Elle,

Thanks for the valuable input so far.

I think that annuities should be used sparingly and with great
discretion. They're definitely not for everyone. I'm also a believer
that if an investment makes you uneasy, don't buy it (regardless of
the reason). My first goal is peace of mind. Financial savvy comes
second.

The lack of aforementioned discretion used by many advisers has fueled
the anti-annuity fires. The good news is that many compliance
departments are starting to restrict VA sales. I can only speak for
the firm for which I work, but our compliance dept. requires numerous
forms that justify the use of an annuity (many of which the client
never sees). Most of the questions they ask are the same concerns
often brought up in this group. I think that's a step in the right
direction.

I hope I didn't confuse too many readers. I have much more success
using visual aides and hand-written hypotheticals. It's simply too
much information to convey through text. Showing the two accounts side-
by-side and going through a half dozen examples goes a long way
towards clients understanding.

Best wishes to all.

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"kastnna" <kastnna[at]auburnalum.org> wrote
snip but all comments read
- quote -

I can't imagine why it would be so misunderstood. <big
wink!
- quote -

I'd say this is a philosophical question. But for what it is
worth, remember I entered this thread plugging low fee
annuities (for one) as more of an insurance product, not an
investment product. Where insurance buys peace of mind, it
can be a good thing yada.

- quote -

I trust you mean the company made more than the max of
either 6% or the S&P 500 less 3%. It was the guarantee of
getting the S&P 500 (less 3%) in good years that I found
appealing. Maybe that's changing a little?

Thanks for the long explanations. But ya know, if anything,
they make me more hesitant to purchase an annuity. So many
strings attached. So many more decisions, requiring a fair
amount of research to do right, to make in the future.

Just saying as your average college+ and numbers educated
consumer/individual investor.

Aside: I do not think you really posted out of order. You
responded to Don's post first, not mine, which is fine. I
understood what was going on. Oh and by the way thanks also
for using proper acronym writing rules. It really helps the
reader to first spell out the acronym's words, following
them with the acronym in parentheses, as you did with
"GMIB." Shows you know something about writing!

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On Apr 8, 12:50*pm, "Elle" <honda.lion...[at]spamnocox.net> wrote:

- quote -

1) The odds of not getting back what you put in are small. It's not
like an immediate annuity that removes all account values and
liquidity right away. As you suggest, with an immediate annuity, you
could invest $100k, die two months later and have only received a
couple hundred dollars. Not the case with deferred annuities. They are
like most other investment accounts until you actually ANNUITIZE the
contract. Many investors NEVER annuitize the contract. If you die
without having done so, the death benefit pays your heirs at least
what you invested.

2) I think you've misread the 10 year requirement on GMIB exercising.
The 6% annual compounding guarantee starts at year one and occurs
every year until age 85 (I called MetLife, it will be moved to age 90
in the coming months). If in a given year, the investor exercises the
GMIB 6% "step-up", then they must wait 10 years to annuitize the
contract (this is what they mean by "exercise the GMIB rider). IOW, if
the $100k account value falls to $90k, the investor would wisely lock
in the 6% guarantee (resulting in a $106k benefit base). However, they
must then wait ten years to call Metlife and request an annuity based
on the $106k (or the the account value at that time, ehichever is
greater). Keep in mind they have a $90k account value that they can
withdraw from as they see fit. So why would anyone in their right mind
WANT to annuitize the contract? Annuitizing results in losing all
liquidity and is therefore a last resort only once teh account value
is gone. Furthermore, the Metlife prospectus clearly states that if
the account value ever reaches zero the contract is annuitized based
on the benefit base amount even if the "10 year requirement" has not
been met. So if the account value is positive, the investor cannot
annuitize for 10 years, but they wouldn't want to anyway. If the
account value is $0, they get an immediate annuity based on the
benefit base amount.

The 10 year requirement is a hollow threat, but to be fair, it is the
most common misunderstanding I run into with these annuities.

- quote -

Given what I stated above, I would appreciate an example of a time
when this would be a drawback.

- quote -

So a guarantee that stops at 85 (or 90) is a drawback to no guarantee
at all??? The benefit base doesn't disappear at 85, it just no longer
compounds annually at 6%. RMDs and, likely, death will almost
assuredly had a bigger impact by the time this even become
significant.

