Annuity Providers Archives

How do you Choose the Best in Class Annuity?

June 1, 2013 By Annuity Guys®

The latest issue of Barron’s proclaims to know and list the Top 50 Annuities. Being the Annuity Guys® that we are, we quickly located the article and tables to find out if they were right. What criteria would they use to choose the very best. Finally we would have the answer that all of our readers and callers need so desperately.

Unfortunately, their best in class annuities may do more harm than help.

Annuity Guys® – Dick and Eric, evaluate Barron’s Top 50 annuity article and their best in class annuity selections.

**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.

Don’t get us wrong, we are grateful that this publication largely dedicated to investing in stocks and bonds or other securities has dedicated some time to cover a financial instrument that should be considered for at least a portion of most retirement portfolios that need safety, income and modest growth. However, consumers hoping to find answers about the top annuities will only know a small part of the story. Their hypothetical examples only apply to a very tiny segment of the annuity buying population.

While we hate sounding like a broken record, you should know that with annuities there is not a “one-size fits all” model. Sure you can use a list like the one found in Barron’s to ask for a comparison, but an expert advisor who specializes in income and retirement planning will be more likely to come up with better annuity choices when your specific scenario is fairly considered.

Here is an excerpt from the Barron’s article that made us shake our heads sideways.

Top 50 Annuities By Karen Hube

The once-dominant variable annuity^# is getting a bit of competition from cheaper iterations. These stripped-down products offer some surprising advantages, though.

Armand Baughman, 71, a retired Continental Airlines pilot of Valley View, Texas, has always viewed annuities as too complex, illiquid, and expensive to warrant his consideration. But last year, he socked $200,000 into a tax-deferred variable annuity^#, calling it “the best thing since Cracker Jacks.”

What changed? As part of an effort to lift sagging profits after years of challenging market conditions, firms are giving the oft-maligned annuity a makeover: an ultralow-cost, variable annuity^# that offers a broad array of alternative investments, including hedge funds, currency funds, managed futures, and other strategies.

Annuity companies are trying to make a comeback after years of struggling to remain financially sound under the cloud of low interest rates and high stock-market volatility. With annuity sales down 8.4% last year, to $211.8 billion, the lowest level since 2005, annuity providers are aggressively designing and marketing annuities that — like the low-cost variable annuities^# — appeal to very specific investor goals or needs.

“For years, companies offered products that tried to do everything at once — give the highest rates, best liquidity, best income **guarantees, and benefits,” says Ken Nuss, founder of AnnuityAdvantage.com, which has free listings of fixed index and income annuities. “But that’s over. They’re getting better at fulfilling a specific goal more effectively.”

To help sort through a breadth of products, Barron’s surveyed annuity companies and industry experts to come up with the 50 most competitive contracts in popular annuity categories. The results, based on common investor assumptions and goals, are detailed in the table, right.

Low-cost variable annuities^# with alternative investments earned a new category entry in the top-50 survey this year, thanks to the growing number of these contracts and their potential benefits to investors.

ANNUITIES, WHICH ARE TAX-DEFERRED INVESTMENT vehicles that allow you to turn on an income stream either immediately or years from now, come in two basic categories: Variable annuities have payouts that fluctuate along with their underlying investments; fixed annuities offer a **guaranteed interest rate for a specified number of years. [Read the full article at Barron’s]

Transcription:

Dick: Hello, I’m Dick.

Eric: And I’m Eric and we’re the annuity guys. Today Dick, we’re going to look at best in class annuities. Now, that sounds awfully high pollutant there. What’s best in class mean? Sounds like a horse racing term.

Dick: Well, Eric, one of the problems that we’ve had in our videos and we’ve been criticized at times; we had folks say…

Eric: No.

Dick: Why don’t you guys tell us what a company; which annuity and that type of thing? Well, let’s just give some disclosure here. Folks were in the most tightly regulated, most highly compliant industry; and if we start mentioning company’s names, we actually have to go out to get their approval first.

Eric: We need a lot more leave time to be able to tell you what the company name is.

Dick: Before we can do a video.

Eric: We have to get approved by the company and then they take about six weeks to banter back and forth; and then they come back, they usually say, no.

Dick: And then there’s another problem, if we start mentioning companies Eric…

Eric: Because it’s wrong as soon as we say it.

