by pjc » Fri Jun 18, 2010 01:17 pm
An agent wants to sell me a Variable annuity--and says I can pay a small fee to be able to have monthly withdrawals AND at the end of my 3 year contract--TAKE my money out with no penalties --the Amount I put into it MINUS the dollars I took out in withdrawals. Then he said the only penalty is if I withdraw more than 8% I can only Take my money after the 3year contract is up BUT at the Market Value -whatever that will be (vs. amount I put into it). Does that make sense? Have you ever heard of such a thing? He also said if I do not go over my 8% when it's time to TAKE OUT the money, I can cash in the Market Value IF it's HIGHER than my portfolio value. Have you ever heard of such a thing?
Posted: Fri Jun 18, 2010 11:30 pm Post Subject:
did he happen to mention the federal tax penalties for early withdrawals? The insurance company can't get you out of those, regardless of how the agent makes it appear.
InsTeacher 8)
Posted: Mon Jun 21, 2010 12:35 pm Post Subject: Allstate SureIncome Rider
No, mention of federal tax implications due to early withdrawals. However, if I am to exceed annual withdrawal of 8% then I think I am somehow penalized.
In more insight on such rider?
Posted: Mon Jun 21, 2010 11:26 pm Post Subject:
One of the least understood facts about annuities is this: ONCE YOUR MONEY GOES INTO THE CONTRACT, THERE IS NO WAY TO GET IT OUT WITHOUT SOME TAX LIABILITY. Even your beneficiary would pay income tax on any gain distributed as part of the death benefit if you died prior to surrendering or annuitizing the contract.
If you're under age 59-1/2, there will be a 10% tax penalty on the amount of GAIN you take, incrementally, or upon surrender at the end of 3 years. You will also pay income tax on the GAIN when you receive it.
The 8% withdrawal is apparently the most you can take in any year -- based on first year premium paid or contract value -- without incurring a "surrender penalty" -- which is most likely enough to cause you to lose whatever interest has been credited.
The manner in which you describe this contract -- pay a small fee to be able to have monthly withdrawals -- makes little sense to me. But the contract most certainly pays a hefty commission to the agent.
What is the reason you are even considering a variable annuity?
I don't know your situation. You don't mention using it as a rollover vehicle for something like 401(k) plan assets, using the annuity as protection against market declines if you should die before annuitizing.
But, generally speaking, unless a person is fully funding all available retirement plan options available to him at present, and is under age 59-1/2 today, it would probably be an unsuitable recommendation to promote this kind of product to someone like that.
It would be interesting to me to know what your age is and what your intent is as far as your money is concerned (i.e., capital appreciation, capital preservation, etc) -- and we don't need to know the amount of money involved (it's not really important), and how you were even approached by the agent about a variable annuity in the first place.
Seems very odd. Hopefully, the agent refrained from using the word "GUARANTEED" in any way as far as you and your money is concerned. Because the only guarantee in a variable annuity is the cost basis to the beneficiary if you die prior to surrender or annuitization.
Some variable annuities, however, are now offering a "guaranteed (minimum) income" feature at annuitization or a rider with as much as a 5% interest rate guarantee under certain conditions, but none of those are "3-year" contracts as you are being offered. They are 10- or 20-year contracts, generally frown on withdrawals (especially monthly), and if surrendered before the end of the 10- or 20-year "guarantee period", all bets are usually off, and one only receives current market value, which could be more or less than originally purchased.
Posted: Tue Jun 22, 2010 03:10 am Post Subject:
There's not nearly enough information here to make a claim one way or the other. I'm not well versed on Allstate's VA, but in the interest of throwing random idea about here goes.
Perhaps the "fee" your paying is a shortened surrender period rider, maybe it's a 3 year surrender, maybe it's zero surrender.
8% free withdrawal would make Allstate's product one of the least generous in this department, most are standard at 10%.
Or...
What's your age? Or more importantly asked: how many years before you are 59.5? The three years could simply be a 72t (or q) distribution to avoid IRS penalty taxes. 8% could (maybe just maybe) be the maxed amount at the highest reasonable interest rate depending on the method for determining the 72 distribution. However, if this is the case, the agent has messed up, because 72t (or q) distributions would require the same amount be withdrawn every year.
He also said if I do not go over my 8% when it's time to TAKE OUT the money, I can cash in the Market Value IF it's HIGHER than my portfolio value. Have you ever heard of such a thing?
Yes absolutely, if the underlying sub account create a gain in your investment, then you'd be entitled to take out the accumulated valued of that investment performance. In other words put in $100k and your investments increase in value to $110k then you have the ability to pull $110k assuming no surrender charges. You will owe taxes on at least $10k if this is non-q money assuming you are not transferring a Roth IRA.
Now for some additional points of clarification...
Seems very odd. Hopefully, the agent refrained from using the word "GUARANTEED" in any way as far as you and your money is concerned. Because the only guarantee in a variable annuity is the cost basis to the beneficiary if you die prior to surrender or annuitization.
