their other buckets.
Those who do long range planning because the guarantees give accurate and precise minimum numbers
Who want a Pension like program but without the restrictions.
This is an "Option" derivative (Insurance) product. Options cost is the returns less premiums. Losses are absorbed by the Insurance Co.
Because I know what my minimum future income will be, I can do other Investments without worrying about "what happens if..."
Today's dFIA is not as rich as 2012's. But today's bond yield is not as good at 2012's.
Do Not attempt to explain to someone else until you thoroughly understand this product and its different aspects.
Notice every thing above is "Insurance like" and " Income like. " Only tangent relationship to Investments.

Would I buy again. In a heart beat.
Would I buy now, No, because it is a part of our portfolio and we do not need to have more Insurance.
I could do better in a good MF/Index. I do better in my trading accounts than Index MFs. Back testing is meaningless to me. The Future is more important.

:annoyed
GL
:beer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by gasdoc »

itstoomuch wrote:Most(?) people will buy annuities for their guarantees, not for their investment possibilities. The guarantees are substantial for some people.

Again, the order of our dFIA purchase was for: 1) Income; 2) Insurance; 3) Investment.
We were then 62/65 at purchase, 2012.

1) Income: Our "Income Acct" growth has been the guaranteed minimum step-up amount of 5%, annual compounding, upto 15 years vs market as cited. The withdrawal guarantee is 6.5% at 70yrs (2018) and if held for 5yrs, with remainder, single life, period certain discount does not apply because of the remainder.
2) Insurances. Regardless of the market performance, the 5% step-up and withdrawal guarantees hold. A steady market or a falling market guarantees a 5% account increase. You lose if the market returns does not increase the "account value". You gain in the "Income Acct" at withdrawal.
3) Investment: Not a good choice for the "market account" but pretty good "income Acct", better than long CDs and medium term bonds but less so than a stock-bond portfolio.

YMMV
this is a product targeted to those who is close to their Number.
Want to protect their Number prior to and after withdrawal phase
Want to leave a remainder to heirs either in this program or in their other buckets.
Those who do long range planning because the guarantees give accurate and precise minimum numbers
Who want a Pension like program but without the restrictions.
This is an "Option" derivative (Insurance) product. Options cost is the returns less premiums. Losses are absorbed by the Insurance Co.
Because I know what my minimum future income will be, I can do other Investments without worrying about "what happens if..."
Today's dFIA is not as rich as 2012's. But today's bond yield is not as good at 2012's.
Do Not attempt to explain to someone else until you thoroughly understand this product and its different aspects.
Notice every thing above is "Insurance like" and " Income like. " Only tangent relationship to Investments.

Would I buy again. In a heart beat.
Would I buy now, No, because it is a part of our portfolio and we do not need to have more Insurance.
I could do better in a good MF/Index. I do better in my trading accounts than Index MFs. Back testing is meaningless to me. The Future is more important.

:annoyed
GL
:beer
Not to be argumentative, but wouldn't it be better to purchase a standard immediate or deferred annuity, and then find another vehicle to do the other stuff? Basic imediate and deferred income annuities are like term life. Every company offers them, keeping the price down.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by malabargold »

Shakespeare said it best " what's past is prologue . . ."
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Mel Lindauer »

bkinder wrote:
itstoomuch wrote:Most(?) people will buy annuities for their guarantees, not for their investment possibilities. The guarantees are substantial for some people.

Again, the order of our dFIA purchase was for: 1) Income; 2) Insurance; 3) Investment.
We were then 62/65 at purchase, 2012.

1) Income: Our "Income Acct" growth has been the guaranteed minimum step-up amount of 5%, annual compounding, upto 15 years vs market as cited. The withdrawal guarantee is 6.5% at 70yrs (2018) and if held for 5yrs, with remainder, single life, period certain discount does not apply because of the remainder.
2) Insurances. Regardless of the market performance, the 5% step-up and withdrawal guarantees hold. A steady market or a falling market guarantees a 5% account increase. You lose if the market returns does not increase the "account value". You gain in the "Income Acct" at withdrawal.
3) Investment: Not a good choice for the "market account" but pretty good "income Acct", better than long CDs and medium term bonds but less so than a stock-bond portfolio.

