Is your annuity safe?
Question: I have $100,000 in an annuity with AIG that my mom and I depend on for income to live. Should I cash it out even though I would suffer a loss, or do you think I should hold onto it? It’s so hard to know what to do. —Kitty Schwartz, Plano, Texas
Answer: Most people buy an annuity at least in part because they see it as a refuge, an investment they can count even if the financial markets are spiraling downward. But that faith has been tested in recent weeks.
The government needed to step in to cover the debts of AIG, the nation’s largest insurer, and the health of many other major insurers has been called into question.
So it’s no surprise that I have been inundated with questions from people worried about the security of money they have in annuities.
I would love to be able to give a simple reassurance.
But annuities are often complicated products. I’ll try to lay out the most important issues surrounding that choice as best I can.
To do that, however, you first must understand the safety mechanisms that are in place for annuities so you can better gauge the risk you actually face (which for many people will be a lot less than they fear). And you must also understand the possible consequences of withdrawing your money from an annuity.
3 lines of defense
Basically, there are three lines of defense that protect the money you have in an annuity.
The first is oversight. Insurance companies are regulated at the state level, and the main job of each state’s insurance commissioner is to assure that the companies headquartered in that state have enough reserves, or capital, to meet their obligations to annuity owners and other policy holders.
The second line of defense becomes a factor when insurers run into trouble despite the oversight. Specifically, the state insurance commissioner steps in, do anything from arranging for a takeover of the ailing insurer to transferring annuities and other policies to a healthy insurer.
The third line of defense is the network of state guaranty funds, a factor if a failed insurer doesn’t have enough in assets to cover obligations annuity holders. Most states cover up to $300,000 for life insurance death benefits, $100,000 in cash surrender values for life insurance and $100,000 in withdrawal and cash value for annuities, although some states have higher limits.
This coverage is per person per insurance company. So if the state limit for annuities is $100,000 and you have a $100,000 annuity with one insurer and another $100,000 with a different insurer, you would receive $100,000 of coverage for each annuity.
A quick note about variable annuities. Most people who own variable annuities have their money invested in one or more “subaccounts,” or mutual fund-like stock or bond funds. The money in these subaccounts is segregated from the insurer’s assets and cannot be tapped by the insurer or its creditors. So while the market value of your variable annuity may decline, the money you’ve invested in a variable annuity would be safe should the insurer fail. (If you have invested in the variable annuity’s “fixed” account, that money is part of the insurer’s assets and would be covered by the guaranty fund.)
So if your annuity’s value is within your state guaranty fund’s coverage limit, you don’t need to bail out to protect yourself from a loss. That’s not to say you might not want to get out at some point in the future for peace of mind or if you decide annuities aren’t for you. But you don’t have to exit in a rush, which might trigger taxes and penalties. Your money is secure.
What if the value of your annuity exceeds these limits? In that case, you’ve got a few factors to consider.
Consider your insurer’s financial strength
Assessing the financial strength of your insurer is difficult if you’re not an insurance analyst. But you can get a feel for it by checking how highly your insurer is rated by ratings companies like A.M. Best, Standard & Poor’s and Moody’s. (It’s important that you have the exact name of your insurer, as there may be multiple subsidiaries with similar-sounding names, each of which is rated separately. The name of the insurer that issued your annuity should be on your contract.)
Granted, these ratings are hardly foolproof. Rating agencies can get it wrong. And rapidly deteriorating markets can make what was a sound company weeks ago vulnerable today.
It’s hard to draw a dividing line between what rating represents an acceptable level of safety and what rating doesn’t. But I think it’s reasonable that someone relying on an annuity for security would want to see a rating of A or better. (The rating scales vary somewhat between companies, but A is usually the third highest rating, after AAA and AA.).
Weigh the taxes and penalties
You’ve also got to consider withdrawal penalties. Most annuities carry surrender charges that typically start at 7% or so and decline gradually each year until they disappear after seven years. In some cases, however, surrender charges can run as high as 20% and last 20 years. If you pull money out early, you could take a sizeable hit.
There is a bit of a loophole here, though. Most insurers allow you to withdraw a small amount – usually 10% of your balance – free of surrender charges each year.
Taxes are another consideration. If you withdraw money from an annuity, you’ll owe tax at ordinary income tax rates on any gains (and on your original investment if your annuity is held within an IRA account funded with tax-deductible or pre-tax dollars.) If you’re under age 59 ½, you’ll pay an additional 10% early withdrawal tax.
There is a way around the tax hit. Instead of just pulling your money out of the annuity, you can do what’s called a 1035 exchange into another annuity. In fact, you can do a 1035 exchange and split your money among two or more insurers with good ratings to diversify your exposure. You’ll still be in an annuity, of course. So if your goal is to exit the annuity altogether, this tactic wouldn’t help. A 1035 exchange also doesn’t exempt you from any surrender charges that may apply. And, indeed, by moving to a new annuity, you would likely start the clock again on a new set of surrender fees, which could make a future exit more costly than getting out today.
