Archive for January, 2007
The Real Scoop on Annuities – Part One
Steve Selengut asked:
Insurance companies have always been major financial institutions, and they could probably have claimed possession of the largest and safest investment portfolios on the planet. At one time, their role vis-a-vis Wall Street was clearly that of a giant customer for the securities that the investment banks and securities firms brought to market. Their real estate holdings were religious in size and quality. They were direct lenders to corporations, their owner-policyholders, and to other institutions. They were the Trustees who managed the private employee pension plans of the world.
Insurance companies sold life insurance policies and annuity contracts that contained guaranteed benefits that depended on their ability to invest safely and soundly. They sold investment management services that built upon their legendary reputation as an industry built upon guarantees, trust, and financial integrity. They were not known for the production of unusually high rates of return, but they were one of only three entities allowed to utter the sacred g-word, and the only one that marketed products that protected people from the financial vagaries of life and death. It was a simpler world then, one less prone to the conflicts of interest, scandals, and financial disruptions that exist on the modern Wall Street.
Today, it’s difficult to distinguish one financial institution from another as they compete for an ever-growing pool of investment dollars. Insurance companies, now publicly owned, have become an integral part of an industry that seems uninterested in protecting anything other than their obscenely paid leaders.
The time-honored distinction of the annuity contract was the guaranteed retirement benefit it provided. The “you will never outlive your income” boast could not be uttered by any other financial entity! The annuity contract itself was never intended to be an investment product, although the disciplined savings element was given well-deserved emphasis. This was the original old age and disability retirement program— a contributory, trustee directed, investment account that anyone could have for a few bucks a week. Like bank savings accounts and federal government securities, risk of loss was not a factor, and the guarantee was a benefit well worth the lower than market yield.
Over a hundred years, the concept became generic: Annuity = Guarantee— safe, solid, and virtually risk free. Equities were nowhere to be seen; derivatives had yet to come of age; neither seemed necessary. The guarantee was enough— it still is, but annuities are really best suited to retirees,and/or the healthy poor.
Annuities were developed for the protection of the indigent— people without the assets needed to generate enough income to sustain them in retirement. An annuity is a series of identical payments made over a specific period of time. Any departure from a plain vanilla, one-life, annuity reduces the payout because of additional time, cash back, or life contingencies. In its purist form, a fixed amount is paid to the annuitant until his or her death. Any leftover funds belong to the company, and the company continues to pay those who live longer than predicted by the actuarial tables— a simple concept, actuarially pure, easy to deal with, and with no surprises (until the government decreed that men are required to live as long as women).
Annuitants would never outlive their income, but absolutely nothing would be passed on to their heirs; a dismal prospect for the kids, but a valuable benefit for the retiree. I don’t know about you, but this sure sounds like a great way to fund a Social Security program! The companies make enough money on the plain vanilla variety to pay their salespeople between 8% and 12%. Typically, they lock-up the money for eight to twelve years with large penalties and pocket most of the additional income that their actual investment and expense experience produces— but for those who can’t fund their own retirements, this is entirely acceptable. A mandatory, fixed annuity based Social Security really needs to be considered to replace the counter-productive system in effect today.
Enter the modern day Variable Annuity oxymoron, sold by an industry that has lost touch with its noble roots, if not the realities of the stock market. The sales pitch emphasizes the prospect of gains in the market rather than the safety and security of the contract. Hundreds of insurance-annuity companies sell their Mutual Funds to unsuspecting retirees, in the form of a much-more-speculative-than-meets-the-eye retirement program. In it’s zeal to claim its share of the investment dollar, the industry has rationalized away the risk of equity investments. Financial Planning computer models are programmed to include variable annuities in their asset allocations, shifting the retirement income risk to the consumer. And it’s such an easy sell because what the customer hears is: a guaranteed retirement income plus stock market appreciation.
Unfortunately, the stock market never has been able to generate guaranteed levels of income, and sometimes fails to move higher just because we think it should. Serious problems occur when mutual funds are packaged with annuity contracts and the critical differences between them are either overlooked or undisclosed, perhaps innocently, perhaps not. The founding fathers of the annuity contract would not be pleased with today’s glitzy versions. Let’s back up a century and consider some basics. Just who needs an annuity anyway?
