are annuties from insurance cos. a safe investment

Submitted by osceolarose on Sun, 06/14/2009 - 18:52

I have two. I am happy wiyh their performance but am worrying if they could fail in this economy

Posted: 15 Jun 2009 05:01 Post Subject:

Your annuities are safer than you realize. There are so many reasons that an annuity is safer than most other investments, but here are a few.

1. Reserve Requirements - If you put $1 in the bank, they need to keep about 3 pennies of it on deposit and held "in reserve." An insurance company is required to keep dollar for dollar in reserve!

2. FDIC is a joke, and I don't want to start a big debate on it (Did you know they have 20 years to pay you back...and if the major banks failed they would just print more money making it useless!)...

The annuity is basically secured by each state's insurance division. There are a lot of components involved, but just know that if the insurance company goes belly up...you don't lose your money!

Look up Gary Spicuzza (sp?) and ask him if an annuity is safe...you'll get all the information you want to hear!

Posted: 15 Jun 2009 05:24 Post Subject:

I have two. I am happy wiyh their performance but am worrying if they could fail in this economy



What type of annuity plans are these?

Posted: 15 Jun 2009 05:27 Post Subject:

Hi osceolarose..

are annuties from insurance cos. a safe investment



I'd thank Chris for his detailed explanation. But at the same time I'd ask you one simple question-

What all investment options would seem safer to you than this one under the present downturn?

Steven

Posted: 15 Jun 2009 04:52 Post Subject:

I have two. I am happy wiyh their performance but am worrying if they could fail in this economy



The answer to whether they are safe is "maybe".

If it is a variable annuity, there is lots of risk and the insurance company doesn't make much of a difference except for any guarantees that may be backed by the insurer.

If it is a fixed annuity, the safety will based upon a combination of the company strength and the amount invested.

Posted: 15 Jun 2009 07:18 Post Subject:

What type of annuity accounts do you have? If they are variable, then they are subject to the whims of the stock market. Otherwise, fixed and indexed annuity accounts are quite safe.

They are backed by the full faith of the insurance company and the Guaranty Assoc in your state. Usually insured up to 100k per contract and 300k per household.

Posted: 16 Jun 2009 02:28 Post Subject:

Regarding Fixed Indexed Annuities:

"There is no asset category that outperformed them."
Professor David Babbel of Wharton speaking about index annuity returns
- Forbes 6 June 2009



Since 1995 when Fixed Indexed Annuities first hit the market, "There is no asset category that outperformed them."

The reason for this is because there isn't any downside risk of principal.

Gains are locked in and when the market is flat or down the worst thing that happens is the client receives 0% interest for that year.

A 25% loss of princpal (2001 crash) requires a 47% gain the following year to keep even with a boring annuity that's just limping along at 5% per year.

A 39% loss of princpal (2008 crash) requires a 80.73% gain the following year to keep even with a boring annuity that's just limping along at 5% per year.

A Fixed Annuity is the place to put your money after you've made your money and no longer want to risk your principal with the day traders on Wall St. playing stocks like a flea market swap meet.

Posted: 16 Jun 2009 05:50 Post Subject: Can one convert a variable annuity to a fixed one?

Can one convert a variable annuity to a fixed one when the VA isn't performing well?

Posted: 16 Jun 2009 10:45 Post Subject:

You can 1035 exchange:

Life Insurance for Life Insurance;

Annuity for Annuity;

Life Insurance for Annuity.

You CANNOT 1035 exchange an Annuity for Life Insurance.

Section 1035 of the Internal Revenue Code

Title 26 — Internal Revenue Code ("IRC")

Sub Title A — Income Taxes

Chapter 1 — Normal Taxes and Surtaxes

Subchapter O — Gain or Loss on Disposition of Property

Part III — Common Non-Taxable Exchanges

Updated: Friday, July 14, 2006

Section 1035 — Exchange of Stock for Property

(a) General rules --

No gain or loss shall be recognized on the exchange of --

(1) a contract of life insurance for another contract of life insurance or for an endowment or annuity contract; or

(2) a contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity contract; or

(3) an annuity contract for an annuity contract.

Posted: 16 Jun 2009 11:10 Post Subject:

Can one convert a variable annuity to a fixed one when the VA isn't performing well?



Yes, but if this is your thought process, you are the type of person who should always be a long term saver instead of an investor.

It's ok to be a long term saver. It's ok to be a long term investor. If you go back and forth, you will get crushed.

Ex. Anonymous12 buys a VA with $100,000. The market takes a hit and his investment is now worth $60,000. He takes his money out and puts it into a fixed product that averages 5% a year. After 11 years, he still has less than the $100,000. If his money was getting 5% every year, he would have had $171,000.

People who go back and forth, buy high and sell low.

Posted: 16 Jun 2009 11:13 Post Subject:

Since 1995 when Fixed Indexed Annuities first hit the market, "There is no asset category that outperformed them."

The reason for this is because there isn't any downside risk of principal.



I don't know if it is true or not that there has been no asset class to outperform them. Do you have anything to back up that assertion?

It is true that there is no downside risk of principal.

