Annuity Safety Archives

Relying on Annuities for Retirement Pensions

July 20, 2013 By Annuity Guys®

The private sector has been bailing on providing pensions for employees over the last few decades. Now, it appears legislation to “radically change” public sector pension plans may also be in the works.

In Illinois, we are aware of how much strife a public pension battle can impact both the fiscal health of the state and that of those employees who were promised lifetime retirement benefits. The proposed legislation would provide for private insurance carriers to manage the public sector retirement income pension systems. Historically, many individuals enjoyed the benefits of defined benefit plans. Yet, now with benefits being cut and lump sum buyouts being offered, many employees are weighting the option of defined benefits versus a pension styled annuity plan.

The Annuity Guys® discuss why insurance companies – with proven track records in managing investment and longevity risk successfully – may be better choices for overseeing your retirement income than both private and public sector pension managers.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

If you (and your spouse, if you have one) could have a pension styled income for life and still pass on any unspent retirement dollars to heirs, would you do it? This is the reason many individuals are converting lump sum buyouts, 401ks and IRAs into annuity portfolios that provide lifetime income, safe and consistent growth with preservation of their lump sum principal from their retirement savings.

Here’s the news from MSN that generated the inspiration for this weeks blog.

Senator Hatch says insurance firms can ease U.S. pension crisis

By Lisa Lambert

WASHINGTON (Reuters) – A top Republican senator unveiled legislation on Tuesday that would radically change public pensions by having life insurance companies pay benefits through annuity contracts, helping to alleviate the underfunding that has engulfed many plans.

The bill introduced by Utah Senator Orrin Hatch, the highest-ranking Republican on the Finance Committee, would have the government pay a premium each year to a state-licensed insurer in an amount equal to a set percentage of salary. Employees would then receive fixed income annuity contracts from the insurance company.

“A new public pension design is needed, one that provides cost certainty for state and local taxpayers, retirement income security for state and local employees and one that does not include an explicit or implicit government **guarantee,” Hatch said in a speech to the Senate.

Annuities function similarly to pension plans by paying set amounts in regular installments. The accumulation of annuity contracts would even out interest-rate fluctuations, according to Hatch, who would have insurers competitively bid for them.

Underfunding is “not possible,” he added.

The bill would not cover past pension liabilities, but allow state and local governments “to stop digging the hole with their existing defined benefit plans,” said Julia Lawless, a spokeswoman for Hatch. [… Read more at MSN]

Is an Annuity the Wrong Choice for You?

March 16, 2013 By Annuity Guys®

Should I or shouldn’t I – that is the question.

Many of our site visitors struggle with the decision to choose an annuity for a portion of their retirement. No one wants to make a poor decision regarding their retirement security yet the volume of commentary on how to structure retirement is overwhelming.

How do you know if you are making the right decisions?

If you are considering an annuity for a portion of your retirement income or safety of principal, we would encourage you to focus on the **guarantees. If you can be happy with the **guarantees, then anything above the or **guaranteed growth is icing on the cake.

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This week we are sharing with you one of our new annuity tools that we are making available in our premium section – The Annuity Owners Manual. This concise brochure summarizes the types of annuities and the type of person who might consider these different annuities. Also, it poses a few key questions that you want to get answered prior to sitting down with a local advisor. Click here or on the booklet for your copy.

Dick and Eric discuss highlights of the Annuity Owners Manual and why you’ll want a copy for yourself.

Why do Wives Prefer Annuities?

March 2, 2013 By Annuity Guys®

Before everyone starts yelling gender discrimination, we know that husbands can prefer annuities too.

However, it is not uncommon for us to have a conversation with men who let us know right from the get go, “I don’t like annuities,” but I have to do something to take care of my wife if I’m gone. As guys, we typically think of ourselves as providers and view it as our responsibility to provide for our families. This should not be construed as being a denigration of women (although my wife would tell me I’m digging myself into a hole right now) but rather a somewhat stereotypical view of men and stereotypes can have some basis in fact.

So why would many wives like annuities? Well, it’s not actually the annuities but rather what they offer that appeals to most wives. Annuities offer a stable lifestyle by providing a stable, safe lifetime income. Annuities are as close as we can come to a “set-it and forget-it” retirement.

Watch Dick and Eric explain to husbands why their wives prefer annuities.

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Read the article that prompted this weeks entry.

Guess what? Your wife loves annuities

Recently, I was speaking in front of a national gathering of individual investors and traders about a topic that most of these market mavens cared nothing about … annuities.

Because this event was located in a tropical location, these future Gordon Gecko’s were accompanied by their wives, who just happened to be sitting by their loving masters of the stock universe during my presentation.

As it always happens when I speak at these events, as soon I start pointing out that annuities should be in place for lifetime income, lifestyle, and a worry free retirement that doesn’t involve the stock market, wives start elbowing their husbands as a reminder of who wins all arguments.

My 14-year-old daughter’s friend, Eloise, pointed out in a recent shuttle service I provided to their dance class, “every time my mom and dad argue about anything, it seems like my mom wins … so I think my mom has all the power.”

As my daughter immediately agreed and said that it’s the same in her house as well, I turned to Eloise and said that no truer words had been spoken, and that she is way ahead of the game with her insight.

As you know, your wife could give a hoot about finding the next great stock or guessing the future price of gold. Your wife cares about one thing and one thing only … lifestyle. Lifestyle to her is not a five-star mutual fund^{^}. Lifestyle to your wife is knowing that she will have enough money to live comfortably if something happens to you. It’s being able to go see the kids and grand kids. Lifestyle to your wife has nothing to do with the Dow Jones or anything related to Wall Street. The only thing that she cares about (if she told you the truth, and might have already) is having enough money coming into the checking account for the rest of her life.

Here’s where the love affair with annuities comes in. When you add up your pension (if you are so fortunate), Social Security payments, and other investment income, there might be a gap in the amount of required that needs to be filled. Annuities are the only strategy that can provide a lifetime income stream that you and your wife can never outlive. When I mention that statement, that’s when your wife’s elbow hits your rib cage as a subtle reminder that this is the only type of investment she cares about. [Read more from MarketWatch on why Your wife loves annuities…]

Millions of Pensions Dumped – Can Annuities Fill the Gap?

February 16, 2013 By Annuity Guys®

Every time you turn on the news it seems we are bombarded with information on pension reform or the scaling back of retirement benefits. In 2012 Ford and General Motors began offloading their pension liabilities and based upon a recent AON Hewitt survey many other business are considering following suit.

What will that mean for the retiree who counted on that lifetime income? What options will they face? Is it doom and gloom or perhaps a new opportunity to take better control of their own retirement?
Watch as Dick and Eric examine this changing trend in retirement funding, what opportunities it creates for individuals and how annuities may play a role in creating a pension styled lifetime income.