Keep in mind that the annuity produces the largest possible commissions for the salesperson and the largest potential penalties for the purchaser. The variable variety adds the commissions from the mutual funds to the package, and uncertainty to the income benefit. Here’s how to determine if an annuity makes sense economically. Is it clear that there is no such thing as a guaranteed variable annuity? The key suitability numbers are easy to develop and to analyze.
The most important number in the equation is your personal expense estimate. How much income is needed at retirement? Always estimate conservatively (that means to use numbers higher than you really expect). If you need a calculator, you’re making it too difficult.
Let’s pretend that the number you decide upon is $48,000, or $4,000 per month. Next, subtract the amount of any guaranteed income you expect to receive from all sources, including social security, pensions, etc. Do not include the value of your investments or properties you plan to sell in this calculation. Again, be conservative, keeping your estimate a bit lower than what you actually expect, and make sure you know why investment earnings should not be included. Let’s say that this number works out to be $27,000.
That’s it. Now all you have to do is to determine if the investment portfolio can safely generate the difference of $21,000 per year in income (dividends and interest only, please). For the purposes of this analysis, the current market value of the portfolio is used, so make sure that you include the value of everything that is marketable. At today’s interest rates you could get the job done safely with under $300,000 but not with normal equity mutual funds or any form of Index Fund.
It is totally irresponsible (actually, its worse than that) to rely on equities to provide retirement income. BUT, if the numbers are just short, and (a) a “windfall” (inheritance) is anticipated within a few years, or (b) the retiree is in poor health, an annuity is the last thing that should be considered! You should be able to invest the money conservatively, generate adequate income and have an estate left over for the heirs. Remember to satisfy the income need before looking at equities. There are no exceptions.
So here we have a last resort product, designed for the poor, that the industry has chrome plated, spit-polished, and supercharged for marketing to people who should know better than to include equities in an income portfolio. Why? Is it because financial pros really think these products are universally suitable? Is it the commissions? Or is RISK just a board game that they played in college?
Cash for Annuity
Insurance companies have always been major financial institutions, and they could probably have claimed possession of the largest and safest investment portfolios on the planet. At one time, their role vis-a-vis Wall Street was clearly that of a giant customer for the securities that the investment banks and securities firms brought to market. Their real estate holdings were religious in size and quality. They were direct lenders to corporations, their owner-policyholders, and to other institutions. They were the Trustees who managed the private employee pension plans of the world.
Insurance companies sold life insurance policies and annuity contracts that contained guaranteed benefits that depended on their ability to invest safely and soundly. They sold investment management services that built upon their legendary reputation as an industry built upon guarantees, trust, and financial integrity. They were not known for the production of unusually high rates of return, but they were one of only three entities allowed to utter the sacred g-word, and the only one that marketed products that protected people from the financial vagaries of life and death. It was a simpler world then, one less prone to the conflicts of interest, scandals, and financial disruptions that exist on the modern Wall Street.
Today, it’s difficult to distinguish one financial institution from another as they compete for an ever-growing pool of investment dollars. Insurance companies, now publicly owned, have become an integral part of an industry that seems uninterested in protecting anything other than their obscenely paid leaders.
The time-honored distinction of the annuity contract was the guaranteed retirement benefit it provided. The “you will never outlive your income” boast could not be uttered by any other financial entity! The annuity contract itself was never intended to be an investment product, although the disciplined savings element was given well-deserved emphasis. This was the original old age and disability retirement program— a contributory, trustee directed, investment account that anyone could have for a few bucks a week. Like bank savings accounts and federal government securities, risk of loss was not a factor, and the guarantee was a benefit well worth the lower than market yield.
Over a hundred years, the concept became generic: Annuity = Guarantee— safe, solid, and virtually risk free. Equities were nowhere to be seen; derivatives had yet to come of age; neither seemed necessary. The guarantee was enough— it still is, but annuities are really best suited to retirees,and/or the healthy poor.
