Maximize the Benefit of a Losing Variable Annuity

I had the chance back in the 01-03 bear market to help some clients with variable annuities maximize the benefits of investments that had gone sour, and just this past week ran across another opportunity to help a potential client with this same strategy. Here is what to look for:

• You purchased a variable annuity that has lost value.
• The death benefit of your annuity is calculated based on a dollar for dollar reduction for withdrawals.

Here is how this strategy works:

Let's say you originally put $100,000 in the annuity and the value has now dropped to $70,000. The death benefit of this annuity equals premium payments less withdrawals on a dollar for dollar basis. You withdraw most of the money from your annuity, leaving only enough to keep the policy active. Let's say you must leave $5,000 in the policy so the insurance company can't cancel the contract. That means you withdraw $65,000 from the policy and move that money elsewhere to recover as the markets recover. Your death benefit on the annuity falls from $100,000 to $35,000 refecting this withdrawal.

What you have done in effect is to create a synthetic paid up whole life insurance policy that will pay out one day to your heirs. Meanwhile your remaining value can be invested to create even more wealth and income for you and your heirs.

This opportunity may also apply if you have a 403b plan that utilizes group variable annuities.

This strategy will not work if the death benefit of your policy is calculated on a pro rata basis, and the insurance industry has caught on to this ploy so most new policies have a pro rata calculation. So before you exchange an old annuity or just give up on it check to see if there may be a better way to skin that cat.

Equity Index Annuities - Dateline Undercover Investigation

With the stock market struggling this year I have noticed the ads for 'retire right' and other seminars that tout equity index annuities hitting the local paper again. If you or someone you know has attended one of these seminars, or is considering investing in one of these products, you might want to watch the April 13th broadcast of Dateline NBC.

The Dateline crew does an undercover investigation of equity index annuity sales practices that is eye opening.

Understanding Your Variable Annuity

Variable annuities are often confusing and hard to understand. In addition to the fees charged for managing the sub- accounts (read mutual funds) within the policy consumers also pay for the insurance portion of the policy (mortality expense) and various riders and options offered with the policy. If you want to compare the expenses of owning or buying a variable annuity, this months issue of "Money Magazine" offers up a simple grid that you can take to your insurance agent ( yes your broker is an insurance agent if she is offering you an annuity) for help comparing.

E-Z annuity fee disclosure checklist

Before you buy any annuity, ask your advisor to fill in the blanks.

What you pay each year Annual fee (as % of account value) for: Number Typical The insurance (a.k.a. mortality and expenses) _____% 1.35% The investments within the annuity _____% 0.95% Riders and options _____% 0.65% Total annual fee: _____% 2.95% What you pay to get out Max. surrender charge (as % of withdrawal) _____% 7% Number of years before surrender charge expires _____ 8

Source:Morningstar, National Association of Variable Annuities, Money research
Note: Max. surrender charge may not apply to all withdrawals.

You can read the full story here.

No Load Annuities - Build Your Own Benefits

Annuities have received a lot of bad press the past few years. High expenses and high sales charges in the form of contingent deferred sales charges (penalties) along with questions of suitablity for older investors has lead to increased scrutiny by both regulators and the press. Yet sales of deferred annuities continues to grow.

Why? Investors must like some of the features that annuities offer. One of the features often describes the ability to invest your money aggressively in the mutual funds offered in the annuity, while knowing your heirs will receive no less than the amount you originally invested less withdrawals when you die. Some offer a step up in the death benefit to the highest value on the annuity contract's anniversary date. Investors seem to like these guarantees, and are willing to pay extra for them.

However with the advent of no-load annuities you may be able to duplicate many of these benefits at a much lower cost than agent sold policies offer.

Take the basic benefit that pays your heirs the higher of the current contract value or the amount of your initial investment. While most annuity contracts charge 1.25% per year in Mortality expenses the Schwab Signature annuity offers this benefit for only .85% per year in Mortality charges, and Ameritas offers this benefit with only a .55% mortality charge.

To get a death benefit that steps up to the highest anniversary value many companies charge an extra .30% annually. But you can approximate this guarantee yourself at no cost by using two no load annuity companies and the 1035 exchange rules. The way this would work is you choose a no load annuity with for example Schwab. If your annuity appreciates in value and you decide to lock in a new higher death benefit for your heirs you simply complete an exchange to say Ameritas. Neither company charges you a penalty or fee for withdrawal so you have effectively stepped up your death benefit without paying anything extra.

By combining immediate annuities with deferred annuities you can also duplicate many of the living income benefits and principle return benefits offered by variable annuity companies. Again with lower cost to you.

If you have variable annuity contracts that you would like analyzed seek guidance from a fee only advisor that will have no conflicts of interest in helping you make the decision that is best for you.

technorati tags:Finance, No-Load Annuity, financial planning

Playing With A Stacked Deck - Equity Index Annuities

Bob Clark, a columnist for Investment Advisor magazine, recently said, "...the role of advisors is to protect their clients from the financial services industry". Many times the products pushed by the large financial service firms do more harm to investors than good. The "hot" product de jour is currently the Equity Index Annuity.

While the equity index Annuity itself is not an evil thing, the way they are presented to investors is many times misleading, and they are often pushed to be a much larger part of a portfolio than prudence would justify. Regulators have become so concerned that the SEC has issued an explanation of equity index annuities, and the National Association of Securities Dealers has issued an "investor alert".

In brief, an equity index annuity, provides returns that a related to some stock market index. As such they can be viewed as an equity derivative (remember those?). Investors typically receive a return that is some portion of the return of an index like the S&P 500 (for example 90% of the point to point return of the price increase of the index, not including dividends), the average monthly return of the index over a predetermined period (again not including dividends), or the monthly gain of the index with a predetermined cap (often 2-3% per month cap). The big draw is that you receive a guarantee that your account will not have a negative return over some period of time. Often touted as "heads you win, tails you don't loose". On the face that sounds enticing. It is only if you kick the tires that problems become apparent.

First, like most annuities there is a long period of time where you a charged a surrender charge if you want or need to withdraw more funds than allowed in the contract (I have even seen instances where the surrender charge is applied to any withdrawal except in the case of annuitization).

Second, any gain from annuities is considered to be distributed first, and taxed as ordinary income (you do not get favorable dividend of capital gain rate when you file your taxes), and any distribution before age 59 1/2 could be subject to a 10% premature distribution tax penalty.

Worst of all the returns investors receive will likely not measure up to expectations. A good place to find information on how different equity index annuities would have performed is available at Personalyze.org. The pitfalls of monthly caps and averaging returns is also available here. This site is great for comparing equity index annuities to each other but for the investor to make a true comparison the returns need to be compared to the benchmark. To give you a means to compare check the growth of a $100,000 investment in a equity index annuity given by Personalyze.org to the following values derived from the sites own data for an investment in the index (of course this does not include dividends). For the period 1970 through 1979 (considered a bear market era by personalyze) $100,000 invested in the index grew to $117,250. For the period 1990 through 1999 (considered a bull market era by personalyze) $100,000 grew to $415,762, and for the past 10 years an investment in the index grew to $202,657.

Technorati Tag Equity Index Annuity