That reminds me... RMDs may be considered a drawback.

- quote -

I completely agree they are complicated and they are not for everyone
(or for most, even). However, I don't agree that complexity
necessarily means profiteering. The insurance company profits by
charging the M&E fees. They also promise to pay later, but they have
your money today. Consider a case of putting in $100k and leaving it
for ten years: Under the GMIB, they owe you at least $196k, but
they've had your money for a decade with which they hopefully made
more than 6% with. Furthermore, if you ever do annuitize, they are not
giving back all $196k immediately, they'll continue to invest it while
the pay you an income stream.

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On Apr 8, 12:50*pm, "HW \"Skip\" Weldon"
<skip5700removet...[at]hotmail.com> wrote:

- quote -

Yes. It is more commonly the case that withdrawals are never taken or
only withdrawn from the contract value without annuitizing.

- quote -

The heirs can receive a lump sum payout of the originally invested
principal minus and distributions or a lifetime payout based on the
their life expectancy. Additional (foolish) riders are included to
enhance the death benefit, provide an additional lump sum to cover
taxes, etc.

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Elle,

For the record, I was unaware of your 12:50pm post when I posted at
1:35. I apologize if it leads to further confusion and/or it appears I
ignored your post.

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I don't think I made any indication that an annuity was truly as cut
and dry as my "S&P example". If I did it wasn't my intention. Of
course, there are numerous caveats. I'll try to give a better primer
of an actual annuity below:

Account Growth: When an investor puts money into a variable annuity
with a GMIB rider (simply VA, henceforth) two "accounts" are
immediately created. One is the actual account value (AV) and the
other is the benefit base (BB). The AV experiences the actual returns
of the underlying investments. All fees and expenses are deducted from
the AV. The BB grows by the guaranteed 6%. At each contract
anniversary the BB can be "locked-in" at either the AV or BB,
whichever is greater.

Ex: Annuitant invests $100k in the S&P500 fund of a VA. At year's end
the investment has returned 15%. The AV is now $112k (15% minus 3% in
fees). The BB is the greater of $106 or $112k. The next year, the S&P
returns 0%. The AV is now $108,640 (0% minus 3% fees). The BB,
however, is the greater of $108,640 or $118,720 ($112k x 6%).

The distinct accounts are very important. The annuitant can call and
request the entire AV at any time (minus any applicable surrender
costs). The BB is not available for withdrawal. The BB is similar to a
defined benefit pension. It's amount off of which the insurer
guarantees an income stream. Liquidity is the true drawback of
annuities, not returns.

Distributions: Funds can be withdrawn from variable annuities without
"annuitizing" the contract. This is actually the far more common
scenario. If the above annuitant wanted to withdraw 6% of the BB at
year's end, the AV would fall to $101,920 and the BB would stay at
$112k.

Annuitizing: If the AV ever reaches $0.00, the contract is annuitized
using the annuitant's life expectancy and the BB. Going back to our
above example, let's assume the market has a run of bad years and in 5
years the AV has fallen to $0 (REALLY bad years, but it's just an
example). The BB has risen to $166,329 ($118,720 grown at 6% annually
for 5 years). At that point, the client has the equivalent of a
$166,329 immediate annuity. There is no account value to liquidate or
withdraw from, only a promised income stream (again, like a pension).

That's the basics. I do believe the 6% guarantee stops compounding
annually at age 90 (I think it was 85 and they are currently moving it
to 90). Annuities do not receive a stepped up basis at death and the
gains are taxed at ordinary rates. Those are definitely negatives. On
the other hand, growth is tax-deffered and there's no guarantee as to
future tax laws.

One often ignored benefit of the VA is that the guarantee allows
investors to take on more risk. A retired investor will commonly have
60-100% of their investments in fixed income. That same retiree
investor has less need to carry safe investments if the guaranteed
annuity promises a 6% compounding pension. The fixed income/bond/muni/
CD retiree may only get a 5-6% return. On the other hand the VA
investor may get 8-9% in equities. After expenses the returns are the
same and the VA guarantees have paid for themselves.

Probably my longest post ever. I apologize. I welcome the responses.

P.S. - I would make about $6k in commission in the above example.

