Sunday, May 29, 2005
When we think of the word equity we think of the stock market. And when we think of the stock market, many of us have a bad memory of the severe losses sustained in the recent market decline. Well, the problem is, the equity index annuity is a FIXED annuity. However, the name would have you think otherwise.
Now let me preface this by sating, not all index annuities were created equal. Some of them just flatout suck and end up really nailing the client to the wall. So before you go out and buy one, do your homework. But, here's something you need to know. Although the UPSIDE performance of an indexed annuity is based on some index of the market, it is a FIXED annuity. This means, barring any disasters, IF you hold it the full length of the term, you cannot lose money...in fact, you can only make money. Now, again, don't cofuse this with a variable annuity that invests in an index. I am talking about a fixed equity index annuity.
So to me, one of the biggest problems with the EIA is the name....Who is the idiot that called it that? I get more people asking me about that than any other question. Yes, the name is confusing and somebody should change it.
So you may think this is my personal issue, but I am honest in saying, it is the fact that it is so confusing for clients. The name has one believe that there is stock market risk involved. Now, there is one other huge problem with the index annuity. I am going to share that with you tomorrow. Please stay tune because this is a good one.
By the way, I never tout my product, but I think this time I will. The Shocking Truths Revealed is a book I wrote that really goes into detail about how people get hurt with annuities and how you can avoid these mistakes. IF you haven't seen it, go to http://www.AnnuityMD.com. It is worth checking out. And I wrote a follow up book which can be picked up as an upgrade STRICTLY on the equity index annuity. This is a must if you are thinking about these vehicles. Okay, that plug is over.
Thank you and remember,
Ignorance is NOT Bliss.
P.S. Here are a couple of more resources. I like to share them with you and I hope you don't mind:
Wednesday, May 25, 2005
Yes, it's not annuity info but some people have requested this so here they are.
We got into a conversation about the living benefit. He told me of an annuity that would offer 12.5% return over a 20 year guarantee period. Now, this sounds wonderful, right? And a little too good to be true, right? On the surface, it looks like the client gets 12.5% per year if the market does not do well over a 20 year period. But here is how it really works. The guarantee is 12.5% of the amount you invest each year for 20 years. So if you put in $100K, you would be guaranteed $12,500 the first year and increases $12,500 per year until year 20 where your principal would be worth $250,000 in this case.
So the bottom line is that if the market didn't perform you would be guaranteed 250% of your original principal at the end of 20 years. Now pay attention. Here is how to see if the living benefit is worth paying for. First of all, the rate of return annualized for this type of return is around 4.68%. So let's initially compare that with any other 20 year rate of return...Hmmm....I think I could get 4.68% anywhere for 20 years on my money (probably for less time that that too). Furthermore, the chances of the market returning less than 4.68% over 20 years is slim to none. In the worst 20 year period, the S&P returned an annual average of 6.43% (according to http://www.mutualofamerica.com/articles/CapMan/October03/SandP500.htm.)
So logically, if you pay extra for this feature, it proboably doesn't make sense. Now seriously, there's always exceptions to the rule because anything can happen in the stock market. But if this feature cost you .50% and the annuity cost you 2.50% you now have 3% in expenses. And chances are you will never need nor use it so you have mitigated your returns and paid an extra $500 or more per year for 20 years in this case (hey $10,000 is a lot of money).
Living benefits are tricky and weighted heavily to favor the insurance company...not the client. Before you pay for a living benefit, analyze it in this way to see if it makes sense. Again, I am not against them completely, I just think you better understand them.
Ignorance is Not Bliss!!!
By the way, some of you have asked me for resources regarding the stock market. Here are two such resources:
Stock Market Basics
Stock Market Directory
Monday, May 23, 2005
Speaking of Variable Annuities
Retirement Needs Spur New VA Products Article published on May 20, 2005 By Alison Sahoo
-->A growing number of variable annuity providers are introducing products and programs to help soon-to-retire baby boomers convert investments into income that will replace wage earnings.
New offerings include VAs with guaranteed minimum withdrawal benefits (GMWBs) for life and VAs marketed to holders of individual retirement accounts (IRAs).