False, very false. Guaranteed minimum withdrawal benefits (which are very different from guaranteed minimum income benefits) offer guaranteed increases in premium for a basis against a withdrawal value. So start with $100k and say it increases 7% simple interest every year or something that that nature with age banded withdrawal guarantees ranging from 4-8% depending on age. Intricate details of this go beyond the scope of the OP's original question so I'm not going to get into now, but to state that the only guarantee offered in a VA is the return of premium death benefit is hugely false.
Additionally, there is one company currently offering an original premium amount death benefit paid even with withdrawals as long as there is $1 left in the account on the day the owner of the contract dies (annuitant if the owner is a trust or something of that nature).
The manner in which you describe this contract -- pay a small fee to be able to have monthly withdrawals -- makes little sense to me. But the contract most certainly pays a hefty commission to the agent.
Really? If this is a surrender free product, and they do exist, the sale is likely to generate GDC equal to 1% or less of the premium.
We seem to be at odds a lot lately, but it takes an incredible amount of audacity to throw stones like big commissions for the agent, and give such an outdated explanation of how VAs work.
Posted: Tue Jun 22, 2010 02:05 pm Post Subject:
The three years could simply be a 72t (or q) distribution to avoid IRS penalty taxes.
A 72(t)/(q) withdrawal plan could not apply to a 3 year annuity. A 72(t)/(q) distribution must be continued for a minimum of 5 years or to age 59-1/2 whichever is longer. Only after the required length of time can distributions be terminated or modified/recalculated.
As far as guarantees in an annuity are concerned, I did make a couple of mistakes in my depictions. So I deserved the "spanking."
However, aside from some of the contractual gimmicks such as guaranteed income and guaranteed withdrawals, the true guarantee is what I mentioned at the outset of my original reply -- once money goes into an annuity, there's no way to get it out without some tax liability. And apparently that was not explained or disclosed to the OP, according to his reply to InsTeacher's question. The blame for that falls squarely on the agent -- who indeed stands to earn a fat commission (surely BNTRS you get the same crap in the mail I do that promise things like 10% first-year interest to the client (3% thereafter) and 8% commissions for the agent) -- bring in $100,000 and get a check for $8,000. Can't get anywhere close to that from a $100,000 mutual fund investment! And you probably can't dump that much money at one time into some form of variable life product without creating a MEC.
and give such an outdated explanation of how VAs work.
Well, maybe that's the real friction here. I guess I'm a kind of 'traditional guy' when it comes to making sure people understand their insurance products. All the latter-day gimmicks that have been attached to VAs and similar products attempt to overcome the hazards of VAs and the true fundamental purpose of annuities, which is nothing more than to create a contract that promises lifetime income to the annuitant (VAs offer the potential for cash accumulation to keep up with or outpace inflation that a 3% guarantee fixed annuity cannot).
Instead, we're being taught to market VAs as tax-deferred savings accounts instead, a depiction which I personally resist. So my bias sometimes affects my responses.
But, as a selling point, clients sometimes hear, "You'll never want to annuitize." (Subtext: use this for the tax-deferred growth and as an escape from the MEC that overfunding VUL/VLI could cause. All of which is true and nothing wrong with it, if properly presented.) And the withdrawal gimmicks reinforce the idea that the product is a savings account rather than an annuity in the traditional sense.
Is it wrong? Well, even I can't say it is, because the contract allows it, but I don't think it's the best explanation either. In the right circumstances, even I use VAs with 10% or greater "free" withdrawal privileges to fund payments for long term care insurance premiums. But I disclose the tax implications, and the fact that there's no way to take money out without taxation. And I explain that this is not the true purpose of an annuity. But it's a strategy that can provide for 25-35 years of LTC premium payments with tax-deferred growth of principal that can't be obtained anywhere else outside of a retirement account (or life insurance, but VUL is not appropriate for such a purpose as this).
At least when an owner understands that if they attempt to withdraw too much cash at one time, there may be an additional fee (surrender charge) to do so, fine. But when surrender charges are "hidden" as the result of the sales presentation, even you have to admit that's wrong.
Compared to fixed annuities, which saddle the annuitants with an unchanging payment in the face of potential (and not too distant) inflation (but at least the insurance company bears all of the essential risk in the contract), variable annuities have inherent risks to the purchasers (attached directly to the performance of the stock market) that many fail to appreciate, courtesy of the agents who earn those big commissions -- "no breakpoints" is what the wholesalers tell us, right? -- and don't always do a good job of explaining that the client bears essentially all of the risk in managing the product. They leave it up to the clients to find it for themselves in the prospectus or contract.
So to overcome the fact that a VA can lose value and diminished value will affect the payment stream after annuitization, the insurance companies have come up with the "guaranteed" riders which are an aberration when used in conjunction with anything tied to the stock market. Are they valuable? Of course they are. Do they relieve the owner of the responsibility to manage the product for the best return? NO.
Variable annuities are great products and there are a lot of great companies offering them. But what I refer to as the "gimmicks" are too frequently presented in a way that seems to obscure the fact that a variable annuity REQUIRES active management of the subaccounts by the OWNER. The potential owner hears something about "professional money managers" or "professional money management" and MANY misunderstand that to mean someone else will make sure they don't lose any value.
