Can someone help me understand this annuity?

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Topic Author
seoulmac
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Can someone help me understand this annuity?

Post by seoulmac »

I started to subscribe this variable annuity two years ago, say age 32, 4000 USD per year (yes through friend from insurance company) before learning the bogleheads philosophy. The selling point is one keeps the policy more than 15 years, the account value is guaranteed to have accumulated to at least an amount as if the interest rate credited had been 3% p.a. Currently it is 4.5% for quite a while but of course this does not indicate future. Also this annuity is without age limit, i.e. I can still get the income if I live until 120. This would depend how I want to activate the annuity payment when I actually retire, e.g. fix-term for certain years, lifelong, adjusting inflation, etc. The more options available may sound more hidden costs though.

This is before fees which I did not pay much attention by then. I am trying to understand how bad it is or what action I take would make me in a better position, as I find it complicated for the terms. Basically before yr10 I am penalized by both high admin and surrender charge (if I surrender), after yr10 the fees will be considerably lower, I made some calculations from year11 it will be <0.7% of the whole capital accumulated, and continue to lower as capital gets further accumulated. Should I:

a) continue to contribute on annual basis until I get retired? This is where I don't know how to annualize the overall fee % to see the overall picture as I continue to contribute principals annually
b) stop contribution after yr10 and let it stay there until I retire?
c) surrender now but basically I get nothing back ... so not really an option to me taking into the feeling

Does the low-yield bond era affect the consideration here?

The fee/administrative charge:
Image

The surrender charge:
Image
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David Jay
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Re: Can someone help me understand this annuity?

Post by David Jay »

seoulmac wrote: Sat Apr 03, 2021 6:49 amThe selling point is one keeps the policy more than 15 years, the account value is guaranteed to have accumulated to at least an amount as if the interest rate credited had been 3% p.a. Currently it is 4.5% for quite a while but of course this does not indicate future.
This is one of the most “misunderstood” (to be charitable) features of many annuities. This crediting formula only applies if one annuitizes the policy (i.e. takes the monthly payout amount). At whatever annuitization rate the insurance company offers - and that annuitization rate will be much lower than what you can receive if you go out and purchase an SPIA at the same age. So the guaranteed percentage is just a game (and you are the one being gamed).

One will not be able to withdraw this amount of money.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Can someone help me understand this annuity?

Post by David Jay »

Sorry to tell you this, but “C” is the correct answer. We sometimes call this kind of loss “education tax”.

It teaches one not to invest in something they do not completely understand, even if someone they trust told them it was a good idea.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Stinky
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Re: Can someone help me understand this annuity?

Post by Stinky »

David Jay wrote: Sat Apr 03, 2021 11:17 am Sorry to tell you this, but “C” is the correct answer. We sometimes call this kind of loss “education tax”.

It teaches one not to invest in something they do not completely understand, even if someone they trust told them it was a good idea.
I fully agree with David Jay.

You’ve been sold an absolutely horrible annuity. That “administrative charge” is amongst the worst that I’ve seen. Assuming that your “target yearly premium” is $4,000, you’ve been charged 38% of that, or $1,540, for the first two policy years. And you’ll be charged another $1,540 next year. Then the fees drop off to a “mere”
$770 for the two years after that. Fees, fees, and more fees!!

I agree with you that you’ll get nothing back if you surrender the policy now. That doesn’t feel good, I’m sure. But it would be a lot worse for you to throw additional money into the policy. That’s a textbook case of “throwing good money after bad”.

I’d STRONGLY suggest that you cease making any more payments into the policy. Surrender it now. You made a mistake in buying the policy, but you can’t do anything now about your past mistake.

As I said above, this is one of the worst, most abusive, variable annuities that I’ve seen. I suggest that you never do business again with the person who sold it to you.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
seoulmac
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Re: Can someone help me understand this annuity?

Post by seoulmac »

Thank you I understand the bad feeling one is the rationale answer.

If I surrender and have this spare money, what is the equivalence of using that? Are there alternative fixed income assets that constantly give you compound 3%? Or I increase bond portion in my overall AA but bond is for defensive not for income in this low yield era? I am holding 10% AGGU. Any suggestions will be helpful, thanks.
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Stinky
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Re: Can someone help me understand this annuity?