Bottom line: If your annuity’s value is over your state’s guaranty fund limit, you’ve essentially got to weigh the cost of getting out vs. the risk of staying in.
If you have an annuity with a highly rated insurer and the surrender charges are still quite high, you might prefer to just hold on at least for now, especially if your annuity’s value isn’t that far above the guaranty fund’s limit. You can always pull money out later on or move it to another insurer via a 1035 exchange after the surrender charge has fallen.
You could even reduce your exposure above the guaranty limit gradually by taking advantage of the annual surrender-free withdrawal provision.
If, on the other hand, the insurer has a low rating or you’re really worried about a loss and the surrender penalty isn’t too severe, you might want to switch via a 1035 exchange to an annuity with a highly-rated insurer, especially if the annuity’s value is well above the guaranty coverage.
If the insurer’s rating is low and the surrender penalty is still high, you could also consider doing a partial 1035 exchange – that is, move enough of your current annuity to an annuity with one or more highly rated insurers so that each annuity falls within or at least not too far above your state’s guaranty fund limits. You would still have to pay a surrender charge, but at least it would be on only a portion of your annuity’s value.
All this comes down to a personal judgment. But I think that ultimately, if you’re going to own annuities, you want to have your money spread among two or more insurers and, to the extent possible, below the guaranty fund limit for your state. You don’t have to get to this position overnight. But the weaker your current insurer is and the higher above the guaranty limits you are, then it seems to me the sooner you want to do this.
Are annuities for you?
One final note: I think this is a good time for people who own an annuity – or are considering buying one – to ask themselves whether they really ought to be in an annuity at all. I’ve long recommended a particular type of annuity – an immediate annuity – as a way to convert a portion of your savings to a lifetime income once you’ve retired.
But immediate annuities represent a very small portion of annuity sales. Most of the annuities that are sold fall into two categories: fixed deferred annuities, which are sold to older investors, most of whom I think would likely be better off in bank CDs and bonds; and variable annuities, which are touted as mutual funds that can shelter their gains from taxes and often sold (usually inappropriately in my opinion) as investments for IRAs and 401(k) rollover money to people who are still years away from retirement.
If nothing else, I hope the attention that insurers and annuities are getting will lead investors to re-assess (ideally with the help of a financial adviser who doesn’t depend primarily on annuity sales for his or her livelihood) whether they really belong in annuities.
As I said at the beginning of this column, annuities can be complicated. But there’s one aspect of them that’s become painfully obvious: Getting into them is a lot easier than getting out.
..these annuities are pieces of junk that separate suckers from their money, impose surrender charges, and give a commission hustler your money, by the long surrender fees….if anything, choose Vanguard annuities, no surrender charges, and no commission hustlers that lie to the fools that buy them…there is merit in immediate annuities, but the commissions are so low low low few want to sell them, go to Vanguard if you must have an annuity, low low fees, no surrender charges…
I think anyone who uses this space to promote annuities, accuse Walter of "bias", and sells these products for a living needs to take a long hard look in the mirror.
Actually the really smart investor would diversify most of their retirement savings in fixed and variable annuities. Stocks and bonds are just stupid they are plumeting and will probably never recover!
Ken,
It is true that any gain on any investment will be subject to income tax. But some investments are more tax efficient than others.
The money that goes into an annuity is after tax, and the earnings are taxed on withdrawal. From a tax standpoint, it's the same thing as a non-deductible IRA. Your earnings will compound tax free.
With a traditional IRA or a Roth, you not only get tax free compounding, you also get a tax deduction on either your contributions or your withdrawals. That makes a big difference on the bottom line. So you almost always end up paying more taxes on an annuity.
The annuity does make more sense if you have already maxed out all your other retirement accounts. That may be true in your case. But it is certainly not true for most of the other people in this country who still have a job.
If my financial adviser told me he owned three annuities, didn't know where the fine print was, didn't care about the surrender charges, and conveniently forgot to explain the fee structure, I would start looking for another adviser.
Trying to decide between an annuity contract and a CD? Ask your advisor to guarantee a strict fiduciary standard of care, in writing, that puts your interests as client first.
That would eliminate 99% of the underemployed salespersons in this forum who seem to spend most of their time posting ridiculously lame arguments for buying annuities.
Some of them might even have to give up blogging and start looking for a real job.
I am the Ken K who posted Oct 27 at 5:04 pm. ( I did not realize my full name would show – my "bad" ). This is to Steve W of Merrimack NH who posted a response to me on Oct 29 at 8:29.
I worked my entire career in the home office of life insurance companies. I know something about annuities, and own three.
You assert that the "fine print" reveals penalties and fees. I don't know what "fine print" you are referring to, as most products from am insurance co. have a "surrender charge" which is assessed if the contract is fully surrendered within a certain time frame. I'll concede that the calculation of the charges are not necessarily easy for everyone to understand. All three of mine have a zero charge from now on. You also state that the IRS will take a big chunk…Well, of course they will. Any gain on ANY savings/investment will be subject to income tax sometime. That is nothing new and not limited to annuities. I'm glad I have my annuities; will convert them to monthly income in the future.