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Over the last 12 months we have reviewed lump sum buyout opportunities with many individuals and discussed whether or not an annuity might work for their situation. When we ran the numbers – some individuals were better off with their company options when it came to **guaranteed levels of income… but until you run the numbers based on each individuals situation you can never be sure.
See the report from insurancenewnet.com that led to this weeks entry below.

Survey: More Employers To Offer Lump-Sum Payouts In 2013

LINCOLNSHIRE, Ill., Feb. 13, 2013 /PRNewswire/ –Last year marked a watershed moment in retirement benefits as numerous companies decreased their pension risk exposure by offering participants a one-time lump-sum pension payout. A new survey by Aon Hewitt, the global human resources solutions business of Aon plc (NYSE: AON), reveals more employers plan to follow suit in 2013.

Aon Hewitt surveyed 230 U.S. employers with defined benefit plans, representing nearly five million employees, to determine their current and future retirement benefits strategies. According to the findings, more than one-third (39 percent) of defined benefit (DB) plan sponsors are somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum payout during a specified period, also known as a window approach, in 2013. By contrast, just 7 percent of DB plan sponsors added a lump-sum window for terminated vested participants and/or retirees in 2012.

“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” explained Rob Austin, senior retirement consultant at Aon Hewitt. “In 2012, many DB plan sponsors were exploring options and planning their strategies—we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation (PBGC) premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet.” [Read More…]

Annuity Ratings, are they Believable?

February 9, 2013 By Annuity Guys®

U.S. to sue S&P over Ratings – that was this years’ February 5th headline in the Wall Street Journal. If the federal government is suing a ratings agency for providing overly rosy evaluations on bundled mortgage-backed securities, what does that imply for their ability to rate insurance companies?

Should we as consumers place our trust in or be guided by a third-party evaluator of annuity providers? For most of us, the answer is YES.

Ratings of insurance companies should be one of the key components of your decision when selecting an annuity provider. When you purchase a lifetime annuity, you must believe that the company will survive longer than their obligation to you.

Third party ratings provide guidance to consumers who would not otherwise have any basis on which to compare companies. Should these ratings be the sole basis for making an annuity decision? NO. History has taught us that these ratings are just one piece of the total puzzle.

Dick and Eric share their thoughts on the validity of third-party ratings of annuity providers in this weeks video.

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Still have concerns about annuities, check out this article on “How Safe are Annuities“.

How Safe Are Annuities?

Safety of money is generally relative to comparing levels of risk between Government backed, insurance backed or individual securities investment risk.

In regard to non-variable fixed annuities, State Regulation forces insurance companies to follow what is known as Statutory Accounting unlike generally acceptable accounting methods (GAAP) utilized by publicly owned corporations. Statutory accounting is a show me the money type of accounting whereby expenses are written off immediately and not capitalized to inflate profits for corporate convenience or even fraud. Most insurance carriers are also publicly traded companies that additionally must also meet GAAP standards.

Insurance institutions are required to demonstrate to state regulatory authorities that dollar for dollar a client’s money (premium) is safely on deposit in secure financial vehicles such as investment grade bonds or government bonds. In addition they are required to have reserves known as additional surplus reserves. The minimum amount of required reserves is decided based on the safety of the investments as determined by state regulators. So based on these stringent requirements insurance carriers are scrutinized and forced by law to meet and maintain a legal reserve for the safety of their clients.

Each insurance carrier is also compelled to participate in a mandated state insurance **guarantee association (SIGA) whereby insured clients have minimum **guarantees on their annuities and life insurance typically and minimally $100,000 on annuities and $300,000 on life insurance some states have higher limits. These **guarantees are not to be confused with FDIC insurance or used in marketing insurance products. The state’s first concern is the safety of the client so in the majority of situations when an insurer begins to have any serious financial concerns the state places them in receivership and transfer s ownership to a better run profitable carrier with all assets moved over from the faltering company. Thus the insured client remains whole and the **guarantee association is absolved of any liability. [Read More…]

Annuity Guys® Video Transcript:

Dick: You’ve probably seen a lot of the news just recently about the rating agencies.

Eric: The US governments, the state governments are suing Standard & Poor’s.

Dick: The S&P 500, that’s right the rating agency.

Eric: Standard & Poor’s is on its way to writing a nice little check.

Dick: Do you think this could have something to do with them lowering the government’s credit rating?

Eric: Are you saying there’s a…

Dick: Do you think it could be a conflict of interest?

Eric: Well, speaking of conflicts of interest. This is probably the perfect introduction into our topic today, when we talk about, when we’re looking at annuities and insurance companies, the rating agencies how do they go about determining these rating agencies, and how they’re going to be selected and how their criteria is?

Dick: Well, it’s very interesting and as you read these articles about the rating agencies out there Eric, so many of them actually are paid by the folks they’re rating.

Eric: That’s exactly, so I’m an insurance company. I want to be rated. I write you a check to come in and…

Dick: To come in and rate me, right.

Eric: … look at my books. So is there a conflict of interest there, perhaps?

Dick: I think we’d have to say, yes.

Eric: Now if you’re going to give me a bad rating, wouldn’t I be better off just not having you come in and look at the books?

Dick: Well, that being the case, you would have competitors out there that would have positive ratings, and you would have poor ratings or no ratings. So you’re forced to comply. Now is that to say that, because there is this conflict of interest that exists, that you can’t rely on any ratings agencies?

Eric: No, I say this as I say it the everyman type of philosophy in the sense of, if I wanted to go in and evaluate each insurance company on my own merits where I want to walk in and say “All right, show me your books. Show me your balance sheet. I’m going to determine if this is a safe to place to put money.”

Dick: You’d have to take a battery of CPA’s and attorneys.

Eric: I don’t have the manpower. Exactly, so what we’re doing is we’re having to rely on these third party agencies, which they’ve been doing this for hundreds of years in some cases, to take a look and say all right, what is the financial status? What’s a third party review of where they’re at financially?

Dick: And if we go from the investment world, and we look at some things that have been going on, packaging the mortgages and this type of thing, the ratings agencies did miss it.

Eric: Well, and that was always the question. How could they miss it? There are some suggestions that perhaps, they didn’t even follow their own standards, when doing those evaluations. Then of course, then we hear about things in the recent past, not so recent past like Enron where they were too late to the bell, and then it even goes back to the 1970’s where New York City had its issues, and of course, the ratings agencies didn’t quite get on top of that in time.

Dick: Now I look at insurance companies a little differently and I think there’s good reason for that, and that is that state by state they have what we would call a statutory type accounting requirement where, maybe a good description would be show me the cash. In other words, they can’t use what’s the generally, acceptable accounting practices, the Gott method, which is used by corporations and that allows corporations to put these things off into the future, to hide present income or to hide present expenses to kind of cook the books. Used properly it’s fair, but if you want to cook the books you can do it sometimes.

