annuities question(s)

Except for a 401k when you left your last job after reaching age 55, there is no 10% penalty.

John Cowart

The one thing that strikes me from the site is with regard to a fixed annuity; "Norman Chiodras, founder of Retirement Planners Inc. in Oakbrook, Ill., occasionally uses fixed annuities for clients as an alternative to CDs. ?They often pay a premium over CDs, and they're safer than bonds because their value doesn't fluctuate,? he says."

First, if they do not pay a premium over CDs, then what would be the point? I advocate immediate annuities as I see 8% for a 60 year old vs the 5.xx% CDs out there.

It may be nit-picking, but his remark about 'safer' is absurd. The annuity gives the same annual return year after year, as would a bond. The trade off with the annuity is to have no return of the face value in return for a higher annual payout. The bond would have given out a known value at maturity. I can say that the payment stream from the annuity does fluctuate in value as inflation chips away. (Mostly down as we haven't seen disinflation in some time)

JOE

It's not really a premium and it's somewhat misleading to term it as such. The annual payout, as a percentage of what one put in, will be higher than that of a CD, but that's not because of an interest premium - it's because the principal is effectively being paid back out in addition to interest. At the end - in the case of an annuity, usually death, in the case of a CD, the maturity - at the end, a CD pays back the principal. An annuity ends up worthless. (barring, of course, various potentially costly add-ons such as minimum payout periods, death benefits, etc).

Saying it pays a premium over CDs is just another example of the common apples-to-oranges comparisons which make this business so potentially misleading.

Ed, I responded that the 2003 tax law changes are what make the 2002 site's arguments on tax law invalid. You should check on these changes, obviously, then google for the effects of these changes on deferred variable annuities in particular. I did not advise anyone to check Quicken nor Motley Fool on the subject, though they each may have useful information.

Elle, the author didn't present any arguments in the article. Four points were made though.

1. Annuities grow tax free until withdrawal.
2. 401k & 403b plans allow pre-tax contributions.
3. 10% penalty for distributions before age 59.5.
4. Earnings will will be taxed as ordinary income.

All four of them are still true, still valid. I don't see the point you're trying to make.

It is true, you didn't suggest any website by name: "I do think it is a worthwhile read as long as people bear in mind this significant change in tax law and also read, say, half a dozen more recent articles on annuities from diverse sources. It's a much discussed subject on the net."

That you are being evasive is not the issue. The important thing was to find out which of the above points were now false because of tax law changes. I think everyone is in argreement that none of them are false, well, except for you.

The point is that they continue to pay out until you die, unlike a CD. If you can manage to live to be 120 years old, you make out like a bandit.

John Cowart

PLus you hope the insurance company lasts as long as the annuity pays out. In times of financial stress not all the insurance companies survive.

Can you cite a single instance in US history where anyone has lost money on an immediate annuity because of the insurance company not surviving?

Hint: the answer is no.

John Cowart

BUT the Annuity lives on in perpetuity. There has NEVER been an instance of an In-Force Immediate Annuity that FAILED to make payments. At worst, it would be taken over by another company. Cal

John, since the typical yield curve is at least slightly rising, a 30 yr. bond will offer a coupon higher than a 1 yr. CD. I am a fan of fixed, immediate annuities, and understand the trade off to be giving up the principal in exchange for the higher annual return. Right now the numbers are near 5% for the 30yr bond (4.92) and 8% for the 60 yr old's annuity. If the 60 yr old is feeling well, I like the annuity. As the annuity rate approached the bond rate, the case for the bond getting stronger as the return of principal at 90 would be enough to return 5% till death regardless of interest (5% = 20 yrs at 0% interest). I'm happy to consider the other variables that add to the value the annuity brings, asset protection in case of lawsuit, I believe BWS mentioned. Aside from that, the numbers don't favor annuity if the rates are similar. JOE

But the future is full of surprises. Think of what happened to the savings and loan associations in the 1980s. Who would have thought those rock solid institutions could ever get into financial difficulties. I would not want to bet anything of what might or might not happen in 2020.

The same question comes up with Long Term Care policies. They dont last the decades, but for other reasons:

True, but not a correct analogy. The banks (although insured to 100k) were NOT protected by the State. Whereas Life Insurance Companies are. There has NEVER been a Life Company failure that resulted in a policy being Null & Void. The failures that have occurred, resulted in ALL of the contract being HONORED (as stated in the contracts) by other companies. Cal

I read the write-up, and the company DID NOT violate it's contract. I all probability the contract in -force stated CLEARLY that no benefits were payable to a "member of the family". If she had gone to a facility as outlined IN THE CONTRACT, benefits would have been paid. Cal

That was NOT a good contract, but it WAS a contract. ! ! ! ! ! ! !

That past record is fine, but still 20 years into the future is a long time and unexpected things can happen. Back in the 1980s many people would have thought it impossible for savings and loan associations to fold.

Hi Joe,

With Mutual Funds you get more. Even some money market funds bring in 5%.

CU John