YMMV
this is a product targeted to those who is close to their Number.
Want to protect their Number prior to and after withdrawal phase
Want to leave a remainder to heirs either in this program or in their other buckets.
Those who do long range planning because the guarantees give accurate and precise minimum numbers
Who want a Pension like program but without the restrictions.
This is an "Option" derivative (Insurance) product. Options cost is the returns less premiums. Losses are absorbed by the Insurance Co.
Because I know what my minimum future income will be, I can do other Investments without worrying about "what happens if..."
Today's dFIA is not as rich as 2012's. But today's bond yield is not as good at 2012's.
Do Not attempt to explain to someone else until you thoroughly understand this product and its different aspects.
Notice every thing above is "Insurance like" and " Income like. " Only tangent relationship to Investments.

Would I buy again. In a heart beat.
Would I buy now, No, because it is a part of our portfolio and we do not need to have more Insurance.
I could do better in a good MF/Index. I do better in my trading accounts than Index MFs. Back testing is meaningless to me. The Future is more important.

:annoyed
GL
:beer
Not to be argumentative, but wouldn't it be better to purchase a standard immediate or deferred annuity, and then find another vehicle to do the other stuff? Basic imediate and deferred income annuities are like term life. Every company offers them, keeping the price down.
Nothing argumentative about your question at all. Actually, buying a SPIA when/if needed is what most smart Bogleheads do IF they determine later in life that they need income they can't outlive. No sense paying all those expensive annuity charges for years and years just to convert it to a SPIA later in life. Makes no sense to me nor to most Bogleheads. Of course it does make sense to an annuity salesperson, though.
Best Regards - Mel | | Semper Fi
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by itstoomuch »

@bkinder

I don't know if deferred income was around in my state in 2012. I had some difficulty analyzing dFIA type of annuity to competing companies.

http://www.wsj.com/articles/SB100014241 ... 0361527424
http://www.kiplinger.com/article/retire ... ility.html
These products are a cross between deferred variable annuities with guaranteed benefits and immediate annuities. Like the variable annuities, you don't tap your account for a number of years, allowing the money to grow. Like the immediate annuity, your monthly payout is fixed for life; the payout generally doesn't increase, as it can with variable annuities. These annuities "can create almost a pension-like income in retirement," says Jafor Iqbal, associate managing director of retirement research for consulting firm LIMRA.

Deferred income annuities have been wildly successful since they were introduced in 2011. New York Life has sold more than $1 billion in less than two years. Nine companies now offer these products, Iqbal says. Fidelity allows you to compare four versions (New York Life, MassMutual, Guardian and The Principal) on their Web site at http://www.fidelity.com/annuities/defer ... es/compare.

Only several years ago, the insurance industry was furiously marketing variable deferred annuities. The products promised a lifetime guarantee of 5% or 6% of the initial investment—or of the highest point the investment reached. But insurers found themselves on the hook for these guarantees they sold before the 2008 market downturn. Since then, companies have been reducing guarantees for variable deferred annuities.

Read more at http://www.kiplinger.com/article/retire ... 8t4q3fU.99
Don't like SPIA s because you give up too much and if you wait to do a SPIA, you don't know the rate until you apply for one. Would you like to guess what a SPIA will be in 5 years?

Already had deferred variable annuities. Purchased in 2008. By 2012, this type of annuity was less attractive than a dFIA-the dFIA was less costly, greater and richer guarantees vs dVA with guarantees.

What I'm trying to get at, "it works for me, now and at the time of purchase." It may may not work for you because the features are not as rich, better alternatives, your goals are different, or whatever. Don't let someone make the decision for you. You have to investigate and make your own considered purchase.

Will I later consider a SPIA, or deferred income annuity. Yes, but not now. I still retain the option to quit the dVA and dFIA, I will lose the paid fees but I view them as the option premium. :annoyed
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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gasdoc
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by gasdoc »

Just an aside- Vanguard now offers various annuities. i wonder if anyone has experience purchasing an annuity from Vanguard. Actually, I think I will start a separate post about this, so please post on that discussion instead of here. Thanks.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by LadyGeek »

The wiki has some background info: Equity-indexed annuity, note the big warning at the top of the page.

gasdoc's thread is here: Experience with Vanguard Annuities?
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dhodson
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by dhodson »

Definitely the guarantees are now much worse. That's not even a question. In general they are bad deals. Sure maybe every once in a while someone market times the product before the insurance companies adjust prices but you have better odds with stock picking.

Talking about some previous pricing/deal that can't be done currently isn't helpful and one only now knows it was a good deal(assuming the insurance company makes good on the promise).
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by itstoomuch »

^ Worse is a relative term. What is offered today is worse than what was offered then. But What I was offered then, was better than, the then competing alternative products :annoyed

If I market timed this product, good for me. I like to say that I know how to pick a good offer at the right time because I spend time and effort in learning and comparing products for the remaining period of my life. :mrgreen: Likewise I'd like to say that I also make good company picks but what I picked yesterday is no guarantee that it will perform as projected. ie no guarantees on MF, ETFs, Bonds, or any Investments-NONE, until you sell a holding or buy to cover a short.

