kastnna <kastnna[at]auburnalum.org> wrote:


- quote -

As you know, I will occasionally rant and rave here about how hard to understand
these products are. I believe it is, at least partly, intentional. I once had
a vice president of a major phone company tell me that they didn't want
customers to understand the plans and pricing. Confusing pricing makes it hard
to comparison shop.

It the case of these annuities, it makes the customer dependent on the salesman
to explain them, which gives the salesman the opportunity to spin the product as
necessary.

-- Doug

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BreadWithSpam[at]fractious.net wrote:

- quote -

Unfortunately, no. I've reviewed bad ones by having people email me a
prospectus, but this set of numbers came from someone who took notes
during a meeting and offered me little more than the data I posted.
For this person, any use of options, or mixed portfolio wasn't really a
choice. I was asked to comment on this product without the chance to
offer much in the way of alternatives.
I looked at it two ways - first, the guarantee that a 2000-2 will not
cause a loss, which of course is just one point, but important for some.
The more abstract way is this - Bell curve, centered on 10% long term
return, with about 15% STD deviation. Giving up the dividend shifts left
by 2%, and upper tail (over 15%) is cut off. For this, the whole tail
below 2% is also cut off. I'd have more to say if I were sent he whole
prospectus, of course.
Joe

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On Apr 25, 12:40*pm, beliav...[at]aol.com wrote:

- quote -

Very interesting. I am admittedly not very well versed in that area. I
also admit I did not do a great job of addressing the OPs primary
question (which you do). Everyone please consider my post more of a
slightly off-topic, warning to anyone considering these products.

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On Apr 25, 10:21*am, kastnna <kast...[at]auburnalum.org> wrote:
- quote -

This and the rest of your advice is sound, but as a practical matter,
to estimate the "fair value" of these products, you need to be a
derivatives specialist, comfortable with the Black Scholes model and
its ofshoots. Part of my job used to be valuing such products, using
traded options on the SPX index as inputs. The annuity market is one-
sided -- the insurance company quotes you an offer price, but not a
bid price -- the price at which *they* would buy the contract.

Exchange-traded structured products AKA index-linked notes with
similar features to indexed annuities are traded on the AMEX -- see
http://www.amex.com/?href=/strProd/SPMain.jsp . Those products are
initially sold to brokerage customers at a 5 to 10% markup, in my
experience, but their prices on the secondary market after the initial
offering may be fair. The bid-ask spread will typically be much
smaller than the surrender fee of an annuity.

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On Apr 24, 4:53*pm, L <lcas...[at]joimail.com> wrote:
- quote -

Index annuities are dangerous and probably require more due diligence
than other annuity product available. I'm pro-annuity, for the record,
and yet I've never sold one. The reason you're get "mixed messages" is
because the insurance companies do a terrible job (intentionally?) of
disclosing exactly how equity-index annuities (EIA) work. Finra and
the SEC technically classify EIAs as fixed annuities and therefore are
exempt from the disclosure and liscensing requirements associated with
variable annuities. I, personally, feel this is a mistake on the
regulators part.

To answer your question, you're going to need to pour through the
prospectus. Each EIA is different and the devil is in the details. On
the surface, EIAs should seem simplistic, but there are caveats
galore! Most have a minimum interest rate they will credit and a
maximum interest cap. I saw one EIA just the other day in which the
max cap rate applied monthly and the minimum interest credit was
applied annually. In a volatile market, that's a pretty sneaky way to
lower your returns [you can wipe out an entire years returns in one
bad month, but you can't gain it back in an equally positive month].

EIAs also have a participation rate. Like the name suggests, if you
have an 80% participation rate, then you earn 80% of what the index
earned (subject to the minimum floor and maximum cap discussed
earlier). As Joe said, dividends are often not credited, either.

Fees are deducted from earnings and can be both elusive and excessive.
Again, read the prospectus.