Eric: There’s a little bit more manipulative action.

Dick: The Enron example would be good. But when it comes to insurance companies, they have to have everything transparent, out in the open in the statutory type accounting. So the third party rating agencies have quite an advantage there.

Eric: And we have a favorite, in the sense of, when we typically have a conversation with a client we tend a lot to use AM Best, because of their history with evaluating insurance companies, and that’s what you want, a consistency across time in what they invest since 1906.

Dick: They’ve been doing it for over 100 years and the thing that I like about it is that they have just a history, that when you go back and you look at companies, things don’t change fast. So a rating where a company has an A or A-plus rating, if they were to move down to maybe all the way down to a B-rating, that good take place over years and years and years. It isn’t typically anything that happens overnight.

Eric: Let’s talk about ratings and I hate to the example of one company, but it’s AIG.

Dick: Everyone knows AIG.

Eric: Everybody knows AIG. Here it is. Here’s a company that had an A-rating, on the insurance side. Now there’s always some question as to “All right, were they really in trouble,” in the sense of they’re going through a government bailout, all these things are happening.

Dick: And they were rated by AM Best, and yet even CNN reported that folks may need to be aware because of AIG going through all of this trouble, and it really had more to do with their investment side, and amazingly their insurance side was A-rated, remained A-rated, is still A-rated and very safe, and secure.

Eric: And that’s where you have to look at a company, when it’s a large company like that, that has multiple divisions. The insurance side may be a separate entity than what’s maybe getting the black marks out there.

Dick: Exactly and what would’ve actually taken place with AIG or other insurance companies is, if they really had gotten into trouble, all of the assets are there that gives them an A-rating. They would’ve been put in receivership. So a more profitable company that has economies of scale is making a profit off of their assets would have all of AIG assets moved over to them, and they would continue to operate profitably with those assets.

Eric: So I guess let’s look at this in totality now. So if I’m somebody coming in looking at annuities can I rely on these third party ratings, effectively, to help me judge what something is going to be a good choice for me.

Dick: I think the answer to that is, yes.

Will a Collapsed Dollar Harm Annuities?

February 2, 2013 By Annuity Guys®

Jack in CA asks; If the dollar goes into a nose-dive, how safe will it be to own an immediate, fixed or hybrid annuity?

In figuring out how to best answer Jack, we have to speculate on the level or severity of the collapse – if we have total anarchy or a Zimbabwean type of inflation, the paper dollar would be worthless and so would most investments. Do we feel that is likely to happen in the near future? No. Now, that being said, common sense says that if you spend more than you make, eventually you will go broke and our government has to figure out a way to meet its obligations and payoff its debt.

Annuities; just like equities, bonds, and commodities; to name a few, can have a place in a well structured portfolio. Dick and Eric examine the potential effects that the collapse of the dollar would have on the annuity industry and address annuity strategies that are best suited for this particular situation.

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Considering an inflation adjusted annuity? Check out this recent USA Today article from John Waggoner

Should you get an inflation-adjusted annuity?

An inflation-adjusted annuity aims to solve the problem by giving you an automatic cost-of-living increase every year. But the cost is steep.

Most people still have nightmares about math word problems: “If Nate has 37 red gumdrops and Hope has 43 blue feathers, what time will their train reach Altoona?”

If you have a 401(k) plan, you’re being asked to solve a similarly impossible problem: “Assume that R is the amount of money you’ll need to retire, X is the number of years you’ll live, Y is your rate of return, and Z is the rate of inflation. You have no idea what X,Y, or Z is. Solve for R.”

One solution is an inflation-adjusted annuity, which promises to pay you a sum that will rise with the cost of living every year until you die, much as Social Security does. Should you try one? Only if you expect to live long — and even then, you’d be better off waiting until interest rates rise.

The rule of thumb with 401(k) withdrawals is to start by taking out 4% of your portfolio the first year, and adjusting that amount upward for inflation each year. Most times, it’s too conservative: You’d need a $1.25 million portfolio to get an initial $50,000 annual withdrawal. But when the first few years are down years in the stock market, your withdrawals can simply aggravate your losses and increase the chance you’ll run out of money.

Because the stock market is unpredictable, to say the least, some people use an immediate annuity to smooth out some of the bumps in a portfolio. An immediate annuity is a contract between you and an insurance company. You pay the company a lump sum, and they agree to pay you a set amount per month for the rest of your life. If you live to 120, you win. If you join the Choir Invisible the year after signing the contract, you lose, and the annuity company pockets your investment.

The payout is based primarily on an interest rate — what the company expects to earn on your lump sum. As a simple example, suppose you want to invest $100,000. According to Immediateannuity.com, a 65-year-old man could get $548 a month for life — a 6.58% payout rate.

The 30-year Treasury bond yields about 3%, and insurance companies are not magic yield-making wizards. Some of the extra yield comes from the money left on the table by annuitants who have gone to the great field office in the sky.

The rest comes from the insurance company’s own investments, which is why it’s good to choose a financially strong annuity company. You want a company that can still pay, even during economically stressful times. States do have **guaranty associations backing annuity policies, typically to at least $100,000, but it’s best to avoid shaky companies entirely.

While the annuity’s payout is decent, it’s fixed. Let’s assume that inflation averages 3% — the average inflation rate since 1926, according to Morningstar. The effects of inflation are cumulative: After 30 years of 3% inflation, your $548 will have the buying power of $220. Unless you plan to live on toasted plaster, you’ll have to find a way to offset inflation, and a fixed annuity won’t provide that. [Read More…]

Annuity Guys® Video Transcript:

Dick: Today, we want to give a shout out to Jack in California.

Eric: You don’t know Jack.

Dick: I do know Jack. In fact, this is for and Jack and Sharon. Jack, hey, we appreciate the question. The concern today is what happens if the dollar collapses, what does that do to annuities?

Eric: Right. What’s it going to do to fixed index annuities and hybrid annuities? Excellent question. Now, we first have to define the collapse of the dollar I guess. If we look at it in a Zimbabwean sense . . .

Dick: Or Germany.

Eric: . . . where they’ve had, basically, a decimation of their currency . . .

Dick: Anarchy in the street.

Eric: . . . then the honest answer is nothing can save it.

Dick: Nothing’s going to save it.

Eric: In all honesty, it wouldn’t save the country. Social Security would be messed up. Your pension would be gone.

Dick: Right. Even having gold, you’d need to hire the A-Team to protect your gold.

Eric: Your interests.

Dick: I think that we’re all looking for that answer that is somewhere in the middle. We’re facing a lot of headwinds in our economy. Our government does not look very reliable, at this point, to make the right decisions.

