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Read Our Latest Thoughts on Annuities and Other Investing Topics

Welcome to the AnnuityAssist.com Blog. Visit the blog regularly to learn new annuity terms and facts, consider our original research, and to view commentary on industry trends and developments. Our goal at AnnuityAssist.com is to illuminate typical annuity features and functions and provide educational content on these complicated financial contracts so that you may consider them with confidence to help  achieve your long-term financial goals.

“An investment in knowledge always pays the best interest.” – Benjamin Franklin

Mr. Insurance Man, Tear Down This Wall!

http://www.nerdwallet.com/blog/finance/advisorvoices/insurance-man-tear-wall/

Author: Anthony Isola

The article compares variable annuity’s surrender fees to the Berlin Wall—creating high early exit costs as a way to keep people locked into their contracts. It also notes that surrender fees are often used to recoup losses from the commissions paid to the salesperson. Moreover, many variable annuities come with high annual fees, a hard sell, convoluted contracts, leaving many investors confused about what they bought.

Lastly, the article discusses when it may be an appropriate time to purchase a variable annuity: primarily when you have maximized your 401(k) or 403(b), and your traditional/Roth IRA, and you still want tax deferred investments. However, this applies to a small amount of investors, as someone who has maxed out all retirement account options is not as likely to need to add more for retirement.

We agree variable annuity contracts are some of the most complex out there, often costing the investors 3% to 4% a year in fees and containing high surrender penalties for early exit. But what the article doesn’t address is a performance comparison of a tax deferred annuity vs. a taxable equity portfolio—a topic we cover in Tax Deferral Can Be a Double-Edged Sword. In reality, tax deferral may not justify the purchase of variable annuity, even when you’ve maxed out your retirement account options.   

 

How to time annuity purchases

http://www.marketwatch.com/story/how-to-time-annuity-purchases-2015-03-31

Author: Stan Haithcock

In Stan’s view, it is impossible to time the purchase of an annuity with accuracy—and we agree. However, we disagree that laddering annuities is an efficient use of your investment money. For one, it is referred to as “treading water” or “killing time”. In our view, most investors need growth—not killing time!

Additionally, Stan states the shortest duration for a fixed annuity is three years, which may not help you if interest rates rise in the next two years, or less! In our view, a sound laddering strategy is available with bonds and CDs at 6, 12, 18, 24 or 30 month laddering intervals. This will protect you if rates are moving up in the next three years.  It also allows a portion of your money to come due in a relatively short period of time—taking advantage of higher rates.

Using a laddering strategy may make sense when committing a portion of your portfolio, but you might not have as many shorter term options with using a fixed annuity to ladder your investment.

Matt Wallace: Beware of the person peddling annuities

Matthew Wallace, Planning matters Matt

http://www.thetimesherald.com/article/20140503/BUSINESS/305030006?nclick_check=1
AnnuityAssist’s View: We agree! Commissions on annuity sales are high and even financial advisors can be tempted to recommend annuities based on their commission instead of what is best for their client. Higher commissions also increase the surrender penalties and duration of the surrender penalty period—another reason we are not a fan of sales structure within the annuity industry. By and large we agree with the signs of what you should watch for when you’re approached about purchasing annuities.

Fixed Annuity Sales Receiving Added Scrutiny from FINRA

Bruce Kelly and Darla Mercado

http://www.investmentnews.com/article/20140502/FREE/140509979

AnnuityAssist’s View: FINRA’s scrutiny over potentially predatory 1035 exchanges of annuity contracts is a step in the right direction, in our view. The large sales commissions from these exchanges can potentially create a conflict of interest, and we applaud tighter scrutiny over the industry and its sales tactics.

Insurers' Overpromises Bad for Insurers, Worse for Investors

If you're worried about investment losses and outliving your savings, you may have been told annuities are the answer. But are they?

Persistent low savings rates during the housing boom, the housing bust that removed the proverbial “piggy bank” of home equity, along with increased life expectancies, have made many retirees, and those approaching retirement, face a very real fear of outliving their assets.

This ongoing ticking of the longevity clock has led many to purchase annuities, attracted by tax-deferred growth of deposited funds and the lifetime income guarantee (the “sleep-at-night” factor).

