Possible solution to Vanguard / Transamerica Annuity

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Allan Roth
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Possible solution to Vanguard / Transamerica Annuity

Post by Allan Roth »

One POSSIBLE solution to the high fees in the Transamerica annuities once sold and managed by Vanguard is annuitizing over a ten year period certain as I'm finding it yields an above market interest rate. Fixed income is more tax efficient within tax-deferred accounts and the total bond sub account after fees is yielding just a bit under 1%.

I've requested some quotes for clients and finding out the 120 month ten year period certain is yielding about a 3.25% IRR and suspect that's because of a contractual commitment made by Transamerica when the actuaries never dreamed rates would be as low as they are now. Life and ten year period certain will obviously pay less.

Just understand that this is only backed by Transamerica while the total bond is roughly 65% backed by the U.S. Government and agencies of the U.S. Government.

I don't know if this applies to all Transamerica annuities purchased through Vanguard but this is something you can look into. Also, understand there are taxable implications to annuitizing.

Do your own due-diligence but this is a POSSIBLE solution especially attractive if one has low income and waiting until age 70 to claim social security. In addition, if you own an annuity from another insurance company, it's possible their contractual obligations also offer an above market rate.
wesgreen
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by wesgreen »

Definitely worth investigating. Thank you!
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Dale_G
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by Dale_G »

Older policies - from the time Vanguard began issuing policies in the late 1990's into early 2000's, had guaranteed rates of 4% on annuitization. I annuitized two policies about 8-1/2 years ago, one for 10 years and another for 23 years.

I don't know when the guaranteed rate was reduced from 4%, but the rate can be found in the contract near the annuity tables.

Annuitization has worked well for me during this period of low fixed rates. But I am gambling that market rates rates don't climb significantly higher than 4% over the next 14 years for the longer annuitized policy.

Dale
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Dale_G
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by Dale_G »

Also of possible interest, especially to owners of older Vanguard annuity contracts:

my annuity contract issued August 1999 provided for the option of "partial annuitization". It is buried in the contract - and at the time I annuitized, the Vanguard VA people were not familiar with this provision and had to check with "some" legal department. Fortunately, the legal department was able to actually understand the contract. I don't know if this provision was included in later contracts.

The point is that if someone (with this provision in the contract) has maturing CD's, or other loose money, they can add that money to the annuity and then immediately annuitize that sum plus whatever additional amount they wish, while leaving at least some money still in the VA account i.e. not making a full surrender.

This leaves the possibility of later adding another hunk of money and immediately annuitizing that. I found no language in the contract limiting the number of partial annuitizations or limiting additions of new money after a partial annuitization.

Dale
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Stinky
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by Stinky »

Allan Roth wrote: Fri Sep 17, 2021 10:00 am
I've requested some quotes for clients and finding out the 120 month ten year period certain is yielding about a 3.25% IRR and suspect that's because of a contractual commitment made by Transamerica when the actuaries never dreamed rates would be as low as they are now.
I can absolutely confirm, from first-hand knowledge, that product development actuaries in the 1980s and 1990s never dreamed that rates would be as low as they are now.

When I entered the life insurance business in the late 1970s, we were seeing the "unbundling" of life insurance products from whole life into what became universal life, with separate charges for mortality and expense and explicit interest credits. For a short time, some universal life products credited over 10% interest rates. In such an environment, a 3% or 4% interest rate guarantee seemed to be well "out of the money".

The same mentality was at play in the annuity companies. It was not uncommon to see 3% interest rate guarantees for an entire deferred annuity product, or at least for the "settlement options" like the 10 year period certain option.

The guaranteed rates have been reduced for more recent contracts, but contractually remain in force for older policies.

I agree that any analysis of an inforce annuity or life insurance contract should consider the guarantees embedded in the contract. The older the contract, the better the chance that there are policyholder options that are well "in the money".
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
hirlaw
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by hirlaw »

Dale_G wrote: Fri Sep 17, 2021 11:36 pm Also of possible interest, especially to owners of older Vanguard annuity contracts:

my annuity contract issued August 1999 provided for the option of "partial annuitization". It is buried in the contract - and at the time I annuitized, the Vanguard VA people were not familiar with this provision and had to check with "some" legal department. Fortunately, the legal department was able to actually understand the contract. I don't know if this provision was included in later contracts.

The point is that if someone (with this provision in the contract) has maturing CD's, or other loose money, they can add that money to the annuity and then immediately annuitize that sum plus whatever additional amount they wish, while leaving at least some money still in the VA account i.e. not making a full surrender.

This leaves the possibility of later adding another hunk of money and immediately annuitizing that. I found no language in the contract limiting the number of partial annuitizations or limiting additions of new money after a partial annuitization.

Dale
I opened my Vanguard VA in 2003. No partial annuitization allowed. They must have caught and corrected that in later contracts. I do have a 3.25% guaranty. I am 65 and have not yet annuitized. I will check on Alan's idea of a period certain annuity. However, the additional income may mess up my attempts to do partial Roth conversions up to age 72.
Phil DeMuth
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by Phil DeMuth »

I wasn't aware that the fees went up with Transamerica took over. Is it advisable to do a 1035 exchange to some other insurer? If so, who?
hirlaw
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by hirlaw »

To my knowledge the fees have not gone up. At least, I don't recall a notice from Transamerica that it was raising fees.
Rex66
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by Rex66 »

It’s important to review your original contract

A while back a poster was getting less than what his contract guaranteed. TA was trying to give him a lower/newer annuitization rate. He complained to TA even outlining exactly their mistake but was told he was wrong (which he wasn’t). He wound up filing a complaint with the state insurance commissioner if I recall and it sounded like only then was TA going to fix the problem.

Make sure you confirm you get correct amount.
treypar
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by treypar »

I reviewed my VG Transamerica contract and the contract provided the same IRR that Allan calculated for 120 months. Allan thanks for pointing this out.
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Dale_G
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by Dale_G »

Phil DeMuth wrote: Sat Sep 18, 2021 11:33 am I wasn't aware that the fees went up with Transamerica took over. Is it advisable to do a 1035 exchange to some other insurer? If so, who?
Because the annuities are contracts, the original or succeeding insurance company cannot increase fees beyond those stipulated in the original contract.

Newly issued contracts are a different matter.

Dale
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informal guide
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Re: Possible solution to Vanguard / Transamerica Annuity

Post by informal guide »

The May 1, 2020 prospectus for the Vanguard Annuity has a fee table, listing "separate account expenses." The "Mortality and Expenses Risk charge" is currently at 0.17% but "will not exceed 0.20%." This charge, along with the 0.10% "Administrative expense charge" is included in the calculation of the daily account values (i.e. annuity expenses over and above fund operating expenses are now 0.27% but could be raised by Transamerica to 0.30%.). I believe all older contracts also have this 0.20% charge.

IAMAL, but this suggests Transamerica could raise the annuity expense ratio by 3 basis points at their discretion.

These expenses apply to both the accounts in the accumulation stage and to accounts that have annuitized on a variable basis. They do not apply to account that have annuitized on a fixed basis (including period certain annuitizations mentioned above by Allan). The fixed basis annuitization rates are as described in individual contracts and are net of any other expenses.
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