Help with Parents Annuities

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SonnyDMB
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Joined: Sun Nov 26, 2017 4:48 pm

Help with Parents Annuities

Post by SonnyDMB »

The parents (mid 70s) are having me meet with their finance advisor (sales rep) in a few days. I need some help on what questions to ask (and solutions) as the bulk of the portfolio is deferred variable annuities which I don’t have a solid understanding of (my portfolio is index funds).

Some of the things I’ve been able to figure out:
* 86% of portfolio is in 2 transamerica variable annuities (563K value with original premiums of 150K and 243K). In their IRA
* They have not started drawing money on either but plan to in 2022 for at least 1 of the annuities.
* Premiums were paid in 2012 and 2013 respectively. No additional money was added after initial purchase.
* Has income max rider (5% annual guarantee increase I believe) and death benefit rider (Having difficult time understanding death benefit rider terms)
* 1.3% M&E fee for policy + 1.25% for income max rider + 0.75% (I think) any year 5% automatic step up provision applies + 0.15% for death benefit rider (included in the 1.3% M&E fee it appears) + 0.8% for underlying investments exp ratio (which is moderate category roughly 70/30 split). I think this is all the fees.
* Withdrawal % is 4.8% till 80, than 5.8% after 80.
* Their current withdrawal base is such where they would get roughly $2300/month if/when they start withdrawing next year.

* 14% of portfolio is in UITs (unit investment trusts). (90K). 13K of which is subject to cap gains.
* I can’t see much info on these to know if it’s equity or bond focused nor can I see what the fees are.
* Everything (the annuities and UITs) is in traditional IRA
* Other source of income is social security (parents in 70s)
* Social security and the income from the annuities is enough to cover expenses without stress (per the parents).


I’m not sure what other information to list related to the annuity and not sure what questions to ask….some initial questions:
* I can’t tell if the death rider is for the premium paid or the current value. It says “return of premium” but the monthly account lists the value as the Current value. perhaps more important, I don’t know if it applies after payouts start or only applies during the accumulation phase?
* If it is only the premium paid and applies during payout phase, is every $$ withdrawn reduce the premium amount first or the growth above the premium amount first?
* I’m not sure what the income options are…..if my parents are focused on $2300/month when withdrawals start, does that mean their ‘annualizing’ it? And if so, does the death rider survive or at that point insurance company gets remaining value when they pass?
* I’m not sure how this withdrawal amount may change based on market fluctuations. I also assume there is no inflation protection.
* Is a 1035 exchange an option and if so, what should be considered? Less expensive annuity? SPIA? Other?
* If do 1035 exchange for another variable annuity, do they start over on surrender period???
* Other solutions to get out of the annuities and/or should they just stick with them? (Long shot for me to talk them into something else anyway).
* It’s in their IRA and past the surrender period, could they technically just move the value of their annuities within the IRA to index funds without a taxable event?
* I will find out the UIT fees and at a minimum advise to get out of those……though they may spend most of that in next 2-3 years anyway.
* What other questions should I ask their rep ?



They LOVE their rep and talking to them about moving elsewhere is likely not an option (I may try again after a market correction). Basically I need help knowing what can/should be done about the expensive annuities….so they can maximize their income and cash for their own enjoyment as well as their desire to leave remaining unused value to their heirs and not an insurance company…….though something like life w/ a 10 year period certain may be right for them to balance the fear of not outliving their money with not giving the insurance company everything should they pass earlier than later.

I greatly appreciate any help and insight. Thanks.
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Wiggums
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Re: Help with Parents Annuities

Post by Wiggums »

Have the annuity owner request an in-force illustration. An in-force illustration is the only way to gauge the potential future performance of a policy and to see if changes are needed in order to avoid problems.

An in-force illustration uses current policy values (cash value, death benefit and loan balance) and projects future values based on Current earnings (interest rate/dividend that helps grow your cash value), Mortality (the actual cost of the life insurance for you) and Expense charge (the insurer’s fees).
"I started with nothing and I still have most of it left."
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arcticpineapplecorp.
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Re: Help with Parents Annuities

Post by arcticpineapplecorp. »

It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
billfromct
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Re: Help with Parents Annuities

Post by billfromct »

I’m no expert on annuities, but if this annuity is in an IRA (you said “in their IRA”), were required minimum distributions (RMDs) taken out at age 70.5? (Since they are in mid 70s, IRA RMDs would have to be started when they turned age 70.5.)

bill
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Stinky
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Re: Help with Parents Annuities

Post by Stinky »

SonnyDMB wrote: Wed Aug 04, 2021 5:24 pm The parents (mid 70s) are having me meet with their finance advisor (sales rep) in a few days. I need some help on what questions to ask (and solutions) as the bulk of the portfolio is deferred variable annuities which I don’t have a solid understanding of (my portfolio is index funds).