Insurers Stepping Over the Line

The primary benefits for consumers who own an annuity is the guarantee of lasting lifetime income no matter how long the annuitant may live. Over the past decade, annuities have increased in popularity on the heels of two large bear markets and increased stock market volatility. This worry about investment losses gave insurers an "in" to offer many seemingly generous guarantees to stoke the demand from annuity purchasers.

Yet, while these features give the annuity holder the peace of mind in knowing that they will never outlive their retirement income; things don't look quite so bright for the insurance companies on the other side of that promise. In fact, depending on an investor’s actual needs and goals, these contracts may not be good for either side of the transaction—practically the opposite of capitalistic exchange where both parties benefit.

In fact, the recent financial crisis of 2008/2009 shined a fairly bright light on just exactly how much these guarantees can cost insurers. Large potential future obligations in the form of guaranteed income are requiring many firms to raise capital reserves, thus lowering the profit earning ability of their capital, in order to continue backing up these promises to annuity holders.1

In addition, thanks to increased longevity and the need for supporting income, many consumers are holding on to their annuities for much longer than expected, resulting in a grave miscalculation by insurers on their policy lapse rates.2 This, too, will potentially end up costing insurance companies billions more than originally anticipated on their annuity income guarantees.

 Are Annuity Issuers Going Back on Their Word?

In an effort to regain profits and lower risk, some insurance companies have taken to enforcing a few objectionable tactics.3 For example, some are clamping down on the choices of funds in their variable annuity products, as well as forbidding additional contributions into existing annuity contracts.

Another potential "solution" by some insurers has been to offer to buy back annuity contracts from their customers—a plan that could essentially change the retirement income situation for many annuity holders who are counting on that income guarantee for their living expenses.4 Although this may represent an opportunity for owners that realize they don’t need or want the income benefits anyway.

One large issuer of annuities has even gone so far as to require the owners of certain of its variable annuity guarantees to move a minimum of 40% of their annuity money into bond funds.5 A portfolio that is 55% stocks, 40% bonds, and 5% cash is pretty safe already. Why pay for insurance on top? This is like wearing a belt with suspenders.

And what if these consumers refuse to agree to the changes or don’t respond in time? The annuity provider may remove the unprofitable guarantee from the policy anyway, here again, changing the incoming cash flow for thousands of annuity buyers who were counting on these promises, as well as paying for these "privileges" over time.6

While insurers seem to have gone back on their word regarding in-force annuities, they have also likely stopped offering many of the guarantees that were previously part of these products.

In any case, annuity shoppers need to be especially careful before they deposit a large sum of retirement savings into an annuity. We think many annuities are sold unnecessarily to investors that are better served by other strategies. And this trend is yet another reason why it makes sense to limit the amount of your nest egg invested in an insurance contract. Your contract can be changed at the whim of a single company to improve their bottom line.

1 http://online.wsj.com/article/SB10001424127887323998604578565711321338272.html

2 Ibid

3 Ibid

4 http://www.lifehealthpro.com/2013/07/11/axa-proposes-another-variable-annuity-buyout-offer

5 http://online.wsj.com/article/SB10001424127887323998604578565711321338272.html

6 ibid

Will the New Look of Variable Annuities Benefit Clients or Insurers More?

Given the market volatility of the past several years, a number of insurance companies have recently made some fairly extensive changes to their variable annuity products. Some insurers have left the annuity marketplace altogether1.

A historically low interest rate environment, coupled with the high cost of hedging, has variable annuity issuers scrambling to find ways to either continue making their variable annuity (VA) business profitable, or leave it all behind.

As with other consumer products, insurers’ first reaction to the threat of low profits has been to raise prices. Many annuity contracts have clauses permitting changes to contract fees within a range, and recently fees have been on the way up2. In an industry that is already has a reputation for high customer charges, this may not turn out to be a successful long-term solution.  Other companies are offering buyouts3 of benefits that are too far “in the money”. While still others have opted to change the investment requirements in order to limit stock exposure4.

 

Is Anybody Out There?

As these major changes make their way through the VA market, there also seems to be a striking number of large insurers running for variable annuity exits. In just the past few years, some big names such as John Hancock, Hartford Life, ING, Genworth, and Sun Life have all reduced or eliminated their variable annuity business5. And, while this may surprise some, these moves have actually been justified as a way for these insurers to cut their losses, and stop throwing good money after bad.