Dick: After we’ve said it, it’s wrong the next day. And that’s because the best in class annuities; Eric and I have certain annuities that we tend to favor or better than others, and certain companies…

Eric: It’s based off of historical performance that typically is better than others

Dick: But we may have a client one week that’s pretty similar to a client two or three weeks later; and we have to use a different product because some things either change with that annuity or that person’s situation is just a little bit different.

Eric: That’s right. It can be as simple as one is male, one is female. You would think there would not be that much difference?

Dick: So, what got us going on this subject today?

Eric: Well, It varies. I love them, but I hate them right now. You know it’s nice of an investment kind of publication that we typically think up to feature annuities in the top fifty annuities on the cover of that…

Dick: Well, they’re so biased. A lot of times they won’t even talk about annuities.

Eric: That’s right. So, we love the fact that they’ve decided talking about you which are the top fifty annuities. Now, I’ll have you know, they’re wrong.

Dick: Take it with a grain of salt and read it with a critical eye.

Eric: That’s right because as soon as I look at their list, I said “oh no!” Now, they had to make assumptions. They assume within their first section here that everybody two hundred thousand dollars exactly.

Dick: They’re all sixty years old.

Eric: Six-years-old and male. So, this list is probably very good for the time the article was written if you’re sixty and had two hundred thousand dollars. Now, if you’re 63 and female, the list is wrong.

Dick: Or all you have is two hundred thousand in your name; or what if you had a million to your name? All those variables change. Suddenly, that isn’t the right annuity because there’s other reasons you’d be doing this.

Eric: So, it did address some of the issues in the different pieces but we would tell you that when you first look at this, don’t assume everything here is going to apply to your situation. There’s typically not just one best annuity.

Dick: No! And then when you start talking about working with an advisor that really gets it, they’re going to take a much more sophisticated approach and it’s good not going to be one best in class annuity; it’s going to be three or four or five; and they’re going to have to all work together.

Eric: Right. It’s a balancing act of usually giving you an option. Maybe this one is lower rated but has a slightly better pay out for what your intention is.

Dick: Yes, yes.

Eric: This one has a higher rating but maybe slightly lower or may have to hold it a little bit longer…

Dick: This piece over here works well in a tax-free environment for growth and there’s the maybe starting a portfolio out of a good immediate annuity might make sense out there. So, again, being able to structure this properly, I would say to get best in class annuities, there’s no substitute for working with an expert.

Eric: And that’s where you rely on somebody in their expertise to define for you, what fits your situation. I know I sat down and run numbers and I’ve had what I thought was going to be the best one going in. And all of a sudden I said I run numbers and for this particular unique situation it had to be somebody that was exactly this year old and got to hold it for this long, one specific annuity all of a sudden jumps out of package you never expect. Nothing pay’s to go back and look at the analysis and…

Dick: Exactly. And it doesn’t hurt folks; never, never think that Eric and I are saying “don’t do your own research.” Look at the company’s ratings; get in our rate vault and look at all of the different annuities and the different features, and ratings, that type of thing; and do some comparison. But then, there comes a point where you do get involved with a an expert, an agent that works with these on a regular basis; and they’ll be able to look at the subtleties, the real differences and that’s where you really can find the best in class annuities.

Eric: And as we’ve spoken, there’s no reason why you can’t pull out a list like this and say “hey, what about company X here? I see that they were best in class on variance. What’s that look like?” The advisor can then run the numbers give you the idea of why what they’re proposing may be better or you know…

Dick: Eric, even with our expertise, we’ve had situations where somebody’s come to us and said “you know I was reading about this or that or whatever”; and maybe we haven’t even opened our eyes to something that they brought to us. And then we started utilizing it for other clients because it looks like they were right. You know, I’d like to think that we have a lock on all the knowledge but it’s working with people on a regular basis that keeps us on our toes and keeps us at the top of our game.

Eric: So if I’m looking for best in class annuity, where do I go?

Dick: You go first of all to our website…

Eric: Which you are here for a long time…

Dick: And you begin your research; and then you work with an expert advisor.

Eric: Yes and that’s the key; it’s getting the facts from somebody that works in this area all the time.

Dick: That’s right!

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.