It is false that the reason that they outperformed because of the lack of downside risk. Over most 10 year periods, equities will outperform them precisely because they do have downside risk. They outperformed because equities did so poorly.

Posted: 16 Jun 2009 12:12 Post Subject:

I don't know if it is true or not that there has been no asset class to outperform them. Do you have anything to back up that assertion?


Yes, 4th grade math. It's not an assertion, it's a mathematical fact.

A 25% loss of principal (2001 crash) requires a 47% gain the following year to keep even with a boring annuity that's just limping along at 5% per year.

A 39% loss of princpal (2008 crash) requires a 80.73% gain the following year to keep even with a boring annuity that's just limping along at 5% per year.

It is true that there is no downside risk of principal.

It is false that the reason that they outperformed because of the lack of downside risk. Over most 10 year periods, equities will outperform them precisely because they do have downside risk. They outperformed because equities did so poorly.


The statement above is contradictory and mathematically false.

Insurance Expert pick any 10 year period Jan 1995 through Dec. 2008 in the S&P 500 that out performed a Fixed Indexed Annuity. Tell me what 10 years you want to chart.

A person will NEVER make up a 39% loss of principal.

Posted: 17 Jun 2009 09:41 Post Subject:

Gary, I have no problem with fixed annuities. This includes "traditional" fixed annuities and indexed fixed annuities.

Is there a problem with me asking you to back up your assertion? Saying that it's 4th grade math does nothing to back up what you are saying. I am asking a legitimate question. I wasn't being argumentative.

It seems pretty strange to refer to fixed indexed annuities as an "asset class". The performance of an FIA is obviously going to be based upon the crediting method used and the underlying index. If FIAs are an asset class, can please tell us what the rate of return was for this class? I'm not saying that your assertion is wrong or correct. I have no idea. That is why I'm asking. I'm having trouble finding this information since to the best of my knowledge, this is an asset class that doesn't exist.

For comparison sakes, here are how some indexes performed since 1/1/95 through 5/31/2009:

S&P 500 6.85%
DJIA 8.02%
Citigroup Broad Investment Grade Bond 6.88%
NASDAQ 6.14%
180 Day CD’s 4.2%
Thompson US High Yield Bond 4.32%
MSCI Emerging Markets 5.72%
MSCI EAFE Index 4.10%

Posted: 17 Jun 2009 09:58 Post Subject:

A 25% loss of principal (2001 crash) requires a 47% gain the following year to keep even with a boring annuity that's just limping along at 5% per year.

A 39% loss of princpal (2008 crash) requires a 80.73% gain the following year to keep even with a boring annuity that's just limping along at 5% per year.



This is true, but does it matter? Equities aren't short term investments. What FIA pays 5% when the market is dropping 39%?

We are talking about very different products with very different purposes. A boring 5% is great when the markets are dropping. However, if that is what someone got since 1/1/95, they have a lot less money than they would have had by investing in the S&P 500 or the Dow. Despite two giant drops, there is still a huge difference. $100,000 into an annuity paying 5% would now give the person $212,000. The S&P 500 would give $277,000. The Dow would have given $328,000.

I’m not arguing for one product over another. Fixed and variable products both have their place. I just believe that showing what happens over a one year period of time is a disingenuous comparison. By the same token, showing how a variable product has outperformed long term doesn’t mean that somebody shouldn’t own fixed products.

Posted: 17 Jun 2009 10:19 Post Subject:

The statement above is contradictory and mathematically false.

Insurance Expert pick any 10 year period Jan 1995 through Dec. 2008 in the S&P 500 that out performed a Fixed Indexed Annuity. Tell me what 10 years you want to chart.

A person will NEVER make up a 39% loss of principal.



How about if we start with 1/1/95-12/31/2004? The S&P returned 12.07%. A $10,000 investment grew to $31,241.

1/1/96-12/31/2005? 9.07% $10,000 grew to $23,830
1/1/97-12/31/2006? 8.42% $10,000 grew to $22,441
1/1/98-12/31/2007 5.91% $10,000 grew to $17,752

It's simply a false statement that someone will NEVER make up a 39% loss of principal. First of all, your statement ignores all gains made before the loss. Like I’ve already pointed out, despite the drop, the S&P 500 still has returned 6.85% since 1/1/95. Going forward, a 10% average return would mean that it would take about 5 years to break even. 8% would mean about 6.5 years.

Gary, I can’t state this enough that I have no problem with fixed products. Everybody should own some fixed products in their portfolio. It’s just that it makes no sense to compare them to variable products. If the markets are good, variable products will outperform. If the markets are bad, fixed products will outperform. We don’t know if the markets will be good or bad.

Posted: 17 Jun 2009 08:08 Post Subject:

Insurance Expert we're going to have to agree to disagree.

It's simply a false statement that someone will NEVER make up a 39% loss of principal. First of all, your statement ignores all gains made before the loss.


See PDF below. I'm not ignoring all the gains made before the loss. The loss is what wipes out all the gains.
If you study THIS chart October 1st 1998 through September 30st 2008 you'll find that a Fixed Indexed Annuity with a 40% participation rate far out paces the market precisely because there isn't any loss of principal during the down years.