GL
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by mlebuf »

Tell your relative that he should never invest in anything that he does not understand or can't explain to a 12 year-old. That automatically rules out equity index annuities and loads of other investments pitched by slick salespeople. The annuity salesperson is hoping to make a big commission from getting him to buy. They make it sound too good to be true, and it is.
Best wishes, | Michael | | Invest your time actively and your money passively.
dhodson
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by dhodson »

itstoomuch wrote:^ Worse is a relative term. What is offered today is worse than what was offered then. But What I was offered then, was better than, the then competing alternative products :annoyed

If I market timed this product, good for me. I like to say that I know how to pick a good offer at the right time because I spend time and effort in learning and comparing products for the remaining period of my life. :mrgreen: Likewise I'd like to say that I also make good company picks but what I picked yesterday is no guarantee that it will perform as projected. ie no guarantees on MF, ETFs, Bonds, or any Investments-NONE, until you sell a holding or buy to cover a short.

GL
Feel free to market time all you want. I'm glad you are happy with your purchase and I mean that. I actually buy individual stocks with about 10% of my portfolio for fun. I realize that there isn't any good evidence for it and thus I don't recommend it. Same is true with these products.
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by black jack »

Thought I'd update this post (as a warning to others, and to relieve my frustration), as I just received my mom's annual statement.

You can see my account of my mom's purchase of an equity-indexed annuity up-thread.

For the most recent year (April 1 2014-March 31 2015): S&P 500 return (including dividends reinvested): 12.73%
Return on my mom's annuity indexed to the S&P 500: 0.0%.

For those unfamiliar with how these work - I assume others work similar to my mom's - there is a cap on the amount of increase in the S&P 500 that is credited to the annuity each month (there are various flavors of this - different spans of months and years). In mom's account, the cap is 1.5%. So if the S&P 500 goes up every month, she scores. But if it goes up by almost any amount (2%, 10%, 100% a month) for, say, six months, then goes down by at least 1.5% a month for six months, her return is 0.

In the past three years (April 2012 - April 2015), the cumulative return of the S&P 500, excluding dividends, has been 50%.
The cumulative return on mom's annuity indexed to the S&P 500 over that same period: 3%.
We cannot absolutely prove [that they are wrong who say] that we have seen our best days. But so said all who came before us, and with just as much apparent reason. | -T. B. Macaulay (1800-1859)
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by itstoomuch »

FI-annuity is NOT an investment product! It is an Income and Insurance Product.

So what is the Income Account value?
What is the guaranteed lifetime income withdrawal rate?
How long is the guarantee run prior to withdrawal?
Is the guarantee compounding or simple?
Is the withdrawal guarantee age based? Age and Holding period based? or Holding based?
What happens if the beneficiary takes income and then dies shortly on taking the income?
Is there a nursing home/care benefit?
What happens when the Index drops by 20% in the fiscal year of the FI Annuity?
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by black jack »

I didn't hear the sales pitch made to my parents, so I don't know under what guise this product was sold to them. As best I could make out from their explanation of why they transferred their retirement savings from their IRAs to a product whose details they didn't understand, it was insurance for their retirement savings - to make sure that their savings never lost value (the guarantee is no loss in (nominal) value), in exchange for trading off some of the potential increase.

And it is a deferred equity-indexed annuity, so no income is being drawn from it. After the deferral period (fifteen years) the investment will be returned with whatever it has gained over that period. They had - now mom has - a pension and SS, plus some investment properties, which more or less covered their expenses, so they did not expect to need the money, and thankfully that has been the case thus far.

The workings of the equity index mechanism are difficult to calculate for most mortals, especially the seniors to whom this product seems to be targeted. I offer this as a real-world example of what the trade-off of the potential increase can represent. As someone observed up-thread, it is very expensive insurance.
We cannot absolutely prove [that they are wrong who say] that we have seen our best days. But so said all who came before us, and with just as much apparent reason. | -T. B. Macaulay (1800-1859)
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Mel Lindauer »

black jack wrote:I didn't hear the sales pitch made to my parents, so I don't know under what guise this product was sold to them. As best I could make out from their explanation of why they transferred their retirement savings from their IRAs to a product whose details they didn't understand, it was insurance for their retirement savings - to make sure that their savings never lost value (the guarantee is no loss in (nominal) value), in exchange for trading off some of the potential increase.