 

How Advisors Are Rolling with the VA Changes

There may be fewer players in the variable annuity market which translates to fewer features and benefits to compare between companies, but it may still prove difficult for financial advisors to keep up with the numerous changes taking place in the VA marketplace.

Equally challenging for advisors is finding the right variable annuity related solutions that can best fit clients' needs. Today, with cuts in benefits, coupled with higher VA fees, many potential annuity clients feel that they are getting less for more—they probably are.

Despite all these tools insurers have to change the annuity equation in their favor, some have taken the extra step of disallowing contributions and additions6 to existing contracts. This may include refusing to accept 1035 exchanges. Here, too, the culprits include several big name insurers including MetLife, AXA, and Prudential.

 

The Bottom Line

For advisors and annuity holders alike, these changes in the VA marketplace may be a tough pill to swallow. Especially in light of the fact that thousands of baby boomers reach retirement every day, seeking long term income sources as well as growth for their retirement funds.

The changes taking place aren't just affecting potential annuity buyers, but also current annuity contract owners. Those who are already "locked in" to variable annuity contracts, for example, may find that the issuing insurer on their VA contract will be coming to them with a buyout offer where the annuity holder is given the option to exchange a living benefit for an increased VA account value.

While we don’t generally think variable annuities are the right solution for most investors, in hindsight, these clients probably bought some of the most valuable annuity contract terms, only to have the rules changed after the fact.  Sounds a little bit too much like “tails I win, heads you lose” from the insurance companies.

In any case, it is imperative that both potential and current variable annuity holders weigh their options carefully when deciding to buy or keep a variable annuity contract, especially as other income producing strategies may be more beneficial and consistent in the achieving your financial goals.

(Looking for advice on your specific contract? Contact Us about our free annuity evaluation for qualified investors).

 

1http://online.wsj.com/article/BT-CO-20130717-712942.html

2 http://www.investmentnews.com/article/20130224/FREE/130229977?template=printart

3 http://www.lifehealthpro.com/2013/07/11/axa-proposes-another-variable-annuity-buyout-offer

4 http://www.investmentnews.com/article/20130401/FREE/130409996?template=printart

5 http://www.lifehealthpro.com/2013/06/11/the-new-look-variable-annuity-market

6 ibid

 

Who Benefits Most from Your Financial Adviser's Recommendations - You or Them?

The overall health of your retirement savings - as well as your plan going forward - can be compared to keeping your physical health in check. This should begin with checking out several different advisers before initiating your long-term financial plan of attack.

In fact, while getting a second opinion in the medical arena is almost protocol, it isn't so much when it comes to financial matters - but it should be. Because most financial advisers have differing backgrounds and training, it is possible you may get vastly different recommendations - even if you share identical financial goals and asset amounts with each of the advisers you meet with.

One of the biggest catalysts for the difference in financial advice is the type of firm where an adviser works. For example, those who are affiliated with insurance companies will typically recommend insurance and annuity products to move you towards your ultimate goals, while those with more of an investment background may likely lead you towards mutual funds, equities, and other types of securities.

Comparing Apples and Grapes

Setting up your investment portfolio is only the beginning though. Changes in your financial circumstances may also require the adviser to make various adjustments to your portfolio over time. And, just as getting different medical treatment will result in differing outcomes for your health; the alternate recommendations from different financial advisers could end up having vastly different outcomes in terms of your retirement lifestyle in the future.

With this in mind, it is important that the advisers you interview can provide the planning, execution, and long-term service that best helps you reach your investment goals. Product based sales agents often have only one solution to any problem. And as the saying goes, “When all you have is a hammer, everything looks like a nail.”

Your financial goals should be a top priority. An adviser that offers a product base on your risk tolerance may only offer you what is comfortable, instead of what is appropriate. And they may not provide ongoing service or advice outside of the sales process. From wealth creation to income generation, your adviser’s job should be to offer the most appropriate path without an eye towards the commissions generated or product loyalty.  Independent Registered Investment Advisers have a fiduciary responsibility to act in your best interest.