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"kastnna" <kastnna[at]auburnalum.org> wrote
- quote -

So I see, as an example,
http://www.metlife.com/Applications/...=0\&IMAGE2.Y=0

- quote -

I think that's one potential (but not definite) drawback to
many: That the principal or what remains of it is often lost
at death. Of course, as I was trying to propose in response
to Douglas, I see these vehicles as insurance policies as
much as an investment. So no, one does not necessarily get
back what one put in. But one might also get back more than
one put in. An annuity (variable or otherwise) with
reasonable fees is always to some extent about peace of
mind.

To me the other major drawbacks are

1. committing for a long period of time before one can
exercise (so to speak) the GMIB. Ten years seems usual.

2. expiration of the GMIB at about age 85, or so it seems
typical.

I think these are important caveats when mentioning a 6%
GMIB. Not to say (1) and (2) above are "bad" things. More
that, with all due respect and IMO, it's not quite as great
a deal as your post might lead one to believe. (Granted the
constraints of posting preclude a complete discussion.) I
would in fact be very interested in an investment vehicle
that guaranteed a return of max(6%, annual S&P 500
appreciation less 3%). But with the caveats, these annuity
GMIB products are not attractive to me. With the ten-year
requirement, I am not sure they would be attractive at any
age.

These annuities are also sure darn complicated, which to me
means the insurance company finds ways to make their money.
This is their right, but I cannot feel secure without
understanding what the company is getting in exchange for my
purchase.

Two cents on this produce from a consumer.

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On Tue, 8 Apr 2008 10:37:53 -0500, kastnna <kastnna[at]auburnalum.orgwrote:


- quote -

Assume the same answer applies if the owner/annuitant never started
any kind of withdrawals from the non-qualified annuity. Yes?

Are the beneficiaries limited to a lump-sum taxable payout or can they
elect a lifetime payout over their life expectancy (paying taxes only
on the amount received each year)?


-HW "Skip" Weldon
Columbia, SC

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On Apr 8, 11:30*am, Don <dwz...[at]telus.net> wrote:

- quote -

A quick look at many of his other posts suggest it could be a troll.

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On Apr 4, 8:02*pm, Don <dwz...[at]telus.net> wrote:

- quote -

Agreed. 40 years was used because the market data was readily
available and significantly long. Can you imagine the uproar, if I had
used, say, three random years in the middle of the 80's? Taking a
quick, uncalculated glance, there really isn't a period of time in
recent history that isn't marred with the occassional negative or low
postitive return. It is in these years that the guarantee gains
ground.

If anything, the uncertainty that your question brings to light is
even more of a reason why one may want to employ an insurance product.
It eliminates the risk.

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On 2008-04-08 08:50:22 -0700, kastnna <kastnna[at]auburnalum.org> said:

- quote -


However you look at it, if the companies could work out some way of
providing their products directly to customers without a whole level of
middlemen who need to be paid commissions, the returns on investment
should increase. That certainly as been possible in the case of equity
mutual funds. I wonder if it is coming in the case of mixed
equity/insurance products.

After all these posts, I wonder why the OP has not replied before now
and cleared up the uncertainty as to exactly what his wife is
considering buying and how that commission of $6600 is to be paid. I am
inclined to believe he put out the original question as a kind of
hypothetical exercise rather than a scenario involving real people.

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On Apr 6, 7:16*pm, Douglas Johnson <p...[at]classtech.com> wrote:
- quote -

The law and regulating authorities do not agree, nor do I. It has an
investment component, that's true. As a result, sales of variable
annuities are restricted to those licensed by the SEC. However, their
first and foremost intent is to provide the security and peace of mind
of insurance (they promise the annuitant will receive income
regardless of market conditions).

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On Apr 6, 5:04*pm, Don <dwz...[at]telus.net> wrote:
- quote -

As I already explained, she most certainly does pay it (in the form of
investment expense charges). All Cal is saying is that it is not
deducted from the clients initial investment as would be the case with
a loaded mutual fund, for instance. Given an A share mutual fund or a
variable annuity, the VA will have a higher initial investment value.

- quote -

Do we have any context for the commission amount? Maybe she is
investing $100,000,000 in which case the amount is a miniscule amount
of the overall investment. I doubt this is the case, but it seems
we're "going off half-cocked".