Ken, when people look at the fine print in their annuity contracts, many of them will find that the only way to get their investment back is to leave a big chunk of it behind. And many of them will lose another big chunk of it to the IRS in the form of taxes and penalties. I usually tell people to stay put and let the fees devour most of their returns every year. But thats just my bias.
We have an 80 thousand annuity with AIG. this was bought through a financial adviser. We have been rying to get the money since September. We still have not received the money. It is not easy to get your money from AIG
So, somebody keeps typing comments as if they were me so I will not waste anymore of my time on this message board. This will be my last post.
The point I was trying to make was instead of rolling over a CD for a long period of time, especially if you plan on using the funds for retirement, a fixed annuity will almost always outpace CD rates. Annuities are a retirement vehicle, and should be used as just that. If you are 30 yrs old, a fixed annuity would not be suitable for you nor would I sell it to you. Since the title of the article is "Is your annuity safe?", I thought that it could be assumed that the people reading it would either have an annuity or be interested in an annuity product. The last I checked, this article is not titled, "Annuities for Everyone!"
That said, people are under an immense deal of stress worring about the current state of the eceonomy. The truth is many people have lost a lot of money in their 401(k)'s and it will continue for some time. The smart investor will diversify their retirement savings in several different vehicles including mutual funds, bond funds, stocks, ira's and yes, annuities. I, by no mean, implied that you should take your entire nest egg and place it into an annuity. That would just be stupid!
When dealing with financial professionals, they should get paid for their knowledge. If you went to any other professional, like a doctor or a lawyer, would you not pay them for their services? I know that people blame financial ALL professionals for the downswing in the economy. I deal with a very conservative customer base. Fixed annuities, when used as an investment tool, are a very conservative product. You cannot please everybody. If you are really that against annuities, don't buy one. Just keep in mind that an annuity contract is a good alternative to CD's.
The write states at the end of the article that "Getting into them ( "annuities') is a lot easier than getting out".
Wrong. It is very easy to get out. Simply write a letter to the company and ask for a surrender form, fill it out, and mail it in.
Clearly, the writer is biased against annuities, and likely (it appears ) equally biased against any product from a life insurance company.
Actually the big upside down mortgage is not a problem since I just raised my commision, there are so many people selling stocks and buying annuities right now I can't keep up with the demand.
"Don’t worry about the state insurance guaranty funds their too big to fail.
Posted By Mike, NYC: October 23, 2008 7:21 pm"
I did not type this comment!
Shane,
I would be happy to give you advice as a Licensed Broker…… Pay me and I won't tell you to google things!
Jimi,
Like most of the others who insist on pushing life insurance in an investment forum, your smooth patter is full of vague assumptions that may or may not be true. You never quite get around to the level of detail that people really need to make a informed decision. And you always fluff over or completely ignore the issue of nosebleed fees and sales commissions.
The annuity guarantee information stated is WRONG. States only guarantee annuities or any insurance products cash value by the PERSON. Meaning you CANNOT go to different carriers to guarantee your deferred annuity the way you can go to different banks to take advantage of the FDIC guarantee. This is very important. If you live in NY or NJ you are only covered for insurance "cash" for 500,000. That is it. You cannot put 500,000 with AIG and 500,000 with Metlife. You can but you're only covered for 500,000
thanks mike next time i have a question i won't have to bother my financial advisor i'll just google it for him
Gottcha's slippery logic might lead you to assume that annuities are tax free. This is of course not true. Annuities are not tax free, they are tax deferred. The money that goes in is after tax, and its taxed again on withdrawal. If you withdraw before you're 59-1/2, the IRS will hit you for another 10%. And in between, the fees in the fine print will rob you blind.
A CD ladder makes early withdrawal penalties highly unlikely. Many insurance agents oops, I mean financial planners appear to have slept through that class. And if you're in a high tax bracket, you can always defer the taxes by putting them in a retirement account. FDIC insurance, GMWB, and death benefit.. no extra charge.
As a licensed broker, I am opposed to lowering the commision. I, as most brokers, am not salaried. And many brokers probably have big mortgages that are upsidedown.
For example, in NY an annuity contract is guaranteed by the state. CD's are only guaranteed by the FDIC.
Financial planning. Easy. Save your money and don't spend to keep up with the Jones. Buy stock in bluechip companies that spend money in research and development and have a good business model. Or pick a no load mutual fund (reseaching is easy) When you're young you can be a bit riskier with a more agressive funds. Contribute max to your 401k contribute, max to an IRA, have life insurance (if you're married) put togeher a will or a trust with quicken. Reinvest all dividens. Carry no debt, except a mortgage, and drive an oldre car and start a savings plan in a high yeild account to save for a new one. Long term money should earn long term rates. Take the money you save by not paying some idiot to advise you to take a vcation once a year with your family. Make your kids pay for higher education they'll have more incentive to actually learn. When you get ready for retiremet move your money into fixed funds with assest protection. Start gifting to avoid taxes on the estate. If you have left over funds form RMDs start roth IRA's for your working children. (RMDs have already been taxed.