The Bottom Line

Just as with most major health issues, it is imperative to get a second opinion—or even a third or fourth—on how you should proceed with your retirement savings. Certainly, before you make any type of final decision, it is imperative to determine exactly how your adviser will be paid.

Regardless of the adviser's expertise or product offerings, his or her pay structure could have a much bigger bearing than any other factor on the advice that is ultimately provided.

Most advisers are more than willing to disclose how they are paid - so be sure to inquire about this at the onset. And, those who aren't so willing to discuss it may be a red flag for you, and  a strong indication  you should continue your search elsewhere.

If Guaranteed Income Sounds Too Good to Be True...It Just Might Be

As life expectancy continues to increase, baby boomers are reaching retirement age at a staggering rate. In fact, it is estimated that roughly 10,000 people in the U.S. reach age 65 every day.1

While longer life spans may appear to be good news for those who are leaving their employment years behind, poor returns in the stock market has led many to seek more financial guarantees - especially as it relates to the safety and security of their retirement assets and income.

The Annuity Mirage

One financial vehicle that has become particularly popular among retirees who are seeking to supplement their income from Social Security and other investments is the fixed annuity. At their most basic level, these fixed annuity products promise their holders income payments and a set rate of interest throughout the life of the contract. Generally, the holder of any annuity can also choose to receive income from the annuity for the remainder of his or her life, regardless of how long that may be, through a process called annuitization.

But fixed annuities are oftentimes sold under the guise that other traditional asset withdrawal methods will not be sufficient to last throughout a retiree's lifetime, causing them to outlive their retirement savings. It is this fear based approach that has led many retirees to take the bait and dive in to fixed annuity products.

The Growing Concern Over Guarantees

Traditionally, fixed annuities have been sold to consumers with the promise that their funds are backed by the full strength and credit of the issuing insurer. Over the years, most insurance companies have been able to meet the income demands of their annuitants.

But insurers are finding that guarantees made 5 or 6 years ago may not be tenable in the current sustained low rate environment. Many are taking every action available to lower their future obligations on some pre-2007 contracts.

Other insurers are starting to sell off their fixed annuity components to investment companies that are picking up these assets at bargain prices, feeling that the return on their own investments in private equity funds and mortgage bonds will be more than sufficient to cover the guaranteed income payments that are due on their newly acquired annuity business.

While those who are close to the various investment companies state that most of the assets invested in possess high credit ratings, there is still a great deal of concern going forward as the number of insurers with ties to private equity entitles are up from only 4% in 2012 to approximately 15% today.

A recent concern from regulators and insurance companies is that if the economy worsens down the road, the investment in the annuity business could end quite badly for investors and annuitants. And, while only time - and investment return - will be able to truly tell if investment firms can make good on their long-term promises to annuity holders, placing one's life savings into a fixed annuity is a risk that many retirees may not want to take.

1http://www.pewresearch.org/daily-number/baby-boomers-retire/

Annuity Quotes from Around the Web

The New Look Variable Annuity Market

By Christopher Raham, Gerry Murtagh, LifeHealthPro.com, 6/11/2013

AnnuityAssist’s View:  Variable annuities were already an expensive solution for retirement income. But the low interest rate environment has forced annuity companies to make the contracts even less appealing for investors. In the current environment, annuity owners may experience decreasing benefits, increasing fees, restricted or changing investment options, or even a ban on additional deposits to existing contracts.

Annuity Quotes from Around the Web

Getting the Full Picture on Annuities and Insurance

By Paul Sullivan, New York Times, 5/10/2013

AnnuityAssist's View:  Insurance contracts are complicated—calculating long term expenses and returns ranges from difficult to impossible. We think that immediate annuities may make sense but only as a small portion of a retirement portfolio, in specific situations, and should be evaluated case by case.

Annuity Fact of the Week

Income annuity (also known as immediate annuity) sales reached $2.38 Billion in Q4 2012, the highest quarter ever for income annuities and 7.2% higher than the 4th quarter of 2011.

Source: Insured Retirement Institute, http://irionline.org/news/article/id/722

Annuity Fact of the Week

 Total estimated annuity sales dropped 8% in 2012 to $219 Billion from $238 Billion in 2011. This was the lowest sales figure for the industry since 2005.

