“Don’t buy an annuity! The **guarantees they offer are often unnecessary and costly.” – has turned into “that annuity sure saved you from the market meltdown!”; and “you’d better hang on to it!”
So, can today’s annuity buyer expect the same performance from an annuity they could have purchased a few years back? Eric and Dick discuss the variable annuities of yesteryear and how they compare to the hybrid annuities and variable annuities# of today.
**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.
A New Twist on Variable Annuities
Variable annuities draw fierce debate from both advocates and skeptics alike. But whether you like the **guaranteed benefits that they offer or think that they cost too much for the protection they provide, one thing is clear: Those who bought variable annuities# with **guarantee provisions five years ago got a screaming deal.
Plunging markets showed off the best attributes of variable annuities# with **guarantee provisions. Now, Hartford Financial is making an interesting offer to some of its variable annuity# holders: It’s trying to buy them out.
The pros and cons of variable annuities#
The reason financial experts on both sides of the variable annuity# debate have such strong reactions to the products is that they offer an unusual set of reward characteristics. On one hand, variable annuities# often give policyholders upside potential similar to that of mutual fund^s, ETFs, or other pooled investments. Yet the insurance aspect of annuities adds the ability to provide additional **guarantees, which regular mutual fund^s and ETFs can’t do. The view that opponents take, on the other hand, is that these **guarantees are often unnecessary and are usually costly. With annual expense ratios for variable annuities# typically well above what a similar mutual fund^ or ETF would charge, the **guarantees they offer definitely come with a cost — and under ordinary market conditions, the cost often exceeds the benefit.
How the market meltdown hurt insurers Over the past several years, though, market conditions have been anything but normal. A more than 50% plunge in the stock market from late 2007 to the market’s bottom in early 2009. [Read More…]
Annuity Guys® Video Transcript:
Dick: We have a real twist on things, Eric. The same folks that we’re advising everyone not to buy a variable annuity#, we don’t get into the variable annuity# as much as we do the hybrid annuity, but a lot of the folks that were talking bad stuff about the variable annuity# . . .
Eric: Saying nasty things about buying a variable?
Dick: We’re seeing this change of events. Were the **guarantees were so good in the variable annuities# of yesteryear, that nowadays, the same guys that were basically saying, “Don’t buy those. They’re just paying high commissions to insurance agents,” are now basically saying, “If you’ve got one of those variable annuities#, do not let it go.”
Eric: The **guarantees you’ve got there, nobody can beat that. I don’t know how you did that. It’s interesting, because we say . . . In the fund thing in this article, they talked about, “The **guarantees were often unnecessary and costly.” Guess what, it’s **guarantees. Why is it you’re . . .
Dick: They’re not unnecessary when they’re necessary.
Eric: They weren’t costly when they saved your butt.
Dick: Exactly, when it became a great deal. That’s where we always say that hindsight’s 20/20. All the experts seem to agree, and then find out later that they’re wrong.
Eric: That’s where when we talk about annuity, you talk about the **guarantees. If you can live with the minimum **guarantee, you know exactly what you’re going to get, and you’re happy with that, anything beyond that is icing.
Dick: Right. I personally, Eric, have talked to several folks that have called in and described their variable annuity# to me. They’ve said, “It’s got a 6% death benefit. It’s got a 6% withdrawal rate that I’m taking out. I’ll get my principle back. I can take 6% out.”
Eric: We can’t get those right now.
Dick: Yeah. We tell those people typically, “Unless there’s some great extenuating circumstances, don’t give that up.” That is a very good **guarantee, and they don’t do that anymore.
Eric: Right. Some of them . . . if you bought it when the market was going gangbusters, and you had that annual lock-in or those ratchets, so it locked in at that high watermark . . .
Dick: Right. You’re working off of that now.
Eric: Then ‘shh’.
Dick: Yeah, going up from there.
Eric: Everything else going down. Now it keeps building off of that.
Dick: Yes. The variable annuity# companies, they looked at past performance. They did their actuarial studies, and they said, “Based on this, we can offer these contractual **guarantees.” What do they tell us about past performance?
Eric: Never predict future performance. Never **guarantee future performance based on the past.
Dick: Exactly. Here they are caught in their own dilemma of future performance not matching past performance, so they’re all scaling back.
Eric: We should make the point that these companies that are trying to buy out of their **guarantees, it’s not at risk to the consumer.
Eric: What these companies are trying to do, they’re just trying to become more profitable, because they have to dedicate a whole lot more assets reserving for those **guarantees. They can take those dollars and use them in more profitable divisions, typically, property casually and those other areas. Those are the companies that are saying, “We can make more money by putting our dollars someplace else.” Your annuities, if you’re in one of those companies that is looking at maybe buying you out . . .
Dick: Think twice.
Eric: First of all, I don’t know if it’s a great option to buy it out. You have to weigh that very carefully, as well.
Dick: Get with an adviser that can really look at it closely and say, “This is a good one. Keep it.” That doesn’t mean that all of the older annuities are good.
Eric: Right. There’s some bad ones.
Dick: Yes, there are. Yet, if you’re looking for a new annuity, there are newer annuities, and this is where we get back into the hybrid or the fixed, because they weren’t investing in the stock market or riskier investments. They’re putting the money from those annuities into bonds and very high-grade investments, US treasuries, so they weren’t hit with the same things that variable annuity# companies have been, and their contractual **guarantees are, in many case, equal to or better than what some of the past variable annuity# **guarantees were.
Eric: Those are really the new style that we like, that typically took some of those best components from those old variables, those income riders and those income **guarantees, and then added those to a fixed component. That’s where we see a lot of the move in today, where if you’re looking at an annuity today, those fixed or hybrid annuities with indexing components to get better returns.
Dick: They give you those contractual **guarantees that the old variable annuities# gave us. I guess, nobody really knows the future, but I’m going to go out on a limb here and predict something. It’s like when we look at ourselves in a mirror, Eric; we are all guilty of it. We look back 2 or 3 years ago and we go, “Wow. I was a lot thinner then. I was a lot younger then. I wish I could go back to that.” I predict that if things continue on with the type of economy and headwinds we’ve had, that we’ll look back at today’s annuities and we’ll go, “Wow. What if I would have got that setup then?” It’s that way each year that goes along, as long as there are some good contractual **guarantees. If we can lock into those and we’re satisfied with those, a lot of times later on, we can look back and go, “Wow. That was a good move.”
Eric: Yeah, I agree. It’s being satisfied with the **guarantee, as long as that . . . Are you going to answer the question? Are the old ones better than the new ones?
Dick: Many times, we end with a statement that basically says, ‘It’s depends’, and it does depend. You really do have to look at it and determine it. Most the time on an older variable annuity#, going back maybe 3 or 4 years, where that annuity had some good riders on it, there’s a pretty good chance that you don’t want to give that annuity up. On the other hand, if we’re looking at some of these newer annuities, and maybe yours was quite a bit older or you didn’t get the riders on it . . .
Eric: Don’t have the **guarantee.
Dick: Right. Or you just can’t live with the idea that your principle’s at risk and it can go backwards, there can be some reasons to change up to a newer annuity.
Eric: In hindsight, basically, or in retrospect, some of the old ones are good and some of the new ones are good; some of the old ones are bad and some of the new ones are bad. You had it, we summarized it.
Dick: That’s right.
Eric: Thanks for checking us out today.
Dick: Thank you.