The idea is of course that any product that is "sold" is after a consultation on the needs of the client. Once a firm understanding of the need and risk tolerance, if dealing with an "ethical" financial person, the client should be directed to the correct plan. ANY person can buy stocks, insurance, mutual funds, bonds etc. etc. self directed. I have all my money managed it's down 36 percent for a 230000 loss in value, and I'm paying 2.1 percent in fees as I lose money. (I've been told an annuity would have had no fee and no loss, in this market, but I don't believe that) I have RMD's that I have to take which for all you "expert financial advisors" know will reduce my ability to regain in the up swing. The only person making money is the advisor and he isn't paid a commision. Managed value to me is negative 36 percent no load or not it's a load of B.S. I could have done better myself.
"No load" from Schaumburg hit the nail on the head: The value of selling commission-based financial products is ZERO. Get over it.
I agree 110%. In fact, I would argue that the value of selling commission-based financial products is less than zero.
Anyone who's capable of reading multisyllable words and a few hardcover books is more than capable of making most of the decisions they will face in the course of managing their own investments.
Occasionally you will encounter questions that require professional advice. Ignore the "free" sales agents. Find a good adviser who will give you reliable, unbiased advice for a flat hourly fee.
Above all, never, ever buy an investment from the same person who's giving you financial advice, especially if their income is based on commissions. The conflict of interest in that arrangement can hurt you even more than a 40% bear market.
To all the commission based guys out there: the value of selling your product is ZERO. Get over it.
A person who really wants an annuity can buy directly, without you being in the picture.
The value of selling any financial product is ZERO.
There is only value in doing real financial planning.
Once again Updegrave wasn't up to par in his opinion. What a one sided article and they continue to be. Even when 77 year old retirees have lost 25% of money in market due to their oh so smart advisor at __d_ard J____ having them in the market past the accumulation phase of their life. You get the picture. Brilliant!!! Some people should be fired and others fired and hung.
WOW! Alot of emotionally charged responses to Annuities on here. Well, first of all I am a commison based insurnace agent, lets get that out of the way. As a matter of fact i make TONS of money on commisions, lets get that out of the way too. I work for the BIGGEST mutual fun company in the world and the annuities we offer are no cost. Are we insolvent yet? Nobody knows, hope not… but.. but…these products DO have value and offer MUCH higher interest rates than cd's with absolutely NO downside risk or phantom tollbooths. or even ransom charges. Or As Mike just mentioned, a CD not not have the liquidity option that a fixed annuity has. Let me repeat that. Anuities are even more liqud than cds. I will sell you an annuity EVEN if it is an IRA in question (already tax deferred). Annuities are a GREAT investment for the right investor under the right circmstances. ESPECIALLY for the commison based insurnace agent. Even ME as a matter of fact. I own many number of annuities for the beneifs that they offer. Most of my retirents accounts are in annuities because annuities are the safest and mostly stable investment you can by. When i look at Walters picture sometimes I think he really enjoys all the selfservng and laghably bad financial advice that erputs every time he rites a nother column about Annuites or is it just my splling? Remembrer its not a bear market or a bull market its a bs market thats how commison based insurnace agents make money.
For all you pro securities guys. If annuities are so awful, why is it right now as we speak, the S.E.C. is making a claim to have the supreme court declare indexed annuities a non exempt security? Problem is, it comes with a couple guarantees that don't exsist in the SEC's world. I can tell you it's not because they are worried about retires and their investments going up in smoke, as last week has shown us.
True 5.5 is the A.P.Y. on the 7 year but… BECAREFUL!! That assumes that all interest will remain on deposit until maturity. (7 YEARS!!!) Any withdrawal of interest or principal, as well as the imposition of any fees, will reduce earnings. If you don't need the funds not bad. As you may be aware tax will eat into the 5.5 A.P.Y as well and you will pay tax every year with out realizing the added income (if you want the 5.5 return.) For a return slightly better than inflation?? A security would more than likely beat that. And 7 years would give me time to weather market volatility. Another gottcha of CD's
If the CD rates and the fixed annuity rates are comparable, and you are more comfortable with CD's…..then use the CD. Just know that the annuity is probably just as safe in most cases and will typically offer more withdrawal flexibility than the CD. I've managed a bank and I've sold financial products in a non-bank environment. Both have their place, but increased safety in CD's is typically a weak argument and long term many highly rated fixed annuities will offer slightly better rates of return and more withdrawal flexibility.
Hi, are you a annuity holder from the state of New York, if you are, then the following Q&A applies in your situation. For more info go to http://www.ins.state.ny.us/faqs/faqs_aig.htm
Question: Is AIG going bankrupt?