Source: LIMRA Annuity Industry Estimates, Q4 2012

Annuity Fact of the Week

84% of variable annuities sold in the 4th quarter of 2012 were sold with an additional guaranteed living benefit.

Source: LIMRA VA GLB Election Tracking Survey, Q4 2012

Did You Mean to Buy an Insurance Policy?

By Gary L. Hall, 3/25/2013

Insurance is designed to replace something lost—it’s an expense. An investment, on the other hand, is designed to generate added value over time.  It seems to me, though, that deferred annuities often blur the line—blending insurance and investment into some combination of the two; a complicated financial product trying to do too many things–none of them well. Annuities, at root, should be nothing more than longevity insurance. But sales rhetoric claiming they’re a foolproof growth investment—market participation with no downside—is common.

But my experience in analyzing annuities leads me to believe that the combination doesn’t result in this fairytale investment—but much more often, poor performing investments combined with inefficient insurance.  Can you imagine insuring a $30,000 car by giving the insurance company $30,000? I can’t. So why do people insure a $500,000 retirement by giving the insurance company all $500,000?

Variable annuity investments are stock and bond mutual funds called subaccounts. Independently, these are legitimate mutual fund-like investments that can create wealth over time. Variable annuities’ insurance component comes in the form of death benefits (life insurance…sort of) and income benefits (longevity insurance) and are often hooked on the word “guarantee.” Some benefits are included in the basic variable annuity contract while others can be added for additional fees.

Fixed-indexed annuities (previously called equity-indexed) are even more insurance and less investment. These are variable interest rate products based on the stock market price and don’t have any base fees. Sounds great! And that is why they sell so well. But because they charge no fees, insurer profits are dependent on your contract returns being lower than the insurer’s underlying investment returns. And insurance companies prefer to put their money in predictable investments like intermediate US treasuries or something with a similar risk/return profile. In case you missed that: indexed annuities must more or less systematically underperform a relatively conservative bond portfolio.

There may be value in that type of financial product –your principal is very safe, returns are relatively predictable, and lifetime income is a great piece of the retirement puzzle. But it’s not a comprehensive solution for most investors, especially those that need growth to support an ever longer retirement. Do most people buy the product with that understanding? There is reason to be skeptical. And I wonder if investors are ultimately disappointed with indexed annuity returns? Seems possible, given how these have been marketed.

Insurers are profit seeking corporations so the insurance piece needs to be profitable. This requires that fees collected be higher than expenses and net payouts over time. On average there must be more principal lost than gained by contract holders as a group.

And from the perspective of an individual contract holder, it’s alarming how difficult it is to keep the insurance aspect in your favor—contracts often allow increases in fees and reductions in benefits at any time, buyout offers may not be a good deal, not to mention the counterintuitive income riders. It’s a tough position to find yourself pitted against the actuaries and a 100-page prospectus.

Understanding these trade-offs is an important part of shopping for annuities. These are insurance contracts whose main benefit is to compensate for longevity risk. Focusing on ambiguous “market participation” or “guaranteed growth” should raise a yellow flag, if not a red one.

Annuity Fact of the Week

There were more than $1.62 trillion of VA assets held by insurance companies as of third quarter 2012, with an estimated $600 billion having a living benefit.

Source: State of the Insured Retirement Industry: 2012 Recap and a 2013 Outlook (IRI, 2012 )

 

Annuity Fact of the Week

As many as 25% of recent variable annuity buyers reported being dissatisfied or unsure of their satisfaction with the purchase. Another 37% were only somewhat satisfied.

Source: LIMRA’s MarketFacts Quarterly Number 3 2012 (Windsor, CT: LIMRA, 2012)

Annuity Fact of the Week

For more than half (55%) of recently purchased variable annuities the discussion was initiated by a financial professional compared with 44% for fixed annuities. Typically variable annuities also carry significantly higher commissions for the advisor.

Source: LIMRA’s MarketFacts Quarterly Number 3 2012 (Windsor, CT: LIMRA, 2012)

Protect Yourself when Considering Annuities

By Gary L. Hall, 2/19/2013

You’ve likely heard of annuities, own one yourself or know someone who does. But despite being popular financial products, annuity education is lacking—even among many financial advisors. Like most investment options, they have a role in the landscape and are appropriate for some investors. However, a lack of education about annuities means potential conflicts of interests go unnoticed. In part two of this two-part series, we discuss reacting to the markets.