Annuities were developed for the protection of the indigent— people without the assets needed to generate enough income to sustain them in retirement. An annuity is a series of identical payments made over a specific period of time. Any departure from a plain vanilla, one-life, annuity reduces the payout because of additional time, cash back, or life contingencies. In its purist form, a fixed amount is paid to the annuitant until his or her death. Any leftover funds belong to the company, and the company continues to pay those who live longer than predicted by the actuarial tables— a simple concept, actuarially pure, easy to deal with, and with no surprises (until the government decreed that men are required to live as long as women).
Annuitants would never outlive their income, but absolutely nothing would be passed on to their heirs; a dismal prospect for the kids, but a valuable benefit for the retiree. I don’t know about you, but this sure sounds like a great way to fund a Social Security program! The companies make enough money on the plain vanilla variety to pay their salespeople between 8% and 12%. Typically, they lock-up the money for eight to twelve years with large penalties and pocket most of the additional income that their actual investment and expense experience produces— but for those who can’t fund their own retirements, this is entirely acceptable. A mandatory, fixed annuity based Social Security really needs to be considered to replace the counter-productive system in effect today.
Enter the modern day Variable Annuity oxymoron, sold by an industry that has lost touch with its noble roots, if not the realities of the stock market. The sales pitch emphasizes the prospect of gains in the market rather than the safety and security of the contract. Hundreds of insurance-annuity companies sell their Mutual Funds to unsuspecting retirees, in the form of a much-more-speculative-than-meets-the-eye retirement program. In it’s zeal to claim its share of the investment dollar, the industry has rationalized away the risk of equity investments. Financial Planning computer models are programmed to include variable annuities in their asset allocations, shifting the retirement income risk to the consumer. And it’s such an easy sell because what the customer hears is: a guaranteed retirement income plus stock market appreciation.
Unfortunately, the stock market never has been able to generate guaranteed levels of income, and sometimes fails to move higher just because we think it should. Serious problems occur when mutual funds are packaged with annuity contracts and the critical differences between them are either overlooked or undisclosed, perhaps innocently, perhaps not. The founding fathers of the annuity contract would not be pleased with today’s glitzy versions. Let’s back up a century and consider some basics. Just who needs an annuity anyway?
Keep in mind that the annuity produces the largest possible commissions for the salesperson and the largest potential penalties for the purchaser. The variable variety adds the commissions from the mutual funds to the package, and uncertainty to the income benefit. Here’s how to determine if an annuity makes sense economically. Is it clear that there is no such thing as a guaranteed variable annuity? The key suitability numbers are easy to develop and to analyze.
The most important number in the equation is your personal expense estimate. How much income is needed at retirement? Always estimate conservatively (that means to use numbers higher than you really expect). If you need a calculator, you’re making it too difficult.
Let’s pretend that the number you decide upon is $48,000, or $4,000 per month. Next, subtract the amount of any guaranteed income you expect to receive from all sources, including social security, pensions, etc. Do not include the value of your investments or properties you plan to sell in this calculation. Again, be conservative, keeping your estimate a bit lower than what you actually expect, and make sure you know why investment earnings should not be included. Let’s say that this number works out to be $27,000.
That’s it. Now all you have to do is to determine if the investment portfolio can safely generate the difference of $21,000 per year in income (dividends and interest only, please). For the purposes of this analysis, the current market value of the portfolio is used, so make sure that you include the value of everything that is marketable. At today’s interest rates you could get the job done safely with under $300,000 but not with normal equity mutual funds or any form of Index Fund.
It is totally irresponsible (actually, its worse than that) to rely on equities to provide retirement income. BUT, if the numbers are just short, and (a) a “windfall” (inheritance) is anticipated within a few years, or (b) the retiree is in poor health, an annuity is the last thing that should be considered! You should be able to invest the money conservatively, generate adequate income and have an estate left over for the heirs. Remember to satisfy the income need before looking at equities. There are no exceptions.
So here we have a last resort product, designed for the poor, that the industry has chrome plated, spit-polished, and supercharged for marketing to people who should know better than to include equities in an income portfolio. Why? Is it because financial pros really think these products are universally suitable? Is it the commissions? Or is RISK just a board game that they played in college?
