My wife has a broker acquaintance that wants her to invest her retirement fund (all of it) in a Pacific Life annuity. The annuity is supposed to double your money in 10 years or sooner. I noticed on the cover of the Pacific Life brochure that it states "may lose money"
What sort of guarantee do these things have if the company goes belly up? With today's rocky financial climate how safe are these investment vehicles? BTW, I think my wife would have to pay $6600 in commissions on this deal.
Thanks
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There's not point in putting retirement funds in an annuity, as it's already tax deferred.
Sounds like a risky ripoff to me
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If I were you, I would not pay much attention to the financial stability of that particular company, nor to the "may lose money" disclaimer, but instead would focus on that extraordinary $6600 in commissions and ask for convincing evidence that the monetary return from the annuity would justify such an expense. Of course, that evidence will not be forthcoming. She might hear something like "But this is an excellent fund. It has done great in the past ...", etc., etc. But how many thousands of times has that been said. The chances are that she would come out far better by leaving the money where it is. The fact is that by moving the funds into a new product with a $6600 cost just for making the move, she would be taking a risk and a gamble far larger than the gamble that the new fund, or any fund, "may lose money" because of market fluctuations.
If I had to choose between accepting a "deal" like that one, and offending and losing a friend, I would choose to lose the friend.
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This is true for fixed annuities, but the vast majority of variable annuities are sold with loads (aka commissions)
Variable annuities can certainly lose value. In addition, one can lose money on a fixed annuity if the insurance company defaults (just as any other creditor of the company can lose money).
It is fairly common for CDs in IRAs to come without surrender charges for savers subject to RMDs. Other CDs are called "liquid CDs", which provide quite broad, penalty-free access to savings. In contrast, typically annuities allow withdrawal of only 10%/year w/o penalty.
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(Liquid CDs)
The OP said that the annuity should double in a decade. What INTEREST EARNING annuity on the market now will yield that much? It doesn't matter what MOST annuities are; it matters what the particular annuity being offered is.
But for the sake of argument, let's say that you're right, and what is being suggested is Pacific Life's fixed annuity. (According to their web page, they only offer a single fixed annuity:
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As the OP said, right on the cover of the investor guide (well, actually page 2), it says: "Not a deposit", "May lose value", etc.
As a final note, there have been periods of time when as many variable as fixed annuities were sold (I haven't located current statistics): "annuity sales were formerly evenly split between fixed and variable annuities"
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(2002 article). But as I stated above, it doesn't matter what is true about most annuities; what is important for the OP is what the facts are about this one. I have no reason to doubt the $6,600 commission or the alleged doubling in a decade, both of which point to a variable annuity. Mark Freeland snipped-for-privacy@sbcglobal.net
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To start with, I would approach this annuity contract with suspicion. I know there are good and appropriate annuities out there, and I don't know enough about you or this contract to tell if there is a "good fit", but many can do better on their own.
To double your money in ten years, requires a theoretical annual appreciation rate of about 7.2%. Compare their **guaranteed** rate with this rate as well as with what you might be able to earn on another investment.
Also, you may have to pay penalties for withdrawing before some minimum time period, so you may not have free use of your money, but rather have to pay a charge, which may decrease the appreciation.
It is **very** important that your wife (and you) gain a comprehensive understanding of the contract, and make sure that you know what you are getting into.
The "safety" of the contract depends on the reliability of the insurance company. Look at
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for an evaluation. (It is a pay site, but if you are investing a significant amount of money, and don't have another independent rating source, it may be worth it).
At
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"Pacific Life Ins Co" ofNEbraska is given an "A" rating as an annuity insurer, which is theirhighest. You'll have to research to see if your Pacific Life is the sameas this one.
**BUT** the safety of your investment also depends on the contractual terms.
--ron
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I would not be concerned so much about who pays the sales charge or commission as the very fact that one exists, which tends to negate any, probably slight, advantage of switching from one financial product to another. Presumably the OP's acquaintance suggested some benefit in making the switch, but it is hard to imagine what it could be. And there could be disadvantages. I would have the same doubts if it were some product other than an annuity and certainly would want to consider more than its recommendation by an acquaintance.