And it is a deferred equity-indexed annuity, so no income is being drawn from it. After the deferral period (fifteen years) the investment will be returned with whatever it has gained over that period. They had - now mom has - a pension and SS, plus some investment properties, which more or less covered their expenses, so they did not expect to need the money, and thankfully that has been the case thus far.

The workings of the equity index mechanism are difficult to calculate for most mortals, especially the seniors to whom this product seems to be targeted. I offer this as a real-world example of what the trade-off of the potential increase can represent. As someone observed up-thread, it is very expensive insurance.
I wrote about the grossly misleading sales pitches for this horrible product in this Forbes "expose". http://www.forbes.com/2010/08/10/truth- ... dauer.html

Nothing makes me madder than to see seniors being taken advantage of by misleading sales pitches from unscrupulous and/or misguided insurance sales folks who only have one thing in mind - getting that huge commission for pushing this horrible product.

Feel free to share my column with any and all those who may be susceptible to these sharks. Very often, they're sold at those "educational dinners" at a local restaurant.

BUYER BEWARE!
Best Regards - Mel | | Semper Fi
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Ron »

black jack wrote:<snip...>For the most recent year (April 1 2014-March 31 2015): S&P 500 return (including dividends reinvested): 12.73%
Return on my mom's annuity indexed to the S&P 500: 0.0%.

For those unfamiliar with how these work - I assume others work similar to my mom's - there is a cap on the amount of increase in the S&P 500 that is credited to the annuity each month (there are various flavors of this - different spans of months and years). In mom's account, the cap is 1.5%. So if the S&P 500 goes up every month, she scores. But if it goes up by almost any amount (2%, 10%, 100% a month) for, say, six months, then goes down by at least 1.5% a month for six months, her return is 0.

In the past three years (April 2012 - April 2015), the cumulative return of the S&P 500, excluding dividends, has been 50%.
The cumulative return on mom's annuity indexed to the S&P 500 over that same period: 3%.
But, but, she didn't "lose" any money :oops: !!!

I've been to several of these presentations and I can tell you the audience consists of those seniors (of which I am) that have more fear of losing money than anything else. When I question the presenter on the limits to any "gains", they always respond with the question of "what impacts you more, limits on gains or losing a good deal of $$$ like happened in 1987, 2000-02, or 2008-09?" Most (but not all) of the audience nod in agreement to the presenter's statement.

It's a product for folks fearful of losing what they spent their whole working lives to accumulate and those that look at the short term - that is referencing those periods that the market has been down, while ignoring the long term up trend.

Every product has a market. As for me? No thanks...

- Ron
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Re: Please Help Me Explain an Equity Index Annuity to a Rela

Post by Mel Lindauer »

Ron wrote:
black jack wrote:<snip...>For the most recent year (April 1 2014-March 31 2015): S&P 500 return (including dividends reinvested): 12.73%
Return on my mom's annuity indexed to the S&P 500: 0.0%.

For those unfamiliar with how these work - I assume others work similar to my mom's - there is a cap on the amount of increase in the S&P 500 that is credited to the annuity each month (there are various flavors of this - different spans of months and years). In mom's account, the cap is 1.5%. So if the S&P 500 goes up every month, she scores. But if it goes up by almost any amount (2%, 10%, 100% a month) for, say, six months, then goes down by at least 1.5% a month for six months, her return is 0.

In the past three years (April 2012 - April 2015), the cumulative return of the S&P 500, excluding dividends, has been 50%.
The cumulative return on mom's annuity indexed to the S&P 500 over that same period: 3%.
But, but, she didn't "lose" any money :oops: !!!

I've been to several of these presentations and I can tell you the audience consists of those seniors (of which I am) that have more fear of losing money than anything else. When I question the presenter on the limits to any "gains", they always respond with the question of "what impacts you more, limits on gains or losing a good deal of $$$ like happened in 1987, 2000-02, or 2008-09?" Most (but not all) of the audience nod in agreement to the presenter's statement.

It's a product for folks fearful of losing what they spent their whole working lives to accumulate and those that look at the short term - that is referencing those periods that the market has been down, while ignoring the long term up trend.

Every product has a market. As for me? No thanks...

- Ron
They won't lose money with CDs and Treasuries, either. And unlike Indexed Annuities, you know what you'll earn. More importantly, unlike the confusing annuity product, you'll understand what you're buying with CDs and Treasuries.
Best Regards - Mel | | Semper Fi
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