Cash for Annuity
Life Insurance’s Split Annuities
Lara Sawyer asked:
Life insurance is not only a protection for your loved ones but also an investment. Annuities provide you with the possibility to obtain a source of income from a life insurance special contract by paying an insurance premium or premiums. That way within a single insurance policy the insurer protects himself by getting a possible source of funds in the event problems arise and his or her loved ones in case he or she dies. A good example of a life insurance annuity contract uses would be: the taker pays a premium of $20,000 and in return at a certain date starts receiving $300 each month until he or she dies, $2000 for 15 years or death benefits if the insured dies prior the term of the annuity ends. Annuities have two well differenced time periods: the first period where the insured pays the premium or premiums and the second one when the insurance company pays out the agreed amounts.
What Is An Annuity?
An annuity is an agreement by means of which you receive cash payments from the insurance company or tax-deferred retirement income apart from the insurance payment in case of death that your loved ones will receive. There are different types of annuities each one with its particularities. These contracts can adapt to your personal situation thanks to the aforementioned differences. For instance, if you are interested in investing you will be purchasing tax-deferred annuities that will mature with time. But if you are close to the time on your life when you are thinking about retirement you may be interested in obtaining a regular and secure income and thus opt for immediate annuities rather than tax-deferred annuities. As you can see, annuities are quite flexible and cover many different situations. There are also college annuities, charitable annuities, and the ones we are interested in: split annuities.
What Is a SPLIT Annuity
Split annuities combine immediate annuities with deferred annuities. This combination provides a bit of the benefits of both types and thus is useful for those who are interested in investing but still want to secure their future with a source of regular income at the time of retirement. Therefore with a split annuity you get an immediate and regular stream of cash for a period of time chosen by you which is the payment of principal plus interests of a portion of the premium paid. The rest of the money grows by accumulating the interests till it eventually reaches the original amount.
Example Of a SPLIT ANNUITY
Here is an example of what a split annuity can provide to you. Let’s say you contribute with $200,000 to a split annuity that is divided evenly: 50% to each portion of the annuity. The half that is deferred will accumulate interests that add up to the principal every year. The other half starts providing you an immediate income that consists on the principal plus an interest rate. Let’s say the immediate part period equals 10 years, you will receive almost $1420 a month (minus taxes). When the period ends, the other half will be close to reaching the original amount of the split annuity and you could start again.
Sell Structured Settlement
Life insurance is not only a protection for your loved ones but also an investment. Annuities provide you with the possibility to obtain a source of income from a life insurance special contract by paying an insurance premium or premiums. That way within a single insurance policy the insurer protects himself by getting a possible source of funds in the event problems arise and his or her loved ones in case he or she dies. A good example of a life insurance annuity contract uses would be: the taker pays a premium of $20,000 and in return at a certain date starts receiving $300 each month until he or she dies, $2000 for 15 years or death benefits if the insured dies prior the term of the annuity ends. Annuities have two well differenced time periods: the first period where the insured pays the premium or premiums and the second one when the insurance company pays out the agreed amounts.
What Is An Annuity?
An annuity is an agreement by means of which you receive cash payments from the insurance company or tax-deferred retirement income apart from the insurance payment in case of death that your loved ones will receive. There are different types of annuities each one with its particularities. These contracts can adapt to your personal situation thanks to the aforementioned differences. For instance, if you are interested in investing you will be purchasing tax-deferred annuities that will mature with time. But if you are close to the time on your life when you are thinking about retirement you may be interested in obtaining a regular and secure income and thus opt for immediate annuities rather than tax-deferred annuities. As you can see, annuities are quite flexible and cover many different situations. There are also college annuities, charitable annuities, and the ones we are interested in: split annuities.
What Is a SPLIT Annuity
Split annuities combine immediate annuities with deferred annuities. This combination provides a bit of the benefits of both types and thus is useful for those who are interested in investing but still want to secure their future with a source of regular income at the time of retirement. Therefore with a split annuity you get an immediate and regular stream of cash for a period of time chosen by you which is the payment of principal plus interests of a portion of the premium paid. The rest of the money grows by accumulating the interests till it eventually reaches the original amount.