Eric: Right. Peter Schiff is one of those guys that’s been calling for the collapse of the economy because of, basically, the overspending. I don’t think anybody would deny that, as a country, we’ve maxed out the credit cards. Until we start paying them down, we’re kicking the can down the road. We haven’t had a budget in, what, three years on a federal level.

Dick: The debt just keeps rising and rising, and it’s going to have to be paid back. The alternatives aren’t very good. You can raise taxes, which is political suicide, or you can devalue the dollar, which looks like everybody just raising their price. But really the value of the dollar is dropping.

Eric: Right. So your buying power is going kaput. Now, if I own an annuity, am I better off than if I don’t own an annuity?

Dick: Well, I’m going to answer that, but before I do, let me just say this, folks, the topic that we’re on today is complex. It is a very big concern that we talk about regularly with our clients. It’s very important that you do work with a good local advisor, somebody that actually gets it, works from a point of safety and diversification. That’s what we’re really going to talk about today. Your question, Eric, in terms of, if I have an annuity and the dollar starts to devalue, my question would be, same as yours: How far is the dollar devaluing, and did I set my annuity up to offset inflation?

Eric: Right. There are annuities that exist right now, hybrid style annuities, where the income rider is tied to something called the CPI or the Consumer Price Index.

Dick: Right. And immediates will . . .

Eric: They have the ability to, basically, be indexed to that. So those products exist right now if that’s one of the things you’re concerned with. You can set it up. Now, you’re going to start a little bit lower, typically, than you would if you took a level payout.

Dick: When you turn your income on, it’s going to start at a lower level. Yes.

Eric: Right. Now, depending on inflation or that index, you’ll get bumps in your income as those things increase. There are ways to dial in from that, but you’re making a choice to trade, perhaps a higher level now for future safety and security if those things do happen.

Dick: The other aspect of that for those of you that have means, that have the assets to work with, annuities may be one small portion or one moderate portion of your portfolio. It is not the end all and the be all.

Eric: No. We you always talk about asset allocation or diversification. You don’t want to put all your eggs in one basket. It’s really that simple. So having some hard currency. We’ve talked about if you’re worried about the economy as a whole and our domestic crisis, and you think companies here are going to be impacted, you may make the decision to make some investments in companies that are either multinational or overseas.

Dick: Right.

Eric: There are lots of options in securities, bonds, hard currency, gold, silver, platinum.

Dick: Take care of all of it. I don’t want to say in summation, but should we avoid buying annuities with the current economic situation and if the dollar is going to start to see this impact?

Dick: Well, Eric, I think that as we look at this whole situation, I think we want to always be cognizant of how long annuities have actually been around. Annuities go way back to the Roman Empire. That’s where the word comes from, “annua,’ annuity.

Eric: I “annua” that.

Dick: You “annua” that. Then, as we move forward into our modern times, we have annuity companies that have existed for 300 years. Do you think they have seen some devaluing of currencies?

Eric: Oh, yes.

Dick: Do you think they have seen some revolutions? The answer to that is yes, and even those that are quite plentiful in the United States, that are in excess of 100 years old. Insurance companies have a proven record of being able to withstand deflation, inflation, world wars. Not that in a total collapse, an anarchy type collapse that they’re going to be unharmed, but are they worth a diversification in your portfolio to have an allocation towards annuities? I think that any reasonable prudence would say yes.

Eric: Yes. It’s worth considering for a portion of your portfolio.

Dick: Yes. Hey, Jack, thank you for the question. The rest of you out there that maybe now have more questions, send them in, and we’ll get to them as soon as possible.

Is it Unfair to Compare Annuities to Investments

November 9, 2012 By Annuity Guys®

Is comparing annuities to investment choices a mistake? A recent Market Watch article stated that was just one of the three major errors made by both financial professionals and consumers when evaluating annuities.

Eric and Dick examine comparing annuities to investments in this weeks video review.

Three annuity mistakes to avoid

What not to do when evaluating annuities for retirement

By Andrea Coombes

If you’re comparing annuities to other investment products, you’re making a classic mistake—and it’s just one of three major errors that consumers and financial experts make when evaluating annuities, according to a panel of experts at a recent MarketWatch Retirement Adviser event in New York that focused on income strategies.

“Both immediate and deferred annuities have been shown to have a very positive role in an overall retirement-income strategy, but the deployment of these instruments is often hampered by some very fundamental misunderstandings,” said John Olsen, president of Olsen Financial Group, and author of a number of books on annuities, including “Index Annuities: A Suitable Approach.”
The panel, moderated by MarketWatch senior columnist Robert Powell, also featured Farrell Dolan, principal with Farrell Dolan Associates, and David Blanchett, head of retirement research at Morningstar Investment Management.
Mistake No. 1: Unfair comparisons

One such misunderstanding—and it’s often made by financial experts, Olsen said—is to assess the value of a variable deferred annuity as though all of its costs “are nothing but pure overhead.” That can lead consumers to view such annuities as unreasonably expensive. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today we are going to talk about whether it is unfair or fair to compare annuities to investments.

Dick: Eric, I think that it’s the hardest thing in the world for all of us to stay off of comparing annuities to investments, and I think it is unrealistic to think that we would do any comparison; however, I think that’s where we get in trouble.

Eric: It’s the expectations game. So often when people come to us, they’ve been conditioned to talk about return, whether it be from a mutual fund^{^}, savings account, whatever. Everything’s about return. What’s the return?

Dick: They spent their whole life accumulating this money so their focus has always been on that.

Eric: They are trying to figure out how can I get the biggest return rather than mitigating the risk necessarily with an annuity to get the biggest return in dollars, rather than return in rate.

Dick: What inspired us this week, reading this article by Andrea Combs that really gets into some of the things that we talk about on a regular basis; and that is why do we buy? Why do we choose annuities? There’s contractual **guarantees, there is cash flow, and that is what she really gets into, that there’s this transition that we go through that cash flow becomes king. Longevity of knowing that we’ve got money, no matter how long we live, and there is a third aspect which is maybe a little bit more parallel to investment, that is where you require secure level of growth, contractual **guarantees.

Eric: I like the idea of just saying it transfers the risk from me, as the investor or individual, to the insurance company. They are going to take care of doling out my allowance each month, hopefully, and that’s the income stream that I have confidence in. They’re insuring my future income stream, is how I look at it.

Dick: Past wisdom from the investment world has been that if we draw our portfolio down by a certain level, say 4%, 4½, 3½%, everybody’s got their own view of it, that somehow we can continue to do that and be invested. The last decade has shown us that that really can’t be relied upon.

Eric: In an era of 5% CDs, it’s easy to say, “I can pull of my 5% and never touch my principle.” If you looked today, if you can find a 5% CD . . .

Dick: It’s not there.