Answer: AIG is an international financial holding company with numerous businesses. Your insurance and annuity policies are written by AIG’s insurance companies. Those companies are financially strong and their assets are protected by state regulators.
Question: Are the insurance and annuity policies I purchased from AIG safe or am I going to lose my money?
Answer: Your policies are safe. AIG’s insurance companies are financially strong and fully able to honor all policyholders' claims. The New York State Insurance Department will continue to closely monitor the situation to ensure policyholders are protected and that there will continue to be sufficient assets to pay claims.
Anybody struggling with the annuity vs. cd should google "Rule Of 72" and Annuity vs. CD's". Each hit will give you a pretty clear picture that the fixed annuity makes more sense. For example: Bank CD's vs. Annuities:
Annuities may provide:
-State Guarantee of Principle
-Loan Privileges
-Flexible Premium
-Avoidance of probate costs and delays
-Withdraw for dollar-cost-averaging opportunities
-Withdraw for required minimum distributions, penalty free
-Potential Social Security tax advantage
-Nursing Home Benefit
-"Issue no money" capability
-Bonus available on premium
-Guaranteed lifetime income option
-Potentially high yields
-Tax-deferred Growth
CD's offer:
-Guarantee of principal and interest
-FDIC Coverage (Federal Guarantee)
-Relatively low returns in exchange for the guarantee of principal
But CD's, when factored for infation, have negative returns. CD rates historically pay significantly less than the Inflation rate. For example, in NY an annuity contract is guaranteed by the state. Plus fixed annuities come in 3,4,5,6,7 yr terms.
5% – That's easy. Go to Capital One Direct Banking and you can get 5.5% for a 7 year CD. If that's too long then they do a 4.51% 18 month CD.
Oh yes and 100% money back guarantee with balances of up to $250,000, or even more if you can invest creatively using a range of FDIC categories.
WOW! Alot of emotionally charged responses to Annuities on here…Well, first of all I am a commison based insurnace agent, lets get that out of the way…the company I work for is perhaps the biggest mutual company in the world and the fixed annuities we offer are low or no cost…but one must still exhibit some caution when making a recomendation on a contrat with long surrender charges…these products do have value and can offer some great interest rates…EVEN if it is an IRA in question (already tax deferred), a consrevative investor can still earn 4%-6% with %100 money back guarantee…Find a CD or a Money Market paying 5% these days…yeah right…
You know what would make a mutual fund more appealing?? Guarantee the priciple, guarantee a small return, have no fee unless I make interest and have rules and regulation for the persons that are transparent. Let's be honest assets under management is a HUGE business weather the client makes money or not. Most professional investors I know don't like getting paid one time, which is why they move to managment. Ask anyone who is in retirement that moved thier money to an annuity if they are happy of their desicion. I know my dad is. I myself have no interest in an annuity as it doesn't fit my maximum growth needs.
As a licensed broker, I am opposed to lowering the commision. I, as most brokers, am not salaried. My pay is variable and commission based only. If it wasn't for annuities, many people would be in non logical CD products during this downswing in the economy. During this recession, I honestly feel that a fixed annuity product makes the most sense for those nearing retirement age.
Dan I agree and disagree with your comment. I was an advisor and saw agents sell annuities over other investments due to the commission rate being higher. I also saw agents that sold them correctly to the right clients. A lot of it needs to be personal responsibility when decided to sell or not sell an annuity to a particular client.
I am an Insurance Agent.
for a person to lose money because an Insurance Co. went under every Insurance Co. that does business in the state would have to go out of business. This is what your state’s guaranty board is for. If you are still worried you may transfer ownership to your spouse or another person. If is not a spouse taxes will be due.if you have two or more annuties from the same Co. I do agree with other who has post here this author is not an expert. Annuites has outperform the stockmarket since 1995. Annuities is sleep insurance.
Annuties are one of many financial tools. Even my advice should not be taken at face value. I do not know what you situation is. I hope this helped.
Once again, any time Walter begins to describe how annuities work, the commission based product salespeople (CBPS) appear to heap on criticism, very little of it constructive.
In my fee-only, non-product selling practice, I have had to explain to people that the "guarantee" the CBPS told them when pushing the product, is only as sound as the insurance company behind it.
I then forward information on the limitations of our state guaranty fund, which is a surprise to them.
This does not make annuities bad. Let's just do full disclosure.
How many of the CBPS will adhere to a strict fiduciary standard of care, in writing and without exception, putting the interests of their clients first?
For example, there are no-load, low cost annuities that do not carry any surrender charges.
But don't expect a CBPS to recommend one. So for those touting annuities, your clients deserve the best and least costly product available. Not just any “suitable” product that the cat dragged in, simply because your sales manager has been on your back all month to make your production quota.