Earlier this month, John Hancock enhanced its Principal Plus GMWB option for its Venture family of variable annuities, raising the guarantee period from five years to effectively cover older contract holders’ entire lifetime.
GMWBs protect investors against market volatility by allowing them to make systematic withdrawals from a protected value for a certain period of time.
Hancock’s move, says Manulife Wood Logan president Robert Cassato, was designed to expand upon the product’s strong sales momentum. Manulife Wood Logan provides sales and marketing support for John Hancock’s investment products.
Principal Plus was introduced in late 2003. In 2004, says Cassato, sales jumped 47% from the prior year and the rider was included in 50% of total sales. Now, the rider is included in about 80% of new sales.
The new lifetime benefit allows clients to withdraw up to 5% of their initial payment each year for 20 years regardless of market performance. It also guarantees payments for the life of contract owners who are 65 or older.
That gives retirees a steady stream of income and is especially important, Cassato notes, since less than 1% of all contract holders now convert their VAs into payment streams through annuitization.
The vast majority, he says, never realize the products’ intended benefit of receiving regular payments from their investment because they’re afraid that by annuitizing, they’ll give up their ability to access their full holdings should they need them.
“We’re so excited about this,” he says. “This comes at a time when baby boomers are looking to convert their nest egg into a pension and makes VAs the product of choice for the retiring generation.”
Principal Plus is priced at 30 basis points and the new Principal Plus for Life costs 40 basis points. Cassato says he expects most new business to shift to the enhanced option.
GMWBs were pioneered by Hartford in mid-2002, when the company launched its Principal First benefit. The rider allows contract holders to withdraw 7% of their investment principal each year until it’s exhausted. That usually takes 10 or 12 years and investors pay 50 basis points each year for it.
Last year, Hartford expanded its offering with Principal First Preferred. It allows investors to withdraw 5% each year, so payments are spread over a longer period of time. It costs 20 basis points.
Neither, however, guarantees payouts for the life of the contract holder.
Hartford vice president for annuity product development Rob Arena says that the company is focused on designing investment and income products to help retirees both accumulate assets and generate an income stream that will last their lifetime.
“With our variable annuity products, we are helping investors meet these needs by offering a broad range of asset allocation solutions to address their changing investment objectives and living benefits such as GMWBs for retirement income planning,” he says.
The company recently expanded its Director M variable annuity, adding six new investment managers and three new mutual funds.
Despite the growing popularity of GMWBs, however, some say that consumers should still be cautious because the products are complicated.
“The problem is the way that brokers and agents describe the guarantee,” says Tony Bahu, CEO of AnnuityMd.com and author of Annuities: The Shocking Truths Revealed. “Most of the time, the agent doesn’t explain it properly, so people aren’t aware of how they work. Investors should also do their own homework.”
Other VA providers are focusing on encouraging investors to use their products as an investment vehicle for their retirement accounts.
MassMutual, for example, has just launched a new campaign to help financial pros pitch VAs for retirement account rollovers.
Although the ability to defer income tax on gains from VAs duplicates that feature of qualified retirement plans, VAs offer some other benefits that can be very attractive.
Those include income benefits like the GMWB and death benefits that will protect the value of VAs from market declines for contract holders’ heirs. When the customer dies, heirs can receive the higher of the original principal paid in or the contract value on its highest anniversary, depending upon the option selected.
A spokesman for MassMutual could not provide further detail by press time.
According to the National Association for Variable Annuities (NAVA), net flows into VAs were $8.2 billion in the fourth quarter of last year, a 37.9% decrease from a year ago. That includes customer withdrawals and transfers. At the end of the quarter, there was $1.1 trillion in assets held in VAs. This represents a 7.2% drop from the end of 2003.
_______________________________End of Article
Yes, these living benefits are very tricky, and sometimes deceiving. I also believe they are explained so poorly by agents and the industry and that is what makes them so deceiving. Once again, I am not inherently against them (nor for them) but because I have seen so many people get burned by them, I am very leary.
