Please Help - Analyze this annuity w/ income rider

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cheerful runner
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Please Help - Analyze this annuity w/ income rider

Post by cheerful runner » Wed Nov 27, 2019 12:24 pm

Please help me analyze this situation for my parents. They are in their mid-sixties and close to retirement. With pensions and social security, their income will be approximately $5,000 per month. They live in a low cost of living area with a paid off home. Monthly expenses are estimated between $3,000 to $4,000 per month.

For many years they have been with a full-service financial advisor. Recently they have moved approximately $330K to Charles Schwab which is now held in a 60% stock / 40% bond mix of index funds, but they still have an annuity remaining with old financial advisor.

The annuity was sold to my parents in Oct. 2014 for $100,000 and is currently valued at $117,000. The annuity is with AIG and is invested in Polaris Platinum O Series Sun Dynamic Allocation that appears to have a 40% stock / 60% bond AA with 10% international.

Per the financial adviser, the annuity has an income rider that over a 12-year period guarantees a protected base amount that will grow by 6% or market returns, whichever is greater. After the 12-year period, the plan guarantees a 5% annual payment for the life of my parents. The 5% payment is based on the protected payment amount. 5 years into the 12-year period, the annuity statement shows a protected base amount of $130,000 and a protected lifetime payment of $4,550 per year. The surrender fee is currently $2,000 which yields a surrender value of $115,000.

Based on the above information, is there any reason to keep this annuity or would it be wiser to surrender and move to the 40/60 allocation at Schwab?

If my parents are interested in guaranteed income, how would the purchase of a SPIA compare to this annuity?

Thanks in advance for your responses!
Last edited by cheerful runner on Sun Dec 01, 2019 9:55 am, edited 2 times in total.

dbr
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Re: Please Help - Analyze this annuity w/ income rider

Post by dbr » Wed Nov 27, 2019 12:28 pm

You can check current SPIA quotes at https://www.immediateannuities.com/

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Stinky
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Re: Please Help - Analyze this annuity w/ income rider

Post by Stinky » Wed Nov 27, 2019 1:11 pm

What are the fees on the annuity and on the underlying funds?

I'm guessing that the all-in fees are 3% per year or more. If that's the case, the choice is pretty simple in my mind - surrender and move the money.

Those income riders sold post-financial crisis are a good deal for the insurance companies, not so good for the policyholder. There were some mis-priced income riders (that is, too rich for the policyholder) sold before the financial crisis, but that practice stopped abruptly in the 2007-8 timeframe. Just knowing that your parents bought the annuity in 2014 tells me that the income rider is a money-maker for AIG.
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Topic Author
cheerful runner
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Re: Please Help - Analyze this annuity w/ income rider

Post by cheerful runner » Wed Nov 27, 2019 1:35 pm

What are the fees on the annuity and on the underlying funds?
Not sure how to find this. I assumed 2% or greater.

retired@50
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Re: Please Help - Analyze this annuity w/ income rider

Post by retired@50 » Wed Nov 27, 2019 1:45 pm

If their income from pension and SS already exceeds their monthly expenses, it seems that an annuity is perhaps more income protection than they need...??? I agree with Stinky, avoid the fees, pay the surrender charge and invest per the asset allocation that makes them comfortable.

Regards,

dbr
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Re: Please Help - Analyze this annuity w/ income rider

Post by dbr » Wed Nov 27, 2019 1:48 pm

retired@50 wrote:
Wed Nov 27, 2019 1:45 pm
If their income from pension and SS already exceeds their monthly expenses, it seems that an annuity is perhaps more income protection than they need...??? I agree with Stinky, avoid the fees, pay the surrender charge and invest per the asset allocation that makes them comfortable.

Regards,
Yes, there could easily be no need for an annuity at all. Probably the only person who needed these people in an annuity is the person who sold it.

However one should also check on cutting fees using a 1035 exchange. I don't know much about that but I think it is an option that should be checked.

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BL
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Re: Please Help - Analyze this annuity w/ income rider

Post by BL » Wed Nov 27, 2019 8:23 pm

It might be important to know if this is an IRA or not, especially if considering a 1035 exchange to a low-fee company.
I believe you can get an in-force illustration from the company showing more info and guaranteed values.

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Stinky
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Re: Please Help - Analyze this annuity w/ income rider

Post by Stinky » Thu Nov 28, 2019 8:14 am

cheerful runner wrote:
Wed Nov 27, 2019 1:35 pm
What are the fees on the annuity and on the underlying funds?
Not sure how to find this. I assumed 2% or greater.
The first place that I would look for the fees is on the most recent annual report for the policy. I assume that there will be a separate line item for fees. Look for both base contract (possibly "mortality and expense") fees, plus rider fees.