Very risk averse, older investors should review their investment asset allocations closely. For instance, we recommended a portfolio allocation with only 31% equities last year, to a particular client. In 90% of rolling periods of 5 (and multiple: 10, 15, 20, 25, 30, 35 year periods) over 37 years, it met or exceeded its target annualized rate of return of 7.2%, after expenses. His objective: double in 10 years, with low risk.
Yes, it is down this year, but only by 8.8% going into today. Not 40%. This is what asset allocation from your advisers should be doing for you.
But unlike a fixed annuity, even this investment portfolio provides some long term growth potential, to counteract inflation.
It can be easily implemented with no load mutual funds, with about 0.25% annual expense ratio. Plus no extra cost to get in or out.
A portfolio's assets remain part of the client's net worth, not surrendered in exchange for an immediate annuity, its GMWB or other costly add on.
Have you heard the one about the annuity salesman from Zimbabwe? It doesn’t have a funny punch line for some reason.
You know what would make Annuities alot more appealing? Lower the commission payouts and in doing so lower the fee's of an annuity.
Lets see what all you annuity salesmen think about that? Do you think you would "have you clients best interest" in mind? Be honest about that one.
As I am an advisor I legally can't say anything regarding investments. Funny how this dimwit can give such dangerous advice at will, though. I am so glad so many of you have come to the defense here of these products. High fee's? Solid product…all in around 2.5%. Managed mutual fund platform or SMA at any firm? At least 2% and as much as 3%+. I have clients so near retirement they would be devastated by this downturn. At least they know they are OK. Media people should be prohibited from answering specific investment questions and this article is the only reason we will every need as proof.
AIG, the holding company, is in trouble. The 71 insurance subsidiaries of AIG are completely solvent and people with annuities issued by an AIG life insurance company are just fine. When was the last time a client who had money in a B+ or better rated insurance company lost money in their insurance policy or annuity due to company solvency problems? I don't think people understand the statutory accounting rules insurance companies must comply with, which, if followed by other financial institutions, would not have gotten us into this crises. Do some research, check out the article by the National Association of Insurance Commissioners as well as the press release by the Insurance Commissioner from New York regarding how this financial crisis is affecting the insurance industry.
I don't know about you, I would rather have my money backed by an insurance company where I am at no risk of losing my money (but can make money) than have it in a bank CD where I wake up one morning to find out my bank is out of business.
Excellent article. And accurate. Look out for those surrender charges and sales charges and management fees, etc. etc. etc. They are an evils perpetuated by the insurance companies.
Not a bad response. But you only told have the story. First, We don't know what type of annuity this person owns. Is it a fixed Annuity? variable? Equity index? Second, Does it have an income garantee? Most annuities can convert to an immeadiate annuity if the situation makes sense at no extra charge. Thats why you don't see a whole lot of immeadiate annuity sales.
The other thing to mention that I didn't see (although I will admit to not reading the article or the posts as thouroughly as I could have) is that AIG the holding company is the entity getting loans from the government. AIG the subsidiary that owns the assets and guarantees the annuity may not be affected in any way by the parent company's issues.
Please talk to your personal financial planner before you do anything.
AIG's problem is not with it's core insurance business. Their problms stem from selling credit default swaps with-in securities. So infact it is the securites business that brought mighty AIG to thier knees. (1 trillion under management) What did they borrow 85 billion? Sounds to me like they could have weathered the storm. So many experts need to look at investments and retirement unbaised. The best of both worlds seems to be the Indexed Annuity. That is if a client can get by with 10 pecent of the money annually and would rather it last through retirement with tax deffered growth tied to an index. Also with no forced annuitization and a lump some at the end of the term gives the client back complete control. As well as making sure the possibility to lose the initial investment is = to null. Combined with a guranteed rate of return from 2.25 to 3 percent makes it at least a hat to throw in the ring. No fee with some, 10 percent bonus, as well as family endowment riders to replenish the funds used by the annuiant back to the heirs makes it a fantastic choice. How many insurance companies are on the chopping block compared to banks and broker/dealers? 1 AIG, and they wouldn't be if they hadn't engaged in securities. Maybe insurance regulators should take over for the SEC It depends on the client is my point, I personally like stocks that pay dividends with an unchaging yeild, for tax reasons and liquidity. But.. they are riskier than an Indexed Annuity. Annuites have a place just as securites do it depends on the needs of the client. I would avoid any advisor who condems a product absolutly as they are looking at thier own needs.
JAN WORTE: "I have a fixed rate annuity through AIG, with 3 more years til it reaches maturity. The article appears to indicate that I can’t do a rollover to a retirement CD – am I correct or incorrect? I want to take my money out of my annuity (I understand I will be hit by a pentalty), but I’m 60 so there’s no 10% issue. And I would do a direct rollover to a retirement CD at my current bank, where I have other retirement CDs. I’m totally confused. In all the articles I’ve read about annuities, I haven’t seen this particular issue addressed."