Let me explain. Many people are never told that if the 'iving benefit' comes into play, in most annuities, there are strings attached. This means that there are limitations over how you can take your money. With that said, it comes back to haunt the client later.
Furthermore, the living benefit has a price to it. Factor that in with the cost of variable annuities, and you have yourself one expensive investment vehicle. If the market averages 9% over time and your expenses are over 3% and your living benefit guarantees you 6% return, do you see where that becomes a problem?
There is much more to it but I will get into it in the near future in more detail. Thanks for listenting.
For more information, visit:
Tuesday, May 17, 2005
There are many of our subscribers who are involved with variable annuities. One of the biggest challenges with the variable annuity is once you've suffered large losses in the annuity. Why is that an issue? Because, variable annuities have a 'life insurance' policy built in. For example, if you put in $500,000 and over time due to market losses, your variable annuity is only worth $350,000, your death benefit is still the original $500,000. So if you surrender the annuity policy, you may alos surrender your $500,000 death benefit. That is a hard pill to swallow.
Well, what the insurance companies won't tell you is that there are different ways to 'wind down' your annuity without losing all of the benefits. In a variable annuity, there are different ways to calculate your surrender charges. It boils down to what is called dollar for dollar withdrawal versus pro-rata withdrawals. All this means is that, in dollar-for-dollar withdrawal, when you take money out, your death benefit gets reduced by $1 for every $1 you withdraw...where as in pro-rata, if you take out 70% of the money, it reduces the death benefit by 70%.
Now get this...if you have an annuity worth $350,00 with a death benefit of $500,000, and you have dollar-for-dollar withdrawal, then guess what? IF you withdraw $300,000 then you may still have a death benefit of $200,000. This works provided that you keep the annuity in-tact in this example. Therefore, you still have an annuity worth $50,000 with a death benefit of $200,000 and $300,000 (less surrender charges). Now, this is completely unadvertised by the insurance companies.
Furthermore, often times in SOME annuities, the surrender charge sometimes has a twist. For example, if you want to withdraw your entire amount, often times the surrender charge is assessed on the original invested amount. However, if you want to withdraw a portion, the surrender charge is assessed only on the withdrawal amount.
So here's the situation. IF you were in the predicament as mentioned above ($350,000 annuity with $500,000 surrender charge), you may look at this. IF it has dollar for dollar withdrawal, you can withdraw $300,000. If the surrender charge is 3%, instead of getting hit with a 3% charge on the $500,000 and losing your entire death benefit, you would get a 3% surrender charge on $300,000 and keep a $200,000 death benefit. In this situation, you would have saved $6,000 in surrender charges and you now have a $200,000 death benefit fully paid for for the rest of your life.
Now if you are starting to get this, you can see the value of it. Remember, this doesn't work for all variable annutiies, and ou should definintely consult with a professional before making these types of decisions, but I just wanted to let you know that there is a better way.
For more information, please visit:
Sunday, May 15, 2005
Some EIAs average an index's value either daily or monthly rather than use the actual value of the index on a specified date. Averaging may reduce the amount of index-linked interest you earn.
While averaging CAN reduce the amount you earn, averaging can also smooth out the ride. What averaging does is instead of measuring a starting and a finishing point, the insurance company takes the beginning value of the index on a specified date. Then depending on whether it is daily or monthly averaging, they average the value of the market based on the specific period. Then, they subtract the average value from the starting value.
The point is, yes, you are taking an average so if the market went straight up, the average would be lower than the final point. That is, if you take the average of 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10 with 10 being the finishing point, the average is obviously lower than 10. However, the market went straigh up and stayed high, only to go below it's starting point after 1 year, point-to-point would give you no return where averaging would have a better chance in this situation.
Each has its benefits and like anything else, it may pay to diversify strategies.
The way that an insurance company calculates interest earned during the term of an EIA can make a big difference in the amount of money you will earn. Some EIAs pay simple interest during the term of the annuity. Because there is no compounding of interest, your return will be lower.
Although this is true, check with your annuity. Most EIA's pay compounding interest. Particulary EIA's that have annual reset, which in my opinion is a MUST. Again, that is only my opinion. Your situation may vary and you should seek the help of a professional to determine what is right for you.