Eric: I could sell a few of those, if I could find a 5% CD. That world no longer exists, that safety, security aspect of getting those returns, necessarily. This is where if you need those returns that are a larger withdrawal than just pulling out your principle, and a lot of people do today, this is where annuity comes into play.

Dick: I was just going to say, again, talking about not being focused on the return. Unfortunately so many times folks, annuities are sold based on comparing them to investments, and especially the indexed annuity or the hybrid annuity where it’s stated that you’ve got upside potential to a downside risk; there is truth to that. The upside potential is pretty minimal, and the idea that it has outperformed certain investments, certain indexes, S&P 500 over certain time periods in history, it was ever intended to do that.

Eric: It’s not what they’re geared for. We’ve talked about it in the previous videos, in order for you to be happy, you look at the **guarantees. If you can be happy with what the **guarantees are offered through an annuity, then anything that you get above that . . .

Dick: It’s a pleasant surprise. It’s good news. You’ll never be surprised by an annuity by it going the wrong way. I have to qualify that a little bit. We’re talking more about fixed annuities here and not as much about variable annuity^#. Because a variable annuity^# is an investment, and yet, it does have some **guarantees.

Eric: It can have some **guarantees.

Dick: It can have, so there is some aspect about that that you have to say, “Maybe for some people, a variable annuity^# may fit,” but again that’s a whole different discussion.

Eric: Sure. In her last point, she talks about annuitization, which is a really interesting aspect. We’ve talked a lot about hybrid annuities and the fact that you don’t have to annuitize necessarily, to get the same benefit that you would from annuitization. Her focus is on the stream that’s provided from an annuity.

Dick: For all practical purposes, we’ll just assume that her annuitization would also mean turning on income for life; a different terminology. We do find that with clients that . . . what would I call it, Eric? The depression mentality, where we can live off less so we’re going to, and yet, they’ve set this annuity up so that we can turn it on and turn on this income at a certain point of time and relax, enjoy what we have, and know we will never outlive our money. Yet we have these clients who have a tendency to hold back from that.

Eric: I think nobody wants to give up their principle. You worked hard and earned these dollars, nobody likes the idea of just . . .

Dick: Spending it.

Eric: You give it all to the insurance company and you get that allowance. That’s what really annuitization really is; it protects you on the income side. The income rider on these hybrid annuities does something very similar in a sense: Guaranteed income for life, but still allows you to get access. If anything is leftover, that can go on to your heirs. That’s, I think, the aspect about that type of annuity that’s really popular.

Dick: I think it helps people who wouldn’t normally annuitize to go ahead and take their income stream, because they know that they still have some access to the account value.

Eric: I think it’s really one of the things that we are finding really attractive right now because it does allow that flexibility. For people that are used to this return mentality that we’ve talked about, they still have that opportunity to hold on to those dollars a little bit. Not necessarily get the best return, but to get that income stream, have that safety/security.

Dick: Eric, when we talk about comparing annuities to investments, what’s the balance?

Eric: You have to look at the diversification. For me, when you’re looking at those two things, you have to look at protecting the foundation, and that’s where an annuity comes in. After that, hopefully investments can play a part in controlling for inflation and being out there.

Dick: Maybe a healthy way to compare annuities to investments would be in your own portfolio, in terms of what proportion of your portfolio do you want in security and safety for that income foundation or death benefit-type foundation as compared to what portion are you willing to put at risk?

Eric: Exactly. It’s to protect the foundation. How do you want to protect it? Are you comfortable protecting it in the headwinds that we have going on, or would you rather protect it with a rock-solid foundation?

Dick: I agree. Thank you, folks.

Eric: Thanks for tuning in today.

Do Not Waste Time Considering Annuities, If You…

October 31, 2012 By Annuity Guys®

Do not waste your time considering annuities if you cannot find one of the following Annuity Profiles that matches your situation.

Annuity Profiles
1.   Security Oriented – Reached a stage in your life when market risk is not appealing.
2.   Value Freedom from Oversight – Want money to grow securely but do not want to be bothered with constant monitoring. Set it and forget it!
3.   Want a Pension Style Income – Can appreciate a reliable stream.
4.   Like Avoiding Probate for Heirs – Knowing that money can transfer efficiently and IRAs can be stretched over your children’s lifetime.
5.   Your Healthy and Plan to Live a Long Life – Longevity makes annuities work in your favor.

The above scenarios do not have to be an all or nothing strategy. Having specific amounts of money allocated to specific purposes allows for a blending approach when accomplishing retirement objectives.

The above attributes are not as well suited to variable annuities^# where securities risk and higher fees are typical.

Dick and Eric discuss the above Annuity Profiles in more detail.

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Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Case Study Example from the Insurance Information Institute:

Is an Annuity Right for You?

Click a Star to rate us as you watch, we love your feedback!!! Click video once for play or to pause.

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Why should I consider purchasing an annuity?
Annuities can serve many useful purposes.
If you are in a saving-money stage of life, a deferred annuity can:
Help you meet your retirement income goals.
Help you diversify your investment portfolio.
Help you manage your investment portfolio.
If you are in a need-income stage of life, an immediate annuity can:
Help protect you against outliving your assets.
Help protect your assets from creditors.

Annuity Guys Video Transcript:

Dick: You know annuities really aren’t for everyone and Eric and I…

Eric: Shock! Oh my god.

Dick: Eric and I’d like to kind of tackle that today, and just be maybe a little bit blunt and explanatory, on those that an annuity works well for and those that don’t.

Eric: You’re just saying “Don’t waste time, either yours or ours if…”

Dick: Well, now we don’t mind to waste a little of our time, but it’s their time that they’re concerned about.

Eric: Okay, their time. So if you don’t fit the annuity profiles that we’re going to talk about, probably not best to invest too many more hours pondering, whether or not an annuity fits your situation.

Dick: Right, and many times folks, someone has recommended an annuity to you. Could be an adviser, it could be a friend and it’s really wise to look at your options, and consider what does make sense, what doesn’t make sense, whether it’s an annuity, or an ETF, a mutual fund^{^}, whatever it is that you’re thinking about. However, there are some things about an annuity that make them good for some and not good for others.

Eric: Right, so we always talk about **guarantees safety, **guaranteed growth, , those are some of the things. So if you’re a mutual fund^{^}s stock picker and you like that security as being in the market, you like that aggressive growth profile, an annuity’s probably not.

Dick: Right, an annuity wouldn’t be the right thing. I mean you’re less security-oriented. You’re more willing to take risk. Another thing would be that you would really look at this market, and you would say to yourself that over the next decade or two, that you think things are going to really rock and roll. They’re going to do well. If you’re the type of person that really believes that we’re in for a tough couple of, the next 20 years then you may find yourself thinking that an annuity is pretty appealing.

Eric: Yeah, or if you like to be actively involved.