Post by Stinky »

seoulmac wrote: Sun Apr 04, 2021 7:41 am Thank you I understand the bad feeling one is the rationale answer.

If I surrender and have this spare money, what is the equivalence of using that? Are there alternative fixed income assets that constantly give you compound 3%? Or I increase bond portion in my overall AA but bond is for defensive not for income in this low yield era? I am holding 10% AGGU. Any suggestions will be helpful, thanks.
How were you viewing your investment in your variable annuity? As part of your fixed income allocation, or your equity allocation?

I would suggest directing the future money that would have gone into the annuity to the same class of assets that you were using in the annuity. AGGU is a fine choice for this future money if it should be going into your fixed income bucket.

I’m afraid that no one can guarantee that you will earn 3% every year. But, as David Jay pointed out above, you weren’t actually earning that in the VA either.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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TomatoTomahto
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Re: Can someone help me understand this annuity?

Post by TomatoTomahto »

OP, if we were able to earn a guaranteed 3% and also make a good living for a salesman and his/her company, we’d be all over it. But, it’s the old “if it’s too good to be true...”

Your tuition was not too bad, everything considered.
I get the FI part but not the RE part of FIRE.
glorat
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Re: Can someone help me understand this annuity?

Post by glorat »

I got my wife to exit a policy like this also after about 2 years. Thankfully the money amounts involved were not significant.

I ran the numbers across many scenarios and in literally every single case, simply exiting now and taking the hit was the right option because the terms were so bad.

I haven't looked at the terms here but in all likelihood c) is the right answer and I trust the posters above.

If it makes you feel better, which is not to be underestimated, you should know that part of the term structure is designed to make you feel guilty and exiting, making it feel like you've invested some and thus need to keep investing. By exiting, you are sticking one to their tactics.
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seoulmac
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Re: Can someone help me understand this annuity?

Post by seoulmac »

Stinky wrote: Sun Apr 04, 2021 9:27 am How were you viewing your investment in your variable annuity? As part of your fixed income allocation, or your equity allocation?

I would suggest directing the future money that would have gone into the annuity to the same class of assets that you were using in the annuity. AGGU is a fine choice for this future money if it should be going into your fixed income bucket.

I’m afraid that no one can guarantee that you will earn 3% every year. But, as David Jay pointed out above, you weren’t actually earning that in the VA either.
I was seeing that as the fixed income category.
Topic Author
seoulmac
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Re: Can someone help me understand this annuity?

Post by seoulmac »

glorat wrote: Mon Apr 05, 2021 12:44 am I got my wife to exit a policy like this also after about 2 years. Thankfully the money amounts involved were not significant.

I ran the numbers across many scenarios and in literally every single case, simply exiting now and taking the hit was the right option because the terms were so bad.

I haven't looked at the terms here but in all likelihood c) is the right answer and I trust the posters above.
Taking this as a lesson and quantify how bad it is, I have been trying to run scenarios:
https://docs.google.com/spreadsheets/d/ ... edit#gid=0

By comparing the 3% yield with fees, it seems the actual yield would be 2.25% for contribution to retirement, which means I am paying 0.75% to secure a 2.25% yield. If my calculation is correct. In that case how bad it is in the fixed income category?

Well but I note the insurance has right to change the administrative charge ... so it seems it is a lose game anyway
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Stinky
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Re: Can someone help me understand this annuity?

Post by Stinky »

seoulmac wrote: Mon Apr 05, 2021 10:34 am By comparing the 3% yield with fees, it seems the actual yield would be 2.25% for contribution to retirement, which means I am paying 0.75% to secure a 2.25% yield. If my calculation is correct. In that case how bad it is in the fixed income category?

Well but I note the insurance has right to change the administrative charge ... so it seems it is a lose game anyway
I’ll put it bluntly.

This policy is awful. There is no way that I would keep an annuity that has already charged me $1000s of fees, and will charge me $1000s of fees in the future, just to be invested in the fixed option.

I would drop it now, and move on. Don’t throw good money after bad.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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David Jay
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Re: Can someone help me understand this annuity?