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Check out Variable Annuity Watch, 2007, by Scott Burns at assetbuilder.com/blogs/scott_burns/archive/2007/07/19/variable-annuity- watch-2007.aspx for a helpful discussion about the odds that a variable annuity beat an index fund.
Dave
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Every part of me hesitates to agitate this hornets nest, but I just can't resist.
As Cal said (if I understood him correctly), the commission is not deducted from the investors account. If $100k were the initial investment, V's wife will see $100k show up in her account, not $93,400. That said, I acknowledge there is no free lunch. The commission is recouped via the expenses charged annually to the account. Obviously without the commissions, the annual expenses could be lowered. But all the same, the investor will not see that commission directly deducted from the opening account balance as implied here.
There are also no "loads" on variable annuity subaccounts in the sense that some here lead us to believe. Even in variable annuities, one can buy and sell subaccounts as often as they like without paying loads (neither front-end or back) or incurring capital gains. [The exception is that a trading fee is levied if one trades so frequently it constitutes "day trading"]. The "load" and "no-load" status of annuities are slang terms that refers to the surrender charge incurred if the investors tries to surrender the annuity. Almost every major annuity company offers both load and no-load annuities. Unlike mutual fund loads, an investor does not pay a commission to buy or sell the annuity subaccounts.
To be fair, this PacLife annuity may be totally worthless. I haven't investigated, we don't know many details about the investors situation, and frankly many VAs just plain suck. My comments were just towards annuity misconceptions in general.
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Annuities, particularly variable, earn their worth through the secondary guarantees they offer. It troubles me that I've never heard them mentioned or discussed here. These guarantees make up such a significant part of variable annuities that I don't see how a meaningful conversation could be had without their being mentioned, yet it's done constantly. Even more troublesome is that I've heard "pop culture investment gurus" go so far as to dismiss these guarantees because they are "too complicated for the average investors to understand". How insulting! The fact is that the complaints that are constantly made against variable annuities WERE valid. The insurance companies realized that and changed their products to become more competitive. An increasing number of VAs no longer do the things we so regularly criticize them of doing.
Here's an exercise I used to use with clients: Pretend you could go back in time to 1966 (exactly 40 years ago when I used to use this example). Now suppose you took $10k with you and you had the choice of investing in an S&P500 mutual fund or the S&P 500 subaccount of a Variable Annuity with a 6% secondary guarantee. The S&P fund has 0.18% fees, but the annuity charges 3%!!! Which account would have had more?
Surprisingly, in this simple back-test the VA account would be 4 times larger than the mutual fund!
Why? Because even though the VA has higher annual fees, it also guarantees that your account will go up by no less than 6% every year. When the S&P earns 12%, the VA is only going to make 9%. But when the S&P falls 26% (like it would have in 1974) the annuity's secondary guarantee credits 6%. That's how resoundingly important the secondary guarantees are.
Of course one could argue that secondary guarantees didn't exist 40 years ago, but the main point was to show that over a statistically significant period of time things other than AVERAGE annual return became increasingly important. I encourage all to better famiarize themselves with MODERN variable annuities before attacking them.
*sorry for the rant, but I have had a few clients recently thank me for their annuities because they retired shortly before the tech bubble burst and they would be in dire trouble now if it weren't for the guarantees. Try to tell them that the annuity was an overpriced scam.
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Could you please give a link to an annuity company that has such a guarantee?
Can you say what happens, generally speaking, to the annuity when the client dies?
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It is well known that the past returns of financial products depends a lot on the starting dates and ending dates chosen for examples like this. Would the advantage of the secondary guarantee be as noticeable if, say, you began in 1956 and ended in 1996. or began in 1980 and ended in 2005, and so on? In examples like this it would be helpful to know the broad picture showing the whole range of possible starting dates and ending dates. That would give an indication of the actual probabillities that an investor would make out better one way or the other.
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Did that 6600 grow on a tree? It comes out of profits generated by 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
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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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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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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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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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It sounds like a variable annuity, which I would consider an investment product.
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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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.
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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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.
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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