Exclusion of Dividends.
Most EIAs only count equity index gains from market price changes, excluding any gains from dividends. Since you're not earning dividends, you won't earn as much as if you invested directly in the market.
But you also can't lose money due to market risk like you can in the market. However, the fact that it doesn't pay dividends warrants attention. Dividends account for a good portion of the gains in the market so you should be aware of this.
Can I get my money when I need it?
EIAs are long-term investments. Getting out early may mean taking a loss. Many EIAs have surrender charges. The surrender charge can be a percentage of the amount withdrawn or a reduction in the interest rate credited to the EIA.Also, any withdrawals from tax-deferred annuities before you reach the age of 59½ are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income.
Very good points. Always remember that annuities require time to be worth it. They can offer you more than a traditional CD can because you are offering them time on your money and that is the tradeoff.
Ignorance is not Bliss.
For more information and resources on annuities, go to:
Thursday, May 12, 2005
Good insurance is hard to find. There are many different resources to find insurance but how do you know where to go for it? Well, there is a resource that has many different links and articles all in one place. I see disability, health, long-term care, and life insurance on the site. Take a look at it and see if it will help you. For the main site, just click on the title. OTherwise, here are some of the other resources of the site.
Long Term Care Insurance
Wednesday, May 11, 2005
Thanks and we will be on the topic of annuities shortly. I will also provide a link for insurance resources other than annuities on my next post.
Again, for information on structured settlements, please visit:
Visit the site now by going to:
or just click on the title of this article.
Monday, May 09, 2005
As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.
1) Annual Reset
Compares the change in the index from the beginning to the end of each year. Any declines are ignored.
Advantage: Your gain is "locked in" each year.
Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
[This is the most popular feature and for the most part, it is highly advantageous. IT is because when you lock in a gain for the year, you can never lose that gain. This feature comes in bi-annual reset also. However, for the most part, annual reset can be a huge benefit.]
2) High Watermark
Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term.
Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.
Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
[While this seems like a great feature, the insurance companies generally 'mitigate' your potential gains by putting many stipulations on this type of benefit.]
Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.
[Point to Point simply means they take a snapshot of where the index is at one point and a snapshot at another point sometime down the road (usually 1 year later) and determine if the market is up, down or flat in that time period. This is usually a pretty clean and straight-forward method. The disadvantage comes when a market stays high only to go lower when your 'point' is coming up]
We will continue this session on indexing in the next day or two. Thank you.
Ignorance is Not Bliss.
Click Here for Great Annuity Resources
Sunday, May 08, 2005
It can be found at:
Saturday, May 07, 2005
Thursday, May 05, 2005
I was thinking how some people get into an annuity and they think it is a great thing. Well, months or years later, they come to find out that on the outside, the annuity looked great, but the deeper they looked in to it, the worse it looked. In other words, looked good on the surface, but didn't look so great on the inside.
Well, that got me thinking about Michael Jackson. At face value, we all loved him. And many of us still do. However, if all of this stuff is true, then the product stinks. Hey, I am not the judge and nor do I presume that he is guilty or innocent. Only a select few will ever know the truth...
With annuities, however, there is a bright side. While on the surface, they may look good, you can actually do your homework and get a very detailed vision of what they entail. You don't have to wait until it's too late...if you take the proper precautionary measures. You can actually KNOW the product before you buy---Not by listening to your agent, but by doing your own homework.
So don't let your annuities fool you. Do the homework BEFORE you invest. Then you may not end up buying the wrong thing. Sorry for the bad analogy, but it was on my mind!
By the way, check out the only Annuity Forum on the Net. It's the link in the title. In other words, just click on the title of this document (Michael Jackson and Annuities) and it will take you there! It's actually quite cool.
For more in depth and detailed information on annuities, click here!!!
Ignorance is Not Bliss
Monday, May 02, 2005
How is an EIA's index-linked interest rate computed?