Dick: Right.

Eric: You know if you’re one of these hands-on, you want to be the trader, you want to have your fingers in everything. I flash back to the Ronco commercials of yore, you know? The little toaster, where it used to say, you know, “You set it and forget it.” If you’re that mentality, then maybe an annuity is kind of an appeal, because it’s one of those things you want that **guarantee, that aspect of the annuity. You want that regular check coming.

Dick: So folks, if you like the idea of freedom from oversight you don’t have to be involved in the day to day activity, the monthly ups and downs of the statement coming in. If that appeals to you then yes, you’re probably going in the right direction.

Eric: Yeah, if you run to the mailbox get that investment statement and go, “Yes,” then that’s probably not an annuity person, you’re more of an investment person.

Dick: Right, exactly.

Eric: So pension-styled income, we talk about you like the idea of getting that check every month. If that appeals to you…

Dick: Well, it’s quite different. There’s nothing else out there, there just literally, is nothing that gives you income **guarantees like an annuity.

Eric: Well, a pension.

Dick: Well, and that is an annuity. I mean Social Security it is a form of an annuity type arrangement. Pensions are annuity type arrangements, and so if you have a lump sum of money, and you want to know that you’re never going to run out of money, never going to run out of income and you value that, then an annuity really is in that line of thinking.

Eric: Right, if you’re more of a person who says, “You know what? I’m just going to take out a fixed. My investments I’ll manage them. I can pull out 3.0-4.0-5.0% every year and I’ll be happy. I don’t need that **guarantee aspect. I’m comfortable with a little.”

Dick: Right, and if inflation goes crazy, and you start getting into your principal that type of thing that you’re comfortable with making those adjustments along the way.

Eric: You can flex up and down.

Dick: Right, right. Again, you’re kind of out of that mode of auto-pilot or set it and forget it. You’re a hands-on, do-it-all.

Eric: Hands-on, right.

Dick: And we have to realize too, this is another issue that I’ve run into with clients and I know you have. Is that as we age, as retirement progresses along we have less and less tolerance or we see our clients have less and less tolerance, for being right on top of things and manipulating it themselves. They really want a lot of times, more of that auto-pilot setup.

Eric: Right, exactly, and I think people start to feel more secure. When you don’t have a salary check coming every month, all of a sudden that regular flow of income that you’re used to getting, if you’ve been in one of those jobs where you got that check every month, then all of a sudden switching to something that’s a little more uncertain.

Dick: Right and you have to make those decisions.

Eric: And they may have been a little bit more aggressive and had tolerance of the market’s ups and downs, at that point in time in their life, but all of a sudden, now they have to get that monthly paycheck. Those ups and downs become a lot more painful.

Dick: It makes a big difference in your ability to sleep well at night and to feel comfortable with what you’re doing.

Eric: Exactly. Speaking of feeling comfortable one of the things, probate comes in. Everybody’s suing everybody these days, but one of the nice things about a lot of states is that annuities are protected, basically from creditors.

Dick: From creditors, that type of thing, and yet even for probate it’s such an efficient way to take money around the probate court, because it goes directly to the heirs, and so that’s good. Also folks, if you have an IRA, that IRA can be stretched, stretched out to your heirs. And insurance companies are one of the few financial institutions that really do that effectively. They are just set up for it. It’s the way they work. So in effect, you can transfer an IRA. Give your children maybe, the equivalent of their own retirement in the future from your IRA, if you don’t need to spend it.

Eric: Exactly. Yeah, and kind of the last profile that I would say that really is key for an annuity, if you think you’re going to have some longevity. You’re going to live a nice long life and you don’t want to have to worry about running out of money, that’s it. That’s the sweet spot right there.

Dick: Right, right. Well, and you know Eric, we’ve always said and we tell people all the time, look we’re not trying to beat the insurance company or beat up on the insurance company.

Eric: Occasionally, I like to beat them, but…

Dick: But if our clients can win. Obviously, we’re always going to err on our client’s side. So if someone has longevity, they really believe that they have the possibility of living that longer life, they really will actually, statistically come out ahead, and win against the actuaries at the insurance company. So then the rate of return isn’t just decent or acceptable or reasonable, it’s very good, and so that’s where we like to have that conversation. There’s also a flip side to this, which I just might want to mention because there’s a few of you folks out there that are just the opposite. You actually believe you’re going to live a much shorter life, and yet you want to know that you can maximize the money that’s coming in to you, never run out and spend all you want while you’re still here. The thing you want to do there is look at an immediate annuity, that’s medically underwritten, because you’ve got some medical condition that you believe will shorten your life, and we can actually do a medically underwritten annuity.

Eric: Right, you may have a condition that basically says, “You know what? Statistically, it takes a couple years off your life expectancy.” Then they rate that based off of that new age that they calculate.

Dick: Right, right. So Eric, is it possible that some people are wasting their time considering annuities?

Eric: Well, most definitely. I mean you always want to look at all your options.

Dick: You do.

Eric: Obviously, the answer is annuities are not for everyone.

Dick: That’s true.

Eric: So hopefully our little five points here, that we’ve got on this page, will help you determine whether an annuity is right for you.

Dick: Exactly. You really have to weigh your situation over and when you go over these points, if a lot of them sound like you, and make sense to you then go forward, do your research, go consider an annuity, and if it’s the opposite?

Eric: Right, if you can’t hit one of the items on the checklist.

Dick: One or two, yeah, just sayonara.

Eric: Thanks for checking us out today.

Dick: Thank you.

100% Money Back Annuity **Guarantees!

October 5, 2012 By Annuity Guys®

Most big ticket purchase come with a warranty or a **guarantee – including annuities. Did you know that all annuities come with a money back satisfaction **guarantee?

Eric and Dick examine one of the most unknown or misunderstood aspects of annuities available today’s market.

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Definition of ‘Free Look Period’

A period where a new annuity owner is able to terminate their annuity contract without penalties or surrender charges. A free look period often lasts for 10 or more days (depending on state law and the insurer’s terms), allowing the contract holder to decide whether or not to keep it; if he or she is not satisfied, the contract purchaser can receive a full refund effectvely releasing them from the annuity contract to re-consider or choose other alternatives.

Investopedia explains ‘Free Look Period’
During the free look period, the purchaser can continue to ask the insurer questions regarding the contract in order to better understand the policy. If refunded, the amount given back may equate to the value of the account at cancellation or to the amount of purchase payments, depending on the state.

Annuity Guys® Video Transcript:

Dick: Eric, you know most people don’t realize they actually have a 100% money-back satisfaction **guarantee on an annuity.

Eric: That sounds awfully tempting. Now you have to explain does this last forever for as long as I own the annuity? Oh okay, so the 100% money-back…

Dick: No, there’s a catch. You have a window of opportunity.