Reacting to the Market

Annuities are sold as guarantees and safety but what if a poorly timed annuity purchase could actually hurt your chances of meeting your long term goals? In our February 5th post, we explained how annuity commissions can lead to advisor conflicts of interest. But since you can still demand any product, it makes sense to carefully evaluate your own reasons for wanting an annuity.

As the stock market drops and losses mount, most investors become more fearful. Many folks have a strong urge to safeguard their assets in low risk investments until a recovery is well established. However, history shows this is usually a bad strategy when it comes to meeting their long term goals, since the period following large stock market drops are typically followed by strong gains.

Since fixed annuities are similar to interest paying accounts, they make the most sense to buy when interest rates are high. Unfortunately navigating the stock market in real time is not so easy and sales figures show purchases spike when rates are lowest, after the stock market has fallen from its highs.

 

The fixed annuity locks in low interest rates for a predefined period of time and because these are long term contracts, participating in the subsequent stock market recovery is difficult without incurring significant surrender penalties.

The opposite is also true; when the stock market has been rising for several years many people worry they are missing out on the gains and have an urge to put more money into stocks.  Unfortunately when stock market euphoria runs rampant and many investors are interested in putting more money into the stock market, this may be one sign a bull market is nearing its end.

Variable annuities have mutual fund qualities that provide increased stock market exposure, so the best time to buy would be when stock prices are lower. Again, the actual sales data reflect emotional investing with purchases peaking when stocks are high.

UnderstandAnnuities_When are variable annuities a good investment

Like fixed annuities, exiting variable annuities can be difficult and have many hidden expenses.

Annuities aren’t inherently good or bad for everybody, but investor behavior means they’re often misused in ways that may not get you to your long term financial goals. Taking a rational stance and asking the right questions can go a long way to making better long term decisions associated with annuities.

Annuity Fact of the Week

As many as 30% of annuity buyers reported buying the annuity to receive guaranteed income payments for life.

Source: LIMRA’s MarketFacts Quarterly Number 3 2012 (Windsor, CT: LIMRA, 2012)

Protect Yourself when Considering Annuities

By Gary L. Hall, 2/05/2013

You’ve likely heard of annuities, own one yourself or know someone who does. But despite being popular financial products, annuity education is lacking—even among many financial advisors. Like most investment options, they have a role in the landscape and are appropriate for some investors. However, a lack of education about annuities means potential conflicts of interests go unnoticed.  In part one of this two-part series, we discuss the role of advisors.

The Role of Your Advisor

Opinions on annuities are strong and frequently biased. Lucrative sales commissions lead to overzealous annuity sales tactics, while annuities’ popularity leads to opposition from competing financial services. Similarly, annuity advertisements featuring tax benefits and guaranteed income are just as easy to come by as articles denouncing annuities for hidden costs and high surrender fees.

But financial tools are rarely so black and white. Cutting through the noise reveals annuities are similar to life insurance. If life insurance is meant to protect your family from accidental or premature death, an annuity is insurance meant to protect your family for extended longevity.

What’s missing from the conversation is real help deciding whether these complicated products are right for your unique financial situation. One reason is the high commissions paid to advisors for selling an annuity—they’re often more motivated by the size of their next paycheck than what’s appropriate for you. As a result of this and many other annuities, a suitability requirement when recommending annuities only recently gained traction with lawmakers and the Financial Industry Regulation Authority (FINRA).

A suitability requirement put into effect in July forces advisors to justify why a particular product is right for your particular situation and goals. This is a big step in the right direction but ultimately the decision still comes down to you.

Annuity Fact of the Week

The top intended use of recently purchased annuities, as reported by 42% of fixed annuity buyers, 46% of indexed annuity buyers, and 55% of variable annuity buyers, is to supplement social security or pension income in retirement. A previous LIMRA study from 2006 found that less than 1% of annuity assets in force are annuitized.

Source: LIMRA’s MarketFacts Quarterly Number 3 2012(Windsor, CT: LIMRA, 2012); Source: LIMRA, The 2005 individual Annuity Market, March 2006. Annuitization rates for the period 2000-2005

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