I am curious as to what everyone thinks about variable annuities with gauranteed minimum withdrawal benefits. More of our clients are looking these types of vehicles and my company does not offer these because these gaurantees are what put some companies in jeopardy. Any thoughts?
rip off. the expenses are EXTREMELY high…
Useful if you plow enough money in for some meaningful income. I’ve learned a lot about annuities in the past two months and the more I learn the more I see the niche they fill. They’re overly complicated and very dense but once you crack them they’re actually pretty neat little products. Some people use their min. inc. to fund theyr life insurance and account fee’s this way any profits relayed to them are essentially 100%.
They’re useful as estate planning tools and aren’t more expensive than many similar structured notes with an embedded fee - there’s a place for them in a portfolio. As for not offering them, does your company sell bonds?
they have received a bad wrap, imo primarily from commissioned advisors taking a percentage of the premium and recommending them for just about everybody. As an advisor, my company doesnt even offer these and I love going against advisors at other companies that pitch these because I usually win the business with a cheaper mutual fund/bond/fixed annuity combo that is more transparent. They typically have at least a 7-10 year surrender period and while there is certainly a place for VA’s in the market, I don’t think it’s a large percentage of investors. The big problem is there is usually a cash value, surrender value, guaranteed min death benefit value, market value…etc. I say “what’s up with all these different values? how do you know what you have here?” Why not invest in no load mutual funds and avoid the fees, commissions, and long surrender period? Once again this doesnt fit for everyone. High tax bracket investors benefit more due to tax deferral so there is a place for these. Just not a big one.
In theory, a good idea to combat longevity risk (investing in no-load mutual funds doesn’t help in this regard). In practice, a good way to get ripped off by fees and rates, especially for an individual. Hard to lay blame on insurance companies though, they’re taking a lot of long-term risk if it’s a life annuity, and the population subset interested in these annuities are obviously healthier and more likely to blow through the average life expectancy. If they became mandatory there wouldn’t be the same discrimination, but good luck getting that legislation through.
We use these and have used them over the past 4-5 years. I can tell you we have a lot of happy clients that bought them in 2007. We work generally with HNW individuals and use them when retirement planning is a concern (think withdrawal rates in the 5-6% range; we wouldn’t recommend to someone with a 2% withdrawal rate from their portfolio and thus alot of clients with net worths north of $3-4mm we don’t think they are appropriate). Its never for the entire portfolio and usually 10-20% of the portfolio. Check out some of the research by Peng Chen and Moshe Milivesky. We use fixed annuities also - spias, but given the interest rates today they aren’t as attractive. I am a strong believer though that the majority of people (except for the UHNW) need longevity insurance through SPIAs or VAs w/ GMWBs. There is a cost, but there is a cost to all insurance - life, home, auto.
> gaurantees are what put some companies in jeopardy Can you name an example? There certainly was a lot of pain felt by issuers (to the gain of e.g. unit.root’s clients), but I hadn’t heard that volumes were large enough to threaten the solvency well-known issuing firms. With hindsight we can see that these products were priced for a lot lower vol in equity prices, so terms have changed significantly since the equity market meltdown. There was also high competition which led to further mispricing, again to clients’ benefit. unit.root makes a great point about longevity insurance; VAs should also provide decent inflation insurance. All of the negative chatter is based on the 1990s-vintage VAs; the world has moved on and these are useful products now.
DarienHacker Wrote: ------------------------------------------------------- > > gaurantees are what put some companies in > jeopardy > > Can you name an example? There certainly was a > lot of pain felt by issuers (to the gain of e.g. > unit.root’s clients), but I hadn’t heard that > volumes were large enough to threaten the solvency > well-known issuing firms. > > With hindsight we can see that these products were > priced for a lot lower vol in equity prices, so > terms have changed significantly since the equity > market meltdown. There was also high competition > which led to further mispricing, again to clients’ > benefit. > > unit.root makes a great point about longevity > insurance; VAs should also provide decent > inflation insurance. > > All of the negative chatter is based on the > 1990s-vintage VAs; the world has moved on and > these are useful products now. I shouldn’t say that these are what caused any insurance companies to fail because obviously there are many other contributing factors. I have not done a lot of research on the subject to give a specific company, but as you mentioned many of these products were underpriced. Mainly i just wanted to get others opinions on the product and whether or not the fees are worth it, and what types of clients these would be useful for.
What people don’t realize is the HUGE counterparty risk if you buy these GMWB now. Assuming market goes down 30-40% and your guarantees get in the money, there will not be anyone out there to honour the promises as your beloved MFC’s MCCRS will be <150%, its ratings in the BB- and OSFI guys walking on every floor. Just recall what happen to mono-line MBS/CDO insurers couple of yours ago. : )
dukatu2 Wrote: ------------------------------------------------------- > What people don’t realize is the HUGE counterparty > risk if you buy these GMWB now. > > Assuming market goes down 30-40% and your > guarantees get in the money, there will not be > anyone out there to honour the promises as your > beloved MFC’s MCCRS will be <150%, its ratings in > the BB- and OSFI guys walking on every floor. > > Just recall what happen to mono-line MBS/CDO > insurers couple of yours ago. : ) If you buy from a respectable company you’ll be fine - there are also state guarantees as well you can look into.
dukatu2 Wrote: ------------------------------------------------------- > Just recall what happen to mono-line MBS/CDO insurers couple of yours ago. : ) That’s not an accurate or fair comparison of risks. …as for your comment about the MCCSRs - that is hardly the case given the companies who issue these and when you account for the other, much larger, considerations for capital calculations.
It should be a requirement to read the collective works of Chen, Milivesky and Salisbury before even talking about annuities with clients. Which companies you do you guys use? We currently the Prudential with their HD 6 GMWB but JNL’s Lifeguard Freedom 6 seems to be a decent product.
absolutely hate PRU’s product because of the formula allocation - they got lucky that the formula ended up in good performance over the last 2 years. tried to get people into the penn mutual product milivesky was high on but they closed it the week were going to present to 2 clients. We have been using the JNL product you mentioned. Slightly higher fees which are completely made up for with complete freedom of allocation. Transamerica also allows 100% equity I think. I refuse to pay the fees they are charging now to “insure” a portfolio that is required to be in 40% equity or even 20% equity or that will put you in 100% cash based on a formula.
hmm…you guys must work off commission.
SkipE99 Wrote: ------------------------------------------------------- > hmm…you guys must work off commission. By saying there is a place for these assets for a very small percentage of UHNW customers, for whom the tax-advantages offset the higher fees relative to a non-qualified account holding? Not saying there aren’t other tax-efficient vehicles as well, but I’d probably agree there is a place for very few individuals based on my knowledge (I don’t sell investment products or do financial planning, so that’s this outsider’s perspective). I would agree that these probably get sold based on commission vs suitability on the reg though.
Actually I own an RIA… You must work off of fees but don’t know how to charge for allocating assets to a fixed or variable annuity so you simply ignore it even though it may be in the best interest of the client, because it means less fee revenue. There are conflicts of interest in every business model…
> There are conflicts of interest in every business > model… so true. Just not a fan of VA’s. Out of college I got hired by a 403b peddler and they taught us ONE presentation which was the presentation of the 403b which of course was a VA. No education on financial planning, nothing else, just how to sell the VAs cause thats what we get commission on. Might as well have been widgets. This creates a sales-y environment, GlenGary Glen Ross style. Close close close…numbers numbers numbers. I have the upmost respect for advisors that use VAs when appropriate but not the ones that recommend it in the first meeting session for every client they meet.