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On Apr 4, 6:28*pm, "Elle" <honda.lion...[at]spamnocox.net> wrote:

- quote -

Most annuity companies offer such guarantees. The general term is a
"guaranteed minimum income benefit" (GMIB). There are a number of spin-
offs of the GMIB, but I believe it is the most common, useful, and
easy to understand. I hate to tout products, but MetLife offers the
"GMIB plus" which is one of the most common I encounter. The one I
most recently looked at had 1.55% M&E charge + 0.80% for the GMIB+
rider, and fund expenses of 0.50-1.25% (don't quote me on those last
figures, memory doesn't serve). That's why i estimated roughly 3% in
total fees.

- quote -

It depends on the "state of the annuity". If the contract has been
"annuitized" it functions just like any other annuity. If there is a
period certain or joint survivor owner then payments may continue for
a specified length of time. Otherwise they are lost just like any
other annuity. However, one can have an annuity, and withdraw income
from it, without "annuitizing" the contract (I've always hated the
counterintuitiveness of that). In that instance (which has been the
far more likely case thus far) the beneficiaries receive one of two
figures: the greater of the contracts actual cash value OR the GMIB
base. The actual contract value will usually be higher if the
investments have continually increased in value (continually, not "on
average"). If the investements have decreased in value, remained the
same, only marginally increased, or have increased but experienced
great variance, the GMIB amount will be higher.

I hope that helps. If not, I will be happy to try again.

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"Elle" <honda.lioness[at]spamnocox.net> wrote:

- quote -

I agree that a fixed annuity is an insurance product. But from what the original
poster wrote:
- quote -

It sounds like a variable annuity, which I would consider an investment product.

- quote -

However, I'll go on to suggest that insurance products sold by a commissioned
sales force tend to be high cost as well. They could still deliver a valuable
product. If the sales person is good, they might deliver high service.
Commissioned sales force may be the only distribution channel for the product,
so you are stuck with the high costs, but they are still high cost. Someone
pays for the fancy suits and shiny shoes.

-- Doug

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"Douglas Johnson" <post[at]classtech.com> wrote
- quote -


But is it fair to call an annuity just an investment
product? Or is it more of an insurance product? The
insurance provided being (in general) predictable income for
the rest of one's life.

I draw the distinction because one could make the same
argument about, say, life insurance. Life insurance could be
said to be high cost, with a potentially low bang for one's
buck, too, if one forgets that the main product being
purchased is peace of mind.

I do protest fine print and preying on the less educated
with such products. But for some, annuities are a good
choice.

Elle
Disclaimer: I am an individual investor in and owner of
stocks, bonds, CDs etc. (but no annuities) of over two
decades. I own some insurance company stock but otherwise do
not sell annuities. I urge caution in the purchase of
annuities in particular.

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On 2008-04-06 13:25:52 -0700, Douglas Johnson <post[at]classtech.com> said:

- quote -

That certainly is true. Actually, the OP said specifically that his
wife would have to pay a $6600 commission on the deal. That doesn't
look to me like some indirect cost borne by the company that is buried
in the company's financial records. It looks more like he knows that a
commission of that specific dollar amount has to be paid to a sales
person.

In any case it seems like a large amount considering that she is
nearing retirement and already has a long-standing retirement plan in
place.

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"Cal" <cal-lester[at]comcast.net> wrote:


- quote -

The fact remains that the purchaser is paying for it, directly or indirectly.
What you are saying is that annuities bury the cost deeper in the fine print
than mutual funds.

Almost any (all that I know of) investment products that are sold by a
commissioned sales force are high cost products. Someone is paying for those
fancy suits and shiny shoes. Guess who.

-- Doug

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- quote -

Apparently you have not been reading the thread. It was already explained
that
any commissions paid to the seller come out of the general fund of the
carrier,
NOT out of the investment of the buyer.

The comparison was made of a purchase of a Mutual Fund of $10,000, FROM
WHICH
the commission IS deducted, and the remaining balance is the only amount
INVESTED.

In the case of the purchase of the Annuity, the entire amount is placed in
the Cash Value
Account, and earns the stipulated interest from DAY 1.

Cal Lester CLU

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On Sat, 29 Mar 2008 04:50:11 -0500, "Cal" <cal-lester[at]comcast.netwrote:

- quote -

the annuity for the company selling it. It's not a matter of losing
money. It's that the buyer could make $6600 dollars MORE if the
commission didn't exist.
Thumper
- quote -

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