Beyond that,. there will be fees for the underlying funds. Maybe look at the funds in Morningstar, or post the fund names and symbols on the Board.

Following is a link to prospectuses for AIG annuities (I think) that could also help out. I clicked through on one of the links, and it appeared to give "minimum" and "maximum" charges, not current charges. https://www.valic.com/prospectus-and-reports/annuities

Hope this helps. Post back on the Board with questions. I'm betting that the aggregate fees will be 3% or more.
It's a GREAT day to be alive - Travis Tritt

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cheerful runner
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Re: Please Help - Analyze this annuity w/ income rider

Post by cheerful runner » Sat Nov 30, 2019 9:02 pm

Thanks everyone for your responses so far.
dbr wrote:
Wed Nov 27, 2019 12:28 pm
You can check current SPIA quotes at https://www.immediateannuities.com/
It appears a SPIA purchased today with similar terms would yield $720 per month. If I make some assumptions based on what the financial advisor has said, the income rider may yield $830 per month. Will request an in-force illustration of guaranteed values to see if this is accurate.
retired@50 wrote:
Wed Nov 27, 2019 1:45 pm
If their income from pension and SS already exceeds their monthly expenses, it seems that an annuity is perhaps more income protection than they need...???
Good point. Will have to see how my parents feel about this.
BL wrote:
Wed Nov 27, 2019 8:23 pm
It might be important to know if this is an IRA or not, especially if considering a 1035 exchange to a low-fee company.
I believe you can get an in-force illustration from the company showing more info and guaranteed values.
Yes - This is in an IRA
Stinky wrote:
Thu Nov 28, 2019 8:14 am
The first place that I would look for the fees is on the most recent annual report for the policy. I assume that there will be a separate line item for fees. Look for both base contract (possibly "mortality and expense") fees, plus rider fees.

Beyond that,. there will be fees for the underlying funds. Maybe look at the funds in Morningstar, or post the fund names and symbols on the Board.
I've requested this from my parents. Based on this link, the net expense ratio of the underlying funds appears to be 0.8% to 1.05% depending on the class of shares. https://www.sec.gov/Archives/edgar/data ... 3d497k.htm

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David Jay
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Re: Please Help - Analyze this annuity w/ income rider

Post by David Jay » Sun Dec 01, 2019 7:32 pm

cheerful runner wrote:
Sat Nov 30, 2019 9:02 pm
BL wrote:
Wed Nov 27, 2019 8:23 pm
It might be important to know if this is an IRA or not, especially if considering a 1035 exchange to a low-fee company.
I believe you can get an in-force illustration from the company showing more info and guaranteed values.
Yes - This is in an IRA
OUCH!
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: Please Help - Analyze this annuity w/ income rider

Post by Stinky » Mon Dec 02, 2019 7:53 am

cheerful runner wrote:
Sat Nov 30, 2019 9:02 pm
Stinky wrote:
Thu Nov 28, 2019 8:14 am
The first place that I would look for the fees is on the most recent annual report for the policy. I assume that there will be a separate line item for fees. Look for both base contract (possibly "mortality and expense") fees, plus rider fees.

Beyond that,. there will be fees for the underlying funds. Maybe look at the funds in Morningstar, or post the fund names and symbols on the Board.
I've requested this from my parents. Based on this link, the net expense ratio of the underlying funds appears to be 0.8% to 1.05% depending on the class of shares. https://www.sec.gov/Archives/edgar/data ... 3d497k.htm
With expenses of +-1% on the mutual funds, plus probably another +-1% for each of the base contract (mortality and expense) and rider charges, you're on track for a 3% total expense ratio.

And it's inside an IRA to boot? IRA already provides tax-sheltering, and then annuity adds another totally unnecessary level of tax-sheltering. And you're paying 3% for that unnecessary feature. :oops:
It's a GREAT day to be alive - Travis Tritt

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JoeRetire
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Re: Please Help - Analyze this annuity w/ income rider

Post by JoeRetire » Mon Dec 02, 2019 8:01 am

cheerful runner wrote:
Wed Nov 27, 2019 12:24 pm
Please help me analyze this situation for my parents. They are in their mid-sixties and close to retirement. With pensions and social security, their income will be approximately $5,000 per month. They live in a low cost of living area with a paid off home. Monthly expenses are estimated between $3,000 to $4,000 per month.

If my parents are interested in guaranteed income, how would the purchase of a SPIA compare to this annuity?
Why would they be interested in guaranteed income for life if all their expenses are already covered by their pensions and social security?
Don't be a lemming.

Rudedog
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Re: Please Help - Analyze this annuity w/ income rider

Post by Rudedog » Mon Dec 02, 2019 8:46 am

The "advisor" who sold them that annuity within an IRA should be ashamed of himself.

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