Jan, it simply doesn't make sense to change the annuity into a IRA CD. Here are the reasons: With your annuity contract, your principal is guaranteed by the state in which you live. With an IRA CD, your principal is also guaranteed- but on the federal level. Why would you want to put your money into a CD that will NEVER keep pace with inflation? If you chose to cash out your annuity or do a 1035 exchange, you would be required to pay surrender charges and taxes on the value of the entire annuity. A CD not not have the liquidity option that a fixed annuity has. You can withdraw up to 10% per year and in most cases, if you are not taking distributions, you can take an additional 10% each year. For example, if you are in year 4 of your contract and have never taken a distribution, you can take 40%.
I would like to know how many of those commenting here make money off of selling annuities. If you take commissions from selling these products your opinion cannot be trusted. You are biased and will find any reason to sell them in order to benefit yourselves.
Wow, the point you have illustrated most here is how very little you understand about the wide variety of annuity products and their purpose. Clients who have put 401k and IRA dollars into Annuities with income guarantees are currently in a better position than any other market exposed 401k/IRA investor. While it may now take years for the average IRA/401K investor to regain what they have recently lost, the annuity client is smiling at their guarantee and will not have to make up for recent and in some cases devistating losses.
I'm not sure where you folks are buying Cds but I can assure you that if you shop the market at all, you can find plenty of opportunities to realize 4.50% to 5.25% APY. No matter what value stocks and mutuals funds have in my portfolio, I keep a constant $1,000,000 balance in Bank CDs at all times. With my son as designated POD we have always had $300,000 of FDIC insurance at each bank. I would only suggest annuities to people who do not understand money management. That's the only way you can justify the expenses and illiquid nature of annuities.
Once again someone expresses "their opinion" about a financial product without providing "all the facts". I would like to know if the editor that wrote this article is licensed to sell annuities? If the answer is no, or this editor is not meeting with clients every day and accessing their "individual needs", Mr. Updegrave is no "Expert" on annuities. My parents have had traditional fixed and indexed annuities for more than 20 years and have NEVER lost any principal or value. During these most difficult financial times it's very sad for "an expert" to start creating doubt on a product that has been so reliable and safe. Please consider providing some advantages of annuities and stop being like most of the liberal media that would rather report a plane crash than a healthy baby being born. The media is as guilty as some of the crooked CEO's and greedy companies that have been the major cause of this terrible financial crisis the entire world is in.
Elgibility requirements for Medicaid can be hurt by having an an annuity. Many elderly people are better off being broke in order to obtain proper health care.
I thought the title of this article was Are Annuities Safe, not "let me stand on my soapbox and bash them"
Why would you buy a CD when you have no access to the money at all?? Currently, annuity rates are about double what you can get with a CD. At least with an annuity, you have access to your interest and if you do not want that then the money grows without having to pay Uncle Same which you have to with CD's.
Once again, an article on annuities that covers only part of the story. What about living benefits that protect the investment and/or income for the client? Since the S+P is down 40% YTD, an investor who purchased an annuity for $100,000, and begins taking systematic withdrawals (without annuitizing, as you suggest) is guaranteed to be able to take those withdrawals for life, off of the 100k, regardless of the account value. If you purchased regular mutual funds, and began withdrawals, you would be in dire straits. It seems that these products make all the sense in the world for someone who is looking to avoid running out of money in retirement. Further, the use of these living benefits is the reason 50% of sales are in IRA accounts, because that is where most americans have the majority of their investments – and protecting that money is important to their families.
I have a fixed rate annuity through AIG, with 3 more years til it reaches maturity. The article appears to indicate that I can't do a rollover to a retirement CD – am I correct or incorrect? I want to take my money out of my annuity (I understand I will be hit by a pentalty), but I'm 60 so there's no 10% issue. And I would do a direct rollover to a retirement CD at my current bank, where I have other retirement CDs. I'm totally confused. In all the articles I've read about annuities, I haven't seen this particular issue addressed.
You don't think providing guarantee's for a portion of a clients assets in this volatile market is a good idea?
You have no idea what the general public is looking for if you don't see the benefit to living benefits to offset longevity and market risk.
Immediate annuities do not provide a client inflation adjusted income and force the client to relinquish control of their assets… how does that benefit them?
The author gives a very simplistic viewpoint on why many variable annuities are sold in today's marketplace.
The fact is, most don't buy annuities simply as tax shelters. They buy because of exactly what we have experienced the market recently. If you had deposited $100K in an annuity last year, many VA's have a guarantee that you can withdraw 5% of that amount for your lifetime. So, a 60 year old could withdraw 5% for 30 years of more, guaranteed. If this same 60 year old had his/her money in mutual funds, not only would they be down 40% this year, but add on 5% withdrawal and you're in a downward spiral, never to recover. How many people would be happy to be able to look back one year ago and know those amounts were locked in for future withdrawal rates? Tell me again who annuities aren't right for?
Walter,
Once again you fail to mention some of the benefits of an annuity, but continue to make other recommendations to people regardless of all of the facts.