Eric: Could this be the free look period?

Dick: This is the free look.

Eric: Okay, so now when you say free look, now we have to explain free look.

Dick: Well, the states each state has decided that this is too big of a decision to not have a time to look at your contract, your annuity contract. A time period where you can look at your annuity contract, you can reassess your decision, and have that time period they call that free look.

Eric: Okay, so I’ve decided I want to purchase an annuity. My friendly agent shows up at my door. Mr. Van Dyke here is your policy. Congratulations, you own an annuity. So is that when the clock starts ticking?

Dick: That is when the clock starts ticking, and folks what you’ll typically have is a delivery receipt that’s signed, and when that delivery receipt is signed from that point forward, you have this period of time that’s **guaranteed by every state. That time period will vary. Each state has its own limitations on that.

Eric: Minimums, the minimums are…

Dick: Ten days are the minimum.

Eric: I don’t think I’ve seen one less ten days.

Dick: Not less than 10, but some up to 30. I don’t believe they go beyond 30. Now a lot of states will have a say 10 day, but yet the company will give 30 days.

Eric: Right, so sometimes the company’s **guarantee is better than what the state minimum is, so that provision that allows us to review the policy at our discretion, we’ve taken ownership of it; it’s in our hands, we can then truly go through it; without any penalty or ramification other than I get my money back.

Dick: Correct, and the importance of this Eric, we’ve found in our own practice so many times people have hesitation from different viewpoints. Sometimes it’s a hesitation just to get started, because their afraid once they get started and they start moving down a road, they like something, they start to question if they should move forward.

But what we’ve really been able to help our clients with is understanding that they actually do have this 100% money-back **guarantee, so that they can actually move forward with confidence. That even at the point where they’ve made their decision, the money has transferred, the company has it, they now have their contract, we can still make changes.

Eric: Right, you can still undo.

Dick: It can be completely undone, right.

Eric: It’s the major undo button, and that’s what I think works to the consumer’s advantage.

Dick: Yes, it does.

Eric: So it’s an understanding that even once you’ve made the decision, you’ve got the policy in front of you, and that’s I think the key thing. You’ve actually got what the insurance company is going to present you with. All the details, the documentation those things should be explained within the documentation.

Dick: True.

Eric: So as the agent goes over it with you, if for some reason there’s something you don’t like, you have that opportunity to still get out of that initial decision. Some people have buyer’s remorse, and we always talk about it. This is your return. Typically, you only get to do it once, so you should feel comfortable about all those decisions.

Dick: A good understanding about what you’re doing and know that your comfort level is pretty strong.

Eric: Right, and so if you’ve gone in. You’ve got the policy. You’ve asked the questions and for some reason you don’t feel good about the answers or whatever, you’ve got a period of time to either one, do some additional research, make some additional calls or to back out.

Dick: Eric, I do have to say that there are what, I guess I would call bad advisers or bad agents that don’t like this provision, because basically they’re closers. They want to go in and close an annuity and sell an annuity, and they’re not so concerned about what the clients getting. They’re more concerned about their own benefit.

But a good adviser, a credible, serious financial planner or retirement planner will actually take their time and they actually like the free look provision, because they want the client to be very comfortable, with whatever it is they are deciding.

Eric: For people like us that take pride in our practice, in what we do, we want to make sure you fully understand everything you have. Everything has pros and cons.

Dick: Right, there are tradeoffs in everything.

Eric: It’s all part of the understanding process. We’re not saying you can eliminate the cons by using a 100% money-back **guarantee in the free look provision. It’s just understanding what you own and that you’re comfortable, with all of the aspects of what you’ve purchased.

Dick: Right and when we even look at our own practice, we go back over the last seven years or so, how many free looks have we had? One; and that was just changing life circumstances that caused this person to have to rethink what they had decided, but it really can really help relieve some of the stress, from the client being able to make that decision, and at the same time make a good decision.

Eric: Yes.

Dick: So is there really, when we really think about it, is this really a 100% money-back **guarantee?

Eric: It is, because you can undo. Now the big caveat there is the time frame. You have to do it within that provision. Knowing you have at least 10 days I think for every state, but understanding that’s that your time frame. You’ve got it. Look at it. That’s your time. Once those days are gone, so is that provision.

Dick: And there’s nothing wrong, folks with asking your adviser right up front, how long would I have to look at this, before I would actually have to pretty much, stay with my decision. And that doesn’t mean you are going to free look it. It just means that you really want to know what your rights are.

Eric: Right, you want to understand everything that’s there. I think we’ve covered it.

Dick: Yes, we have. Thank you for joining us today.

Eric: Have a great day.

How to Get Rid of a Bad Annuity

September 28, 2012 By Annuity Guys®

Do you think you made a bad decision on an annuity purchase in the past? Do you think you’re stuck due to surrenders and penalties? What are your options?

Dick and Eric examine the options that most annuity owners do not know about to possibly move out of an annuity that was misrepresented or one that no longer fits their financial objectives.

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It should be noted that prior to surrendering or replacing any annuity, careful consideration of all features, penalties and financial goals of the consumer should be evaluated — this is not a decision to be taken lightly.

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about how to get rid of a bad annuity. Well Dick, is there such thing as a bad annuity?

Dick: Unfortunately, Eric, there are some bad annuities.

Eric: Oh no, don’t tell me that.

Dick: Just like any other investment you can make a bad decision. You can buy a bad annuity. The best way I’ve found, to not have to get rid of a bad annuity, is just not to buy one.

Eric: If you don’t make the mistake upfront, you don’t have to suffer the consequences.

Dick: Right, right, right. So folks do you research, watch our videos, watch other videos. Just read, look at what’s out there, and just use some good judgment.

Eric: Well, that’s a nice summation. Are we done?

Dick: That’s the video.

Eric: Well, I guess we should define when we talk about bad annuities; it’s really a personal situation. It’s you end up with an annuity that doesn’t fit your financial goals or your objectives.

Dick: And it is possible that your financial goals or objectives change, so maybe the annuity wasn’t bad originally.

Eric: It’s just bad now.

Dick: It’s bad now and the other thing that we find happens, not so much recently as over maybe the past few years the annuities, folks, have went through quite an evolution, and we believe have reached kind of a level.

Where they’ve; I won’t say they’ve plateaued, but they’ve come out with these innovative riders, income riders; they’ve become very competitive with each other and we’ve kind of seen what would seem to be a leveling off of what we could expect for any of these annuities.

Eric: Yeah, and the nice thing is its innovation.

Dick: Yes.

Eric: You’ve got companies, there’s competition for your dollars, they want to design the best product that one, creates a need or satisfies a need for you, and those strategies make you money, make the company money, and that’s really what they’re designed for.