Post by David Jay »

seoulmac wrote: Mon Apr 05, 2021 10:34 amBy comparing the 3% yield with fees, it seems the actual yield would be 2.25% for contribution to retirement, which means I am paying 0.75% to secure a 2.25% yield. If my calculation is correct...
Your calculation is not correct because you did not fully grasp my first post above. There is no 3% yield. This is how you have been fooled.

Let me give you an story as an illustration:

1. You will give me $4000 per year for 15 years.

2. I will hold the money for 15 years and credit your account with 10% interest for every year.

3. After 15 years, you can spend the money, but you can only spend the money in my store. I can set the prices at any level I choose and I will not tell you the prices until after the 15 years is over.

Will you take my offer? I will guarantee a 10% interest rate which is very good!

This is what they are offering. You will receive 3% but you must spend all the money you paid and the 3% annual credit in the “MY Lifetime Annuity Store” to receive the 3% guarantee. And they can change the price (annuitization rate) as they choose.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
seoulmac
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Re: Can someone help me understand this annuity?

Post by seoulmac »

David Jay wrote: Mon Apr 05, 2021 3:17 pm Let me give you an story as an illustration:

1. You will give me $4000 per year for 15 years.

2. I will hold the money for 15 years and credit your account with 10% interest for every year.

3. After 15 years, you can spend the money, but you can only spend the money in my store. I can set the prices at any level I choose and I will not tell you the prices until after the 15 years is over.

Will you take my offer? I will guarantee a 10% interest rate which is very good!

This is what they are offering. You will receive 3% but you must spend all the money you paid and the 3% annual credit in the “MY Lifetime Annuity Store” to receive the 3% guarantee. And they can change the price (annuitization rate) as they choose.
Oh I think I understand better now. Is it like even my principal paid is 1000, and I am guaranteed to get 2000 face value when retired, they would decide how this 2000 will be cashed out monthly based on the annuity rate they set by then, which is always in their favor.

So the key here is not the interest rate or yield, but the actual annuity rate decided when receiving the first annuity income, which one will never know until then.

I read this from the material:
Image

The lesson is expensive ... thank you
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Stinky
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Re: Can someone help me understand this annuity?

Post by Stinky »

seoulmac wrote: Tue Apr 06, 2021 8:29 am
The lesson is expensive ... thank you
Yes, this mistake seems to be expensive right now. Very expensive.

But, I’ll give you some advice from an older guy. I’ll tell you that if this is the largest financial mistake you ever make, you’ll have led a charmed life. I’ve made mistakes that are multiples of your situation, and many other folks have done the same.

This hurts right now. But pick yourself up and move forward.

And consider continuing to read this Forum, and to post questions occasionally. There are lots of folks here who are more than willing to offer their advice.

Best of luck to you.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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neurosphere
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Re: Can someone help me understand this annuity?

Post by neurosphere »

seoulmac wrote: Tue Apr 06, 2021 8:29 am Oh I think I understand better now. Is it like even my principal paid is 1000, and I am guaranteed to get 2000 face value when retired, they would decide how this 2000 will be cashed out monthly based on the annuity rate they set by then, which is always in their favor.
Yep. It's a "50% off" coupon for a product that's been set to 4x the retail price.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
Topic Author
seoulmac
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Re: Can someone help me understand this annuity?

Post by seoulmac »

Stinky wrote: Tue Apr 06, 2021 8:37 am
Yes, this mistake seems to be expensive right now. Very expensive.

But, I’ll give you some advice from an older guy. I’ll tell you that if this is the largest financial mistake you ever make, you’ll have led a charmed life. I’ve made mistakes that are multiples of your situation, and many other folks have done the same.

This hurts right now. But pick yourself up and move forward.

And consider continuing to read this Forum, and to post questions occasionally. There are lots of folks here who are more than willing to offer their advice.

Best of luck to you.
Yes actually this forum helped me a lot. I switched from US ETFs to Ireland-based ETFs; I have taken paid up insurance on a universal life insurance; I have started to read books recommended. What I find fascinating here is people are giving generous advice and many people like me without a finance or equivalent background joins this forum and very often manages to find explanation in simpler language.
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