Some of the things I’ve been able to figure out:
* 86% of portfolio is in 2 transamerica variable annuities (563K value with original premiums of 150K and 243K). In their IRA
* They have not started drawing money on either but plan to in 2022 for at least 1 of the annuities.
* Premiums were paid in 2012 and 2013 respectively. No additional money was added after initial purchase.
* Has income max rider (5% annual guarantee increase I believe) and death benefit rider (Having difficult time understanding death benefit rider terms)
* 1.3% M&E fee for policy + 1.25% for income max rider + 0.75% (I think) any year 5% automatic step up provision applies + 0.15% for death benefit rider (included in the 1.3% M&E fee it appears) + 0.8% for underlying investments exp ratio (which is moderate category roughly 70/30 split). I think this is all the fees.
* Withdrawal % is 4.8% till 80, than 5.8% after 80.
* Their current withdrawal base is such where they would get roughly $2300/month if/when they start withdrawing next year.

* 14% of portfolio is in UITs (unit investment trusts). (90K). 13K of which is subject to cap gains.
* I can’t see much info on these to know if it’s equity or bond focused nor can I see what the fees are.
* Everything (the annuities and UITs) is in traditional IRA
* Other source of income is social security (parents in 70s)
* Social security and the income from the annuities is enough to cover expenses without stress (per the parents).


I’m not sure what other information to list related to the annuity and not sure what questions to ask….some initial questions:
* I can’t tell if the death rider is for the premium paid or the current value. It says “return of premium” but the monthly account lists the value as the Current value. perhaps more important, I don’t know if it applies after payouts start or only applies during the accumulation phase?
* If it is only the premium paid and applies during payout phase, is every $$ withdrawn reduce the premium amount first or the growth above the premium amount first?
* I’m not sure what the income options are…..if my parents are focused on $2300/month when withdrawals start, does that mean their ‘annualizing’ it? And if so, does the death rider survive or at that point insurance company gets remaining value when they pass?
* I’m not sure how this withdrawal amount may change based on market fluctuations. I also assume there is no inflation protection.
* Is a 1035 exchange an option and if so, what should be considered? Less expensive annuity? SPIA? Other?
* If do 1035 exchange for another variable annuity, do they start over on surrender period???
* Other solutions to get out of the annuities and/or should they just stick with them? (Long shot for me to talk them into something else anyway).
* It’s in their IRA and past the surrender period, could they technically just move the value of their annuities within the IRA to index funds without a taxable event?
* I will find out the UIT fees and at a minimum advise to get out of those……though they may spend most of that in next 2-3 years anyway.
* What other questions should I ask their rep ?



They LOVE their rep and talking to them about moving elsewhere is likely not an option (I may try again after a market correction). Basically I need help knowing what can/should be done about the expensive annuities….so they can maximize their income and cash for their own enjoyment as well as their desire to leave remaining unused value to their heirs and not an insurance company…….though something like life w/ a 10 year period certain may be right for them to balance the fear of not outliving their money with not giving the insurance company everything should they pass earlier than later.

I greatly appreciate any help and insight. Thanks.
I'd be extremely wary of the upcoming meeting with the financial advisor salesman. If their annuities were issued in 2012 and 2013, that likely means that they are just now coming out of the surrender charge period. It's quite possible that the financial advisor salesman is salivating at the possibility of getting your parents to do a 1035 exchange into another annuity, with a hefty commission for himself. I'm guessing that the commission on a $563k sale could be in the $30k-$40k range.

Do they really need to go meet with the financial advisor salesman? I'm afraid that they could be walking into a trap, or at least a high-pressure push for them to purchase another annuity, that will subject them to a new surrender charge schedule.

These annuities appear to have a 4.25% all-in expense ratio. That's awesomely high. A huge part of their earnings are being kept by Transamerica in fees.

Have your parents been taking RMDs? I believe that they are not required to take RMDs from each IRA-type asset account. But they need to include the "fair value" (probably currently $563k) of the annuities in the calculation of the total IRA amount, which is multiplied by the RMD percentage for their ages.

If a SPIA purchaser was a male age 75, the joint annuitant was a female age 75, and the plan elected was life and 10 years certain, their $563k value would purchase about $3,000 of monthly income. That's per immediateannuities.com. That makes their $2,300 per month from the Transamerica policy seem pretty puny.

I don't see any particular reason to do a 1035 exchange into another annuity. They could simply surrender this annuity and roll the proceeds into a regular IRA at Vanguard/Fidelity/Schwab, etc. There would be no current taxation if they rolled into a regular IRA.