Clearly you have an issue with them, and that's fine. There is plenty of room in the financial planning business for a difference of opinion. But you should know that there is no such thing as the perfect investment!
When do you mention to folks that bonds and bond funds can carry just as much risk as stocks? Better yet, how about CD's today yielding 2% with no liquidity.
You articles should stick to the facts. This was one great reading until I got to the end when you stuck in your blanket opinion.
You and Suze Orman must be neighbors.
Anybody who owns an annuity was getting screwed even before the market cratered. AIG is toast. You pay through the nose for a guaranteed minimum withdrawal benefit and now you'll be lucky to get pennies on the dollar from your state guaranty fund before it goes broke. Your best bet is to move everything you can into an FDIC insured account or treasuries, but I'm not even sure I trust those anymore.
Variable annuities are a great way to insure income for life and go after above average returns with certain income riders. As long as they are fully explained to the client and understood. Sitting in CDs at 3% will not help anyone stay ahead of inflation. With Inflation and taxes the effective yield of a CD is in alot of years NEGATIVE! Since the great depression can you Name one annuity policy that had not paid out? No you cant. And why? Because it hasn't happened. Quit trying to scare people.
Walter
With the maket off 40% and futual funds tanking you still really see NO VALUE in Variable Annuity with an income benefit? I agree with you that cost is always a consideration but even in this very unique time that you still see no value seems either highly biased or a bit ignorant of features.
We had a disabled worker who was 61 yrs old mover 96k from American Funds (a very inexpensive and good fund family) to an ING VA last year. Today the Am funds are down 30+% and his VA is down 25%. But he is still collect 5% income for life on his $96k income balance. Again not for everybody but your no value stance seems way off especially in these exact circumstances.
Help me out and let em know if I am crazy our buck up and admit that this is the time you would most likley wish you had an annuity?
This is another great example of irresponsible journalism at its best. To state that Variable Annuities are inappropriate in a qualified account (i.e. 401(k) or IRA) shows the uneducation of the general Financial Media. First, Immediate Annuities, while great for lifetime income, don't give you many good options to keep your standard of living even due to the negative impact of inflation. Plus, an immediate annuity will typically cause a complete loss of control of the assets placed within these vehicles. As for Variable Annuities, it seems that everyone from Money Magazine to the financial industry regulators are not educated as to the benefits offered through these products. The irresponsibilty here lies in the current environment of the markets. Let us not forget that the American people have lost $3 trillion in their retirement assets in the last 12 months. Using a variable annuity for a portion of your retirement assets would have done something for you that no other vehicle can claim: it would GAURANTEE you income FOREVER without giving up control of your assets. The best part here is that if you lost 40% of your value through the markets underperforming (the market loss from 10/9/07 through 10/10/08), your income would have been based on your original investment amount plus what is called a rollup (an interest rate-like benefit that grows your income by anywhere from 5 to 10% annually). In some cases, retirees will be able to draw income on an amount TWICE their actual market value. I would encourage anyone that writes about, thinks about, or regulates this industry to educate yourself PRIOR to misinforming the public. There is plenty of fear and panic to go around, so we dont need anyone adding fuel to an already raging inferno.
Annuities have been a favorite place to grow extra money on a tax deferred basis for many years.
It is an insurance product and therefore great for putting away "extra" money as long as the carrier is strong.(Deferred Annuity)
I would be doubly concerned about companies with declining ratings or negative outlooks.
Insurance works best in an orderly market where confidence levels are high.( the opposite of what we are experiencing)
The markets may not be orderly again for some time perhaps not until most of the excesses of generations after WW II are reined in.
I would not be overly comforted by state guarantee funds. Again they would function well in an orderly market.
I would make sure the insurance company is not only very highly rated but has significantly more liquidity to pay off polcyholders who want to exit their annuities for a real store of wealth in a disorderly market, namely precious metals. The sad fact is that it is our industrial production which backs the assets not gold as in the old days. Where are we there?
The problem is our balance sheets ( Federal Govermment and Corporations are generally bloated with too much debt) Their functioning requires buy in (confidence) by most of us to function in a carefree, efficient manner. We have become so interdependent globally and our ability to function in crisis depends on many people who are neither friendly to us politically or economically. We are out on a limb.
There is hope as long as sufficient numbers have it. The problem is the very people asking us to follow them are jaundiced and they make you think? Do I trust them to deliver?
I say we have no choice because the unraveling of the global financial systems would be chatic at best.
Check out the insurance company's strength yourself by
looking at the latest 10K report filed with the SEC. Look at companies which have the best net worth to assets ratio.(Net Worth divided by Total assets)Mesure of capitalization relative to dollars they manage. (For now, the Higher the better) and best quick ratio( current assets divided by current liabilities) this is a measure of liguidity. Now again, the higher the better.
Look yourself and make a decision on the merits.
Tom, how much do you get paid for selling CD's, and how much do you get paid for selling annuities?
There's a big difference.