Example Of a SPLIT ANNUITY
Here is an example of what a split annuity can provide to you. Let’s say you contribute with $200,000 to a split annuity that is divided evenly: 50% to each portion of the annuity. The half that is deferred will accumulate interests that add up to the principal every year. The other half starts providing you an immediate income that consists on the principal plus an interest rate. Let’s say the immediate part period equals 10 years, you will receive almost $1420 a month (minus taxes). When the period ends, the other half will be close to reaching the original amount of the split annuity and you could start again.
Sell Structured Settlement
Insurance Ce – The Beneficiary Of An Annuity
edward hulse asked:
To use an analogy, in a life insurance policy, the beneficiary has no “status” until the death of the named insured. In an annuity, the beneficiary has no “status” until the death of the annuitant. Similarly, the beneficiary of an annuity has no control of the policy and has no say in the management of the policy. The annuitant benefits from an annuity only when the annuitant dies.
The beneficiary can be either an individual, or a trust, corporation or partnership. There does not have to be any relationship between the beneficiary and the annuitant – indeed, they could conceivably be (but highly unlikely) total strangers. The application form used for an annuity allows the owner to state multiple beneficiaries, and to designate the percentage of each beneficiary if so desired.
Frequently, one spouse would be the owner of the contract, and the other spouse would be the beneficiary. With some companies, co-ownership is allowed, thereby allowing both spouses to be owners. They can be quite valuable in case the annuitant dies as the annuity proceeds would not go to a beneficiary as long as one of the spouses was still alive.
Generally, a single person (or widow or widower) will designate themselves as the owner of the contract and also the annuitant, naming another party as the beneficiary (such as a church, charity, etc.). By doing this, the person has complete control over the investment during their lifetime, and upon their death, the annuity proceeds will automatically pass to the intended heir.
Since the owner of the contract can change the beneficiary at any time, they do not need to notify a listed beneficiary that they have been so designated, or indeed, even tell them if they are removed as beneficiary.
MULTIPLE TITLES
When the original investment(s) is/are made, the owner(s), annuitant, and beneficiary(s) must be so stated. As stated above, only the annuitant has to be a natural person. The person can hold more than one “title.” For instance, they could be the contract owner and beneficiary of the same contract. It is also possible that the annuity owner, annuitant and beneficiary are the same person. It should always be remembered that a non-person entity (such as a corporation, partnership, living trust, etc.) can only be specified as contract owner and/or beneficiary. The annuitant must be a living individual under a certain age.
HOW THE CONTRACT IS “DRIVEN”
Most annuities are considered as “annuitant-driven,” i.e., if the annuitant reaches a certain age, died, or became disabled, certain provisions of the annuity would govern. Some of these provisions could waiver any penalties enacted by the insurer, or the death benefit, IRS penalty, and/or the required annuitization or distribution of the contract would go into effect, depending upon the situation of the annuitant (such as the contract owner dying, reaching a certain age, or becoming disabled). Some annuities state that certain provision can come into being if the owner, co-owner, or annuitant dies, reaches the age of annuitization, or becomes disabled. This flexibility makes the annuity more appealing in some circumstances./
WHEN DO BENEFITS BEGIN?
There are two basic types of annuities in respect to when benefits start (when the annuity “annuitizes”) – immediate and deferred.
IMMEDIATE ANNUITY –START PAYING NOW
With an immediate annuity, annuity payments will commence after a predetermined “period.” The period can be one year, for instance, in which case the first benefit payment will be one year after the purchase of the immediate annuity. Payments can be monthly, quarterly, semi-annual or annual. If the period is one month, annuity payments start one month after purchase.
DEFERRED ANNUITY-START PAYING LATER
With annuitization, the payment period is scheduled to begin at some future date. The period when the contract annuitizes, is called the maturity date. Conversely, for definition purposes, the period prior to the maturity date is called the accumulation period. Further, the period following the maturity date during which payments are made is the liquidation or distribution period.
If death occurs before the annuitization period as stated in the contract, the cash value paid to the annuitant’s beneficiary would equal the amount of premiums paid in. However, most contacts provide for payment to the beneficiary of at least the amounts paid in – plus interest and regardless of sales charges.