The index-linked gain depends on the particular combination of indexing features that an EIA uses. The most common indexing features are listed below. To fully understand an EIA, make sure you not only understand each feature, but also how the features work together since these features can dramatically impact the return on your investment. [This is where the insurance company can limit your earnings. You need to be aware of these methods. What you need to understand is these insurance companies must put these safety measures in place. However, many companies (discussed further in 'Equity Index Annuity Exposed) are notorious for minimizing the amount a client can make in subsequent years after year 1. This is especially true with high bonus annuities.]
1) Participation Rates. A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means the annuity would only be credited with 80% of the gain experienced by the index. [Not only do you need to understand this but you need to kow if this is a method your company subjects you to, you need to see what the minimum participation rate they can assess on your account. What I mean is that, each year, the company has the right to declare what your participation rate is for the year. Sometimes they can severely mitigate your potential gains by lowering this too much. Be careful]
2) Spread/Margin/Asset Fee. Some EIAs use a spread, margin or asset fee in addition to, or instead of, a participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10% and the spread/margin/asset fee is 3.5%, then the gain in the annuity would be only 6.5%. [Again, one to watch out for...not just what it is the first year, but what the company can bring this down to]
3) Interest Rate Caps. Some EIAs may put a cap or upper limit on your return. This cap rate in generally stated as a percentage. This is the maximum rate of interest the annuity will earn. For example, if the index linked to the annuity gained 10% and the cap rate was 8%, then the gain in the annuity would be 8%. [This is probably the most common form of how the insurance companies control your potential gains. As we presently speak, this number is between 8% to 12% depending on how much time you are willing to commit to in your annuity. Once again, it is very wise to know how low this number can go. Presently, many companies are stating the minimum you can ever have your cap down to is 5% but I actually have seen a minimum allowed rate of 0%]
Caution! Some EIAs allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return. Read your contract carefully to see if it allows the insurance company to change these features. [Most contracts give the insurance company the right to declare this every year. This is not unusual. It is wise to see the renewal rate histroy of the company you are choosing to see if they have been generous or not with their clients.]
[One more comment---I can't stress it enough. These safety nets have to be built in by the insurance company for their protection and for YOURS. However, it is up to them how they take advantage or abuse these rights. Some companies are extremely generous and these are the companies you'll want to deal with. Do some homework on renewal rates and you may find some pleasant and some unpleasant surprises!]
Ignorance is Not Bliss!!!
For more annuity information:
What is the Guaranteed Minimum Return?
The guaranteed minimum return for an EIA is typically 90% of the premium paid at a 3% annual interest rate. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10% tax penalty that will reduce or eliminate any return. [There is really not a TYPICAL minimum guarantee. This can fluctuate across the board in indexed annuities. However, you need to know exactly what it is and how it is compounded. For example, if it is 3% on 90% of your money, most people make the mistake that you make 2.70% and that is NOT TRUE. The fact of the matter is that 90% of your money gets compounded at 3%. You might say that you will have less than 100% to start with and you are right. The point is, this minimum guarantee means that you MUST hold your contract for certain number of years to get some kind of return. But in fact, this kind of works like a surrender charge. In most, not all annuities, the minimum guarantee ACTS as the surrender charge. Think about it. If you surrender your contract in the first year, you would get 90% of your money---which is equivalent to a 10% surrender charge. REMEMBER---NOT ALL OF THEM WORK LIKE THIS SO BE CAREFUL AND KNOW YOUR EQUITY INDEXED ANNUITY by asking your financial professional.]
How good is this guarantee?Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, it happens. There are several private companies that rate an insurance company's financial strength. Information about these firms can be found on the New Jersey Department of Banking & Insurance's Web site. [There are many other resources for this. One unbiased resource that is highly regarded in the isurance industry is the Weiss rating. However, ratings aren't always enough. It is wise to do some homework on the insurance company you plan on investing with!]
What is a market index?
A market index tracks the performance of a specific group of stocks representing a particular segment of the market, or in some cases an entire market. For example, the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of a broad segment of the market. There are indexes for almost every conceivable sector of the stock market. Most EIAs are based on the S&P 500, but other indexes also are used. Some EIAs even allow investors to select one or more indexes. [No big comments here]
Ignorance is NOT BLISS!