Dick: And unfortunately, if you were one of the early ones in, buying the annuities that were available four or five years ago and you compare it to what’s on the market today, with the contractual **guarantees, you may be a little disappointed.

Eric: It’s buyer’s envy I guess, so if I own one that I bought five, six, seven years ago and it’s not meeting my needs…

Dick: Or let’s say it does meet your needs somewhat, but not as good as some of the newer generations.

Eric: All right, so you want to tackle all these? So I’ve got one of these, how do I go about deciding what’s the next step? First of all, can I get out of a bad annuity?

Dick: Well, the answer to that is always it’s your money and it’s your decision.

Eric: And it may depend on your annuity, if you bought an immediate annuity most of the time…

Dick: That’s true, that’s true, yes.

Eric: That’s my one caveat, that if you own the immediate you pretty much…

Dick: You’ve given up your lump sum, so it is your annuity.

Eric: And that’s why we always talk about that being a make sure that’s the right decision, because usually that’s it.

Dick: So if it’s a deferred annuity there could be some extenuating circumstances, first of all. If it was really genuinely a situation, where that annuity was truly misrepresented to you; it was not what you thought you were buying; there could be some aspects of going back to the company, going back to the agent, but again, this has to be fairly well-documented. That it was misrepresented. So in those situations if it was truly not suitable, it was misrepresented, it is possible that the company would allow you to get out of the annuity with no penalty, also the possibility of litigation, that type of thing, or going through the state insurance department if it was misrepresented, but let’s just say that it was not.

Eric: It was just what was available at the time and it’s it sounded good at the time. How many times have we made a decision based off of this sounded like a good decision at the time and it might have been the best available at the time.

Dick: And now interest rates are low. Maybe your interest rates have dropped on the annuity. The cap rates have dropped. You didn’t get one of the income riders that are now available, so you don’t have those contractual **guarantees. Well, one of the things that I think that you want to look at first of all is how close are you to maturity? Will that annuity be maturing, and all of the surrender charges will be gone soon?

Eric: Now and when we talk about maturity and this is always an interesting thing when I talk about it with consumers, because they say “Well, do I lose my income at the end of that contractual, that maturity period?” Really, it’s a surrender time frame typically is what that contract. You can continue past that surrender schedule period. That annuity’s designed to keep going and going and going until…

Dick: Right, they still have contractual **guarantees in place for the client, even though the money is available surrender and penalty free.

Eric: Right, so when we’re talking about maturity in this case we’re talking about when there are no more penalties that will be incurred by basically, surrender charges.

Dick: So if you feel that your annuity is not what you really wanted, you’re only maybe a year or two away from being out of surrender charges, you may want to wait until that couple of year’s passes. You’ll also have some other alternatives. Even if you’re fairly new into the annuity, within a few years or so into the annuity, there’s things that you can look at, which could be an offset to the annuity that you have, and the surrender penalties, if the new annuity that you were looking at has a bonus or a market value adjustment.

Eric: Now and this is where market value adjustments are really kind of an interesting not well kind of…

Dick: Not well understood.

Eric: … understood. Even by some agents. I mean we’ve seen people that have had problems with understanding them and really they work in two ways.

Dick: Yes.

Eric: They can be and basically they work as an offset, for the insurance company in case of the change of rates, so what we’ve seen is they can either be, in addition to the contract at the time of surrender or a subtraction. Now if the interest rates have gone up…

Dick: They’re typically then going to add to your surrender charge.

Eric: Right, and if the rates have gone down, then we’ve seen here in the last few years…

Dick: Then you would have a positive MVA, where your surrender charge is actually reduced by a fairly large amount on the MVA.

Eric: And I know personally we’ve seen this happen. So it actually creates an opportunity for some people at times, when they’ve had an annuity that they’re not real happy with, and if things have gotten you think, surprisingly if they’ve gotten worse, there’s usually sometimes an opportunity to offset that surrender with that MVA, and the MVA is not the Motor Vehicle Association.

Dick: No, it’s not.

Eric: It is a market value adjustment, which is a mouthful.

Dick: And not all annuities have market value adjustment, so you have to look at the type of annuity. When I say the type of annuity, an indexed annuity, a fixed annuity, all of those can have market value adjustments, but not all do.

Eric: Right, so when we’re talking about this in relationship usually, it’s on a fixed or a fixed index and that’s because of what they’re using to reserve. So they’ve purchased bonds and that’s sitting behind it, and so if they have to sell them early that’s the reason usually most insurance companies use them, market value adjustment.

Dick: And the reason, another reason folks, why they have the market value adjustment is the annuities that do not have a market value adjustment on the annuity, typically cannot pay as high a rate or have as many **guarantees, as the one that has a market value adjustment. They have more latitude in terms of getting higher rates or better **guarantees, so that’s a good reason to use an annuity with a market value adjustment.

Eric: Sure. So there is one way to get rid of a bad annuity possibly, even that still has a surrender involved, because you still may have an offset from an MVA.

Dick: Exactly. Another is the new bonus or a bonus from a new annuity. So that if you have a considerable bonus from the new annuity that can help to offset some of the surrender, combine that with an MVA and the advantages of the new annuity if it makes financial sense, then it can be worth doing.

Eric: And that should be qualified. We’re not suggesting you would transfer from one bad product into another bad product.

Dick: Of course.

Eric: It’s got to meet your financial needs and this would only be something we’d recommend, if you’ve got something that’s not working, it doesn’t fit, this is an area where you can explore some options to basically, see if there’s something better out there.

Dick: Right. Unfortunately, it is a possibility that someone, Eric, would get involved in a bad annuity, and so there has to be different ways that someone could go about alleviating that situation.

Eric: Right and one of the things we’re talking about is using, usually a transfer of an annuity. We’re not talking about doing a withdrawal, and then rolling it into another one, though those are all options, but to avoid bigger taxation penalties even, we’ll typically look at transferring from one annuity company to another. So those things will keep you out of taxation penalties.

Dick: Yes, so I think that probably the best way to really avoid a bad annuity in the first place is to buy a good annuity. Do your research. Make certain that it is going to meet your objectives, and then, even if the newer generation annuity does come along, and does have a few additional advantages, if the original annuity that you set up met your retirement objectives, then there should still be some merit there and some good basis for why that was chosen.

Eric: Exactly, and you don’t want to just throw something. You don’t want to throw the baby out with the bath water I guess is the saying, and so make sure you’re not making just a rash decision to get something else.

Dick: That’s right.

Eric: And that’s why these annuities do have surrender charges, they do have these pieces, because they are designed to be long term, lifetime income generating products.

Dick: Make you think twice about messing up your retirement by ending your IRA or your annuity and that’s why these penalties are there.

Eric: Right, so as we say, you usually only get to do retirement once, so do it right.

Dick: That’s right. There are no do-overs in retirement. Thank you.

Eric: Thank you.