The purchaser of a Deferred Annuity is permitted to alter the date that payments are scheduled to begin but within certain conditions that are plainly stated in the annuity.
http://www.myceisonline.com
PurchaseStructuredSettlements-1st.info
To use an analogy, in a life insurance policy, the beneficiary has no “status” until the death of the named insured. In an annuity, the beneficiary has no “status” until the death of the annuitant. Similarly, the beneficiary of an annuity has no control of the policy and has no say in the management of the policy. The annuitant benefits from an annuity only when the annuitant dies.
The beneficiary can be either an individual, or a trust, corporation or partnership. There does not have to be any relationship between the beneficiary and the annuitant – indeed, they could conceivably be (but highly unlikely) total strangers. The application form used for an annuity allows the owner to state multiple beneficiaries, and to designate the percentage of each beneficiary if so desired.
Frequently, one spouse would be the owner of the contract, and the other spouse would be the beneficiary. With some companies, co-ownership is allowed, thereby allowing both spouses to be owners. They can be quite valuable in case the annuitant dies as the annuity proceeds would not go to a beneficiary as long as one of the spouses was still alive.
Generally, a single person (or widow or widower) will designate themselves as the owner of the contract and also the annuitant, naming another party as the beneficiary (such as a church, charity, etc.). By doing this, the person has complete control over the investment during their lifetime, and upon their death, the annuity proceeds will automatically pass to the intended heir.
Since the owner of the contract can change the beneficiary at any time, they do not need to notify a listed beneficiary that they have been so designated, or indeed, even tell them if they are removed as beneficiary.
MULTIPLE TITLES
When the original investment(s) is/are made, the owner(s), annuitant, and beneficiary(s) must be so stated. As stated above, only the annuitant has to be a natural person. The person can hold more than one “title.” For instance, they could be the contract owner and beneficiary of the same contract. It is also possible that the annuity owner, annuitant and beneficiary are the same person. It should always be remembered that a non-person entity (such as a corporation, partnership, living trust, etc.) can only be specified as contract owner and/or beneficiary. The annuitant must be a living individual under a certain age.
HOW THE CONTRACT IS “DRIVEN”
Most annuities are considered as “annuitant-driven,” i.e., if the annuitant reaches a certain age, died, or became disabled, certain provisions of the annuity would govern. Some of these provisions could waiver any penalties enacted by the insurer, or the death benefit, IRS penalty, and/or the required annuitization or distribution of the contract would go into effect, depending upon the situation of the annuitant (such as the contract owner dying, reaching a certain age, or becoming disabled). Some annuities state that certain provision can come into being if the owner, co-owner, or annuitant dies, reaches the age of annuitization, or becomes disabled. This flexibility makes the annuity more appealing in some circumstances./
WHEN DO BENEFITS BEGIN?
There are two basic types of annuities in respect to when benefits start (when the annuity “annuitizes”) – immediate and deferred.
IMMEDIATE ANNUITY –START PAYING NOW
With an immediate annuity, annuity payments will commence after a predetermined “period.” The period can be one year, for instance, in which case the first benefit payment will be one year after the purchase of the immediate annuity. Payments can be monthly, quarterly, semi-annual or annual. If the period is one month, annuity payments start one month after purchase.
DEFERRED ANNUITY-START PAYING LATER
With annuitization, the payment period is scheduled to begin at some future date. The period when the contract annuitizes, is called the maturity date. Conversely, for definition purposes, the period prior to the maturity date is called the accumulation period. Further, the period following the maturity date during which payments are made is the liquidation or distribution period.
If death occurs before the annuitization period as stated in the contract, the cash value paid to the annuitant’s beneficiary would equal the amount of premiums paid in. However, most contacts provide for payment to the beneficiary of at least the amounts paid in – plus interest and regardless of sales charges.
The purchaser of a Deferred Annuity is permitted to alter the date that payments are scheduled to begin but within certain conditions that are plainly stated in the annuity.
http://www.myceisonline.com
PurchaseStructuredSettlements-1st.info