If it were my parents, I'd advise them to (a) skip the meeting with the advisor and (b) surrender the annuity and roll into an IRA. Paying 4.25% per year for the Transamerica VA is almost sinful.

Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Stinky
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Re: Help with Parents Annuities

Post by Stinky »

One final comment -

Paying 4.25% per year on $563k of account value means that their VA fees are almost $24k per year.

Every year.

This is likely (one of) the largest expenses your parents have each year.

Obscene. Painful. Borderline abusive and sinful.

(Don’t ask me what I really think about the fees).
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Kelly
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Joined: Sun Nov 18, 2012 6:39 am

Re: Help with Parents Annuities

Post by Kelly »

Stinky is correct. These things are only as good as the guaranteed payments which only require that the annuity value earn about 2% to 3% annually. And that is the rate of return realized only if someone where to live to age 95 or so. As an investment it will never work with fees that high. Heck, according to Vanguard and Morningstar, the expected return for a moderate portfolio is only 4.5%
Topic Author
SonnyDMB
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Joined: Sun Nov 26, 2017 4:48 pm

Re: Help with Parents Annuities

Post by SonnyDMB »

Thanks for the responses.

I did a rough estimate of ages but their ages are 71 and 74. the annuitant is my step-dad (71). their first RMD will be due April 2022....but I believe they can take from the UIT's if they want.

based on responses and further reading, it appears a 1035 exchange isn't necessary....they could simply surrender the annuity (as suggested)......and does appear the surrender value is the current policy value......if it was only the value originally paid for premiums, I'd be concerned.

the real issue will be talking my parents in getting out of the annuity.......they wouldn't do the 70/30 portfolio they are currently in without the 'guarantee'......though at a minimum I should be able to demonstrate SPIA payments from immediate annuities with a 10year guarantee period will be better.

I was the one that asked for a meeting with their sales rep. Parents shared their portfolio with me last year and I was speechless. kinda trying to setup questions for the sales rep that will help the parents realize it's not a good deal and that there is better options. I will definitely show them that their "5% guarantee" is only 0.75% after fees.
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Stinky
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Re: Help with Parents Annuities

Post by Stinky »

SonnyDMB wrote: Fri Aug 06, 2021 11:25 am Thanks for the responses.

I did a rough estimate of ages but their ages are 71 and 74. the annuitant is my step-dad (71). their first RMD will be due April 2022....but I believe they can take from the UIT's if they want.

based on responses and further reading, it appears a 1035 exchange isn't necessary....they could simply surrender the annuity (as suggested)......and does appear the surrender value is the current policy value......if it was only the value originally paid for premiums, I'd be concerned.

the real issue will be talking my parents in getting out of the annuity.......they wouldn't do the 70/30 portfolio they are currently in without the 'guarantee'......though at a minimum I should be able to demonstrate SPIA payments from immediate annuities with a 10year guarantee period will be better.

I was the one that asked for a meeting with their sales rep. Parents shared their portfolio with me last year and I was speechless. kinda trying to setup questions for the sales rep that will help the parents realize it's not a good deal and that there is better options. I will definitely show them that their "5% guarantee" is only 0.75% after fees.
That’s all good information. Sounds like you’ve got a real “sales job” ahead with your parents.

One thought about the meeting with the sales rep - I hope that it’s useful in advancing your cause, but I wouldn’t count on it. If the sales rep is any good, he’ll know how to make their current annuities sound like the greatest thing since sliced bread. He’ll definitely have a pat answer for any objection or negative point that you bring up. I expect that he’s good at his craft.

One thing that you could do for your parents would be to show the corrosive effect that fees have over a period of years. They could easily have a 20 year investing timeline in front of them. A display showing how much their current annuities would grow over 20 years at 6%, versus at 1.75% (with the 4.25% fee factored in). Their current $563k would grow to $1805k over 20 years at 6%, but only $796k at 1.75%. That’s just over $1 million that their annuity will cost them, including fees and lost income on the fees.

Maybe that will convince them.

Best to you.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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MahoningValley
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Re: Help with Parents Annuities

Post by MahoningValley »

This is a compelling thread. Looking forward to hear what happens at the meeting.
Kelly
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Re: Help with Parents Annuities

Post by Kelly »

Hey! Ask the rep to calculate the internal rate of return (IRR in excel) using the account value (the one they can cash out, not the fictional "protected value" or some other name) as the investment and the guaranteed withdrawal benefit (or min income benefit or annuitization payments, etc) as the cash flow. That should be entertaining!!

The IRR is what this thing is worth; nothing else. You'll see 2%, to maybe 4%, by mid 90's. The upper amount is likely closer to 3%.

Kelly
bsteiner
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Re: Help with Parents Annuities

Post by bsteiner »

If the annuities are in an IRA, can't they cash them in without any adverse tax consequences?
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