Further, during the past 11 years "the market" barely exceeded a minimum 1% guaranteed rate over the same 11 years.

The loss of principal is what is devastating to a person's retirement savings.

Posted: 17 Jun 2009 10:35 Post Subject:

The loss of principal is what is devastating to a person's retirement savings.



It is amazing how many people approaching retirement fail to realize this simple, but true statement. When I was working as a financial advisor for a major bank, I encountered so many baby boomers that were looking to retire in the next few years. Their entire portfolio was made up entirely of stocks and because of the downturn in the markets, they were resistant to making any changes.

I actually had a client tell me that he would never do an annuity, because he wanted his money to earn something...not sit stagnant. I looked at his last 5 years and showed him that even if he had earned NO interest...he would still have $127,000 more in his retirement accounts if he didn't have his technology sector stocks.

The annuity is a major tool and when used properly can be the answer to most retirement concerns! The last thing I would personally want is to lose my life savings in the last couple years before I retired. Better yet, I don't want to watch my nest egg bleed money profusely!

Posted: 17 Jun 2009 11:14 Post Subject:

We have a client who had a $3 million retirement portfolio and was ready to retire next year from his practice (he's a doctor). He lost $2.2 million last year because his advisor had him in very aggressive stocks and hedge funds. We have been telling him for two years now about the equity linked index annuity. He would still have $3 million+ if he had just taken it. Even if he took a portion of it and put it in there, he'd still be in ok shape to retire. Now he'll be working another 5-10 years.

Posted: 18 Jun 2009 10:42 Post Subject:

Having safe money is very important. It can be an indexed annuity or it can be something else. It doesn't make sense to have enough money to retire and then because of a downturn in the market, not be able to retire.

I'm a believer in being as conservative as possible to the extent that it will allow one to achieve their financial goals. Unfortunately, for many people, this means that they still have to be fairly aggressive because being conservative may mean that they won't lose any money, but it may also mean that they will never have enough money to retire comfortably.

Gary, I have no problem with agreeing to disagree. However, before we do that, we must deal with factually correct information. I think that you may be using information that isn't factually correct.

Take a look at the marketing piece that you linked to in your last post. Read the fine print. That piece DOES NOT compare the index annuity to an investment in the S&P 500. It compares the hypothetical index annuity to the historical prices of the S&P 500. In other words, dividends are not included. Yet, we know that an investor in the S&P 500 receives dividends and historically, this has been a significant part of the return.

By the way, during that time period, the hypothetical index annuity did slightly outperform even when we calculate the return correctly. You asked me to compare any 10 year period during the time horizon that you gave me. When we do that, there are lots of 10 year periods that the annuity didn’t outperform. There are some that the annuity did outperform. What does this mean? One certainly shouldn’t draw a conclusion about something being better. It means that 10 years is too short of a time period for someone to take risk if they can’t afford the loss.

I'm not trying to disagree with your assertion of the FIA being the best asset class over the period of time from 1/1/1995 to the present. For this to be true, the return would have to be over 7%. That’s why I’m asking you to back this up. If it is true, I would like to know that it is true because I can’t find anything that shows this. If it isn’t true, you need to know that you are giving incorrect information. Too often, index annuities get compared to the S&P 500 index instead of the return of the S&P 500. Like I said, during the time period in question, the S&P 500 has returned over 6.5% and the Dow has retuned over 8% even with two giant drops.

Posted: 18 Jun 2009 12:15 Post Subject:

Insurance Expert,

Those numbers are accurate for the indexed annuity.

Now you are correct the example doesn't included dividens but they also only used a 40% participation rate for the indexed annuity. Until the crash of 2008 the typical participation rate on the point to point uncapped strategy was 60%.

That illustration is a middle of the road example.

Some indexed annuities would have performed better and some would have performed worse but none of them would have lost one penny of the client's money.

And for some mathematical fun even a Traditional Fixed Annuity at 2% would have $124,337 at the end of 11 years.

I didn't write these words below:

Over the past 15 years, the products have become increasingly popular and are offered by major insurers like like Allianz ( AZ - news - people ) and The Standard ( SFG - news - people ). While the investment features have looked increasingly alluring, the catch is that the stock market's wild seesawing could hardly have been better designed to enrich holders of equity-indexed annuities. Since 1995, these annuities have easily outpaced the S&P 500 and bond indexes alike.

"There is no asset category that outperformed them. We were extremely surprised, really just amazed," says David Babbel, professor emeritus of insurance and risk management, who conducted a study of equity-index annuity returns beginning in 1995.


Those words came from THIS article in Forbes.

The article has factual flaws and isn't written to be favorable to indexed annuities, yet, they don't disputed the facts.

Posted: 18 Jun 2009 12:38 Post Subject:

Gary, we're certainly in agreement that one won't lose money in an indexed annuity. We can certainly agree that if a client's primary goal is to not lose money, an indexed annuity is better than a variable investment.

It is true that the index annuities have beaten the index (no dividends)during that time period, but they have not beaten the return of the index (including index). Investors get the latter and not the former. It's the latter that matters.

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