As for a company that offers withdrawals to within $1 of cash value and promises a death benefit of the original principal to a beneficiary, that's a great promise. I wouldn't argue against it, but I'd be willing to bet that the M&E charges to support that promise are higher than most other VAs. Yet, on the other hand, if a person depletes their cash value to $1 and needs to annuitize, what will their payment be? I'm sure that same contract does not promise a guaranteed minimum income if there is only $1 available to annuitize.
The only point is this: once you step away from the fundamentals of annuities (the lifetime income), there has to be a tradeoff elsewhere in the contract. Added fees, higher surrender charges, longer surrender periods, and higher commissions, or a combination.
And please don't get me wrong. I don't begrudge any agent his or her commissions. Agents are responsible to their own conscience for the products they promote, and ideally none would make product decisions based on what's in it for them -- but we know that some don't uphold that part of the public trust conferred on them by their licenses. Here in California, at least, we have "financial elder abuse" laws that try to prevent such harm from falling on our senior citizens. Unfortunately, violations are not a death penalty offense.
Having said all that, the majority of VAs, even those with total internal expenses of 2% or a bit more, still offer tremendous benefits to their owners and annuitants that no other product in the financial services industry can provide. I just don't understand why so many agents are afraid to discuss the costs -- going in or coming out.
It's the annuities I've seen that have 30% surrender penalties in the first few years or surrender periods of 15-16 years that really rub me the wrong way. There are plenty of others that offer far more favorable terms -- and secondary guarantees.
Posted: Tue Jun 22, 2010 02:32 pm Post Subject:
No, mention of federal tax implications due to early withdrawals. However, if I am to exceed annual withdrawal of 8% then I think I am somehow penalized.
And, clearly, when you read the OP's response to InsTeacher's querry -- I think I am somehow penalized -- the agent did not do a good job of explaining the contract to this person.
Probably the only time that's ever happened to the particular agent, right?
Posted: Wed Jun 23, 2010 01:00 am Post Subject:
But why do they have to be gimmicks? I understand that many agents and wholesalers have taken to the streets saying these products guarantee a rate of return of blah%, which is a horrendous blunder. I once had a guy from FINRA mention the "guaranteed rate of return on variable annuities" like it was a real thing.
Perhaps it's malice, maybe failure to understand the product, I tend to think the latter, but who really knows.
It seems like there's some emotional baggage you hold here. I could be wrong, but you make references to wholesalers and certain practices that make me believe some personal experiences have left you a tad prejudice.
My view on these riders is a it's a safety net. As a variable annuity, it does have the benefits of being an investment that can be used much like a mutual fund. The GMWB is a if all else fails I know I can bank on this X% for the next however many years with Y% withdrawals guaranteed for life in most cases.
The return of premium death benefit even with withdrawals product actually works with a GMWB rider. Of course it's more expensive, there's no free lunch. But to the client who has qualified money and has to take RMDs, why not use a product that will allow them to take those RMDs and can even have the entire original principle paid to the kids. Or in a CRT application have guaranteed withdrawals and the charity knows that as long as there's $1 left in the account they get the entire original amount. This is a guarantee though that goes beyond just getting the your principle back if the market reduces your account value and you die providing you haven't taken withdrawals.
It's the annuities I've seen that have 30% surrender penalties in the first few years or surrender periods of 15-16 years that really rub me the wrong way. There are plenty of others that offer far more favorable terms -- and secondary guarantees
An area where we agree, I've been mostly skeptical and untrusting of equity indexed products, which typically have these sorts of characteristics.
Your traditionalism is fine, but if advising clients it makes a lot of sense to be well versed on nuances in products and advancements in them. Not all of the new stuff will be worth it, I think we can agree. But I've seen clients hurt, and extremely angry with their advisor who refused to understand how products have changed and learn that products that 10 years ago might not have seems worth it have changed a lot in that time period.
Posted: Wed Jun 23, 2010 01:25 pm Post Subject:
failure to understand the product
Exactly! How many agents can explain to a client's satisfaction the whole concept of AIR as it affects payments after annuitization? (Or how AIR affects the death benefit in VLI?)
Admitedly. I"m not promoting/looking for annuity business, so I don't have all the answers on annuities. And you're right, as a "safety net", the features (aka: gimmicks) companies are adding have value when used properly and not just added because they're available, but IMHO they are, in a way, attempting to minimize the very real responsibilities the contract owner has to the performance of the subaccounts.
Separately, the whole business of touting cash withdrawal features in both life insurance and annuities is disturbing because it tends to create a false impression in the mind of a client that the product does something special without affecting the ultimate benefit, which we know is incorrect thinking.
some personal experiences have left you a tad prejudice.
Not "personal experience" per se, but the experiences of clients who I could not effectively help get out of a bad product due to the egregious surrender penalties. In a (very) few cases, I was able to guide the client to obtain a full refund from the insurance company on the basis of agent misrepresentation in the sales presentation process. I hate to see people "abused" by agents who don't understand the products the market -- which brings us back to the opening quote -- because I would never think of doing it, as I'm sure would be true for you, too.
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