Lastly, surrender fees can be brutal. For example, the "Allianz
Masterdex 10" EIA (this is the one I had the unfortunate chance to
encounter the other day) stipulated that if you EVER surrender the
contract you receive the LESSER of your original investment compounded
at 1.5% annually or the actual contract value. Suppose $100k with an
8% net annual return over 10 years. The account would be worth about
$216k. But if you surrendered the contract, you'd only get $116k. Even
after a decade they keep $100k in surrender fees! That's incredible!

Good luck and for God's sake, CAVEAT EMPTOR!

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- quote -

I suspect when when the "indexed" kind become mainstreamed, ie. when a
Fideleity
or Vangauard offers them with no penalty and minimal fees like the
other kind
of annuities, then they may be worth lookign at. Right now salesmen
make 6-10%
commision on them and are pushing them really, really hard.

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joetaxpayer <joetaxpayer[at]nospam.com> writes:

- quote -

First off, losing the dividends takes a *huge* hit on the
overall annual return. At the moment, it's back to around
190bp. You'd scream your head off if someone suggested
buying a stock index fund which charged that much. That's
what these guys are doing.

FWIW, I haven't seen one which had both 100% participation
(even without the divs) *and* a cap as high as 15%.

For 1.9%/yr, you could take some cash and buy some long-dated
SPY options to protect some of your down side.

Or you could put together a blended portfolio of stocks
and bonds and get, based on historical performance, most
of the total return with vastly less volatility, especially
if you're comparing a blended portfolio which includes
the dividends against an S&P500 without them. Take a
look a the history of, say, VBINX. Down only 9.5% in
2002 (less than half the downside of the SP500 even
if the SP500 included its divs), yet up 19.9% in '03
when the SP500 went up 28.5 (again, including divs).

- quote -

I'd be shocked - shocked - to see such an index annuity
beat the blended, low-cost portfolio over the very long term.

The problem with some of the analysis is sample selection.

The last 10 years have been ugly. But even in these last
10 years, the Sp500 (with divs) has only returned about 3.5%,
that 60/40 blended index got a touch better than 5%, and
the annuity you describe (100% price, no divs, 15% cap, 2%
floor)? Let's see - if we assume the floor and cap
applies annually (it probably gets applied monthly), I get
a very rough estimate of about 6.6%/yr. Not too bad - and
a very good demonstration of why one might consider these
things. But, again, that's *very* sample specific.

(to come up with that estimate, I took approx 1.5% off
of the annual total returns of the S&P500 and then
applied the cap and floor - note some problems with this -
(a) that's not the real div yield, (b) I applied the
caps on the calendar years - the specific period may
have a huge impact on this - the floor applied to 4
of the 10 years and the cap applied to two of them -
I suspect that if you applied the cap and floor monthly,
the cap would whack away at more return because the
returns are so volatile.)

Anyway, that particular index annuity formula, at
least as I applied it, has come up pretty impressive
in an ugly 10 year period. Do you have a specific
annuity you saw with those terms? I'd like to look
at it a little more closely.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

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L wrote:

- quote -

I am on record as being anti-annuity with the exception of the immediate
kind.
That said, the terms for annuities seemed to have changed from the time
I formed my opinion, and if I saw a prospectus confirming this I may
change my mind.
I am hearing of indexed annuities that offer 100% participation (i.e.
100% of the gain in index is passed on to the account holder. This does
not include dividends.) Also, a return of 2% as a floor, and 15% maximum
return in a year.
You can pull S&P data and run your own numbers, at least to show what
your return would have been in the last X years. You lose return by
giving up the dividends, and having a cap, but gain some by having a
guaranteed minimum. If you are being offered such a product, you should
read it to understand the exact terms.
Joe

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Began reading up on Index annuities. I get mixed messages on what the
real return are after all cost ..particaption etc. Considerning how
crazy the market seems to be 2000 to today would be a good period for
calulating purposes.. if it makes any difference lets assume a person
starts in 2000 with 100K. or even better there must be others who have
real world returns. Thanks

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