Date posted: December 17, 2014
Despite the negative attention that the variable annuity industry has gotten lately, many insurers are still introducing new products. American General just released their newest variable annuity, the Polaris Select Investor. Variable annuities still dominate overall annuity sales and offer benefits to consumers that are unmatched elsewhere. In Insurance News Net’s article, “American General Launches New Variable Annuity,” Cyril Tuohy talks about what the new annuity product has to offer consumers. American General says that the Polaris Select Investor is meant to meet the needs of consumers looking to grow their money over the long term. They say that this variable annuity has a “deep and broad investment platform.”
American General’s parent company, AIG, says that companies are working hard to create products that lead the industry in meeting the changing needs of consumers. More people than ever are responsible for creating their own income stream in retirement and these insurers believe that the Polaris Select Investor is a good option for many of these people. This particular annuity helps investors disperse their money throughout a broader asset class to accumulate capital, while still benefiting from tax deferral. There are 33 different money managers and 90 portfolios that cover 22 asset classes and allocation models. Investors can choose to invest in a customized allocation, one of the asset allocation models, or a combination of the two strategies. There is also the option to add a death benefit for your heirs with this new variable annuity.
Variable annuity sales were down 3% from the first three quarters of last year to the first three quarters of this year. Total annuity sales increased 6% in the same time frame, led mostly by fixed indexed annuity sales. The variable annuity sales decline stems from the fact that a number of insurance companies stopped selling variable annuity products altogether to decrease their own risk. Those companies who sell variable annuities are typically seeing sales increases and are continuing to create new products and innovate existing variable annuities. American General’s announcement of their new Polaris Select VA came less than a week before another big announcement. MetLife and Fidelity Investments collaborated on the new Accumulation annuity. This variable annuity product helps investors capitalize on market gains while limiting their account’s potential for loss. American General’s introduction of the Polaris Select Investor variable annuity is important for the industry as well as consumers.
Date posted: December 16, 2014
NAFA has been working hard to spread annuity information. In the paper that they released this fall before to the 2014 IMO Summit, NAFA gave answers to common annuity questions. LifeHealthPro has been summarizing these answers in a series of articles. In “4 more answers every investor needs to know about annuities,” Daniel Williams follows up with some additional facts about annuity products. This information is helpful to investors and advisors alike and clears up some of the common annuity misconceptions as well.
Rumor has it that the commissions paid on annuity products are high. That is certainly not always the case, especially when it comes to fixed annuities. There is also some miscommunication as to where the commission money comes from. Commissions are paid by the insurance company who is issuing the annuity product. The commissions are not taken out of the money that you pay for the annuity. Fixed annuity commissions are typically paid one time and are often less than ongoing management fees that are paid over time. When you pay fees to an investment firm, they are taken out of the assets that they are managing for you. Advisors selling securities can be paid fixed fees, hourly fees, fees based on a percentage of the value of your assets, commission on the securities they sell or a combination of these. Make sure that you know all about the fees before purchasing your annuity product. Annuity fees and commissions do not have to be high.
Many people have heard that there have been a lot of complaints to the SEC and FINRA about annuities. Back in 2004, there was an SEC report detailing a number of complaints about variable annuities. Fixed annuities were not included in this report and variable annuity complaints have gone way down since then. Annuities are not mentioned in FINRA’s 2014 Regulatory and Examination Priorities. Many people love to hate fixed indexed annuities, but according to FINRA very few complaints are waged about these popular investments. Out of the $6.5 billion of fixed indexed annuities sold, there have been complaints on less than a half of a percent of those. Insurers also cannot “reserve the right” to make changes to your annuity contract. They have to disclose any potential changes or non-guaranteed features in your contract so make sure that you or your financial expert reads the prospectus carefully.
There is some concern from people that they may have to pay extra for tax deferral and that this will negatively affect their heirs when they die. There is no cost for tax deferral with your annuity products. Fixed annuities are granted tax deferral by the government, which is imbedded in the IRS tax code. This can really help to increase your earnings from annuities. Each year that you are not paying taxes with your tax deferred money, it stays in the annuity and earns interest. Keep in mind that if your annuity is inside of an IRA or other qualified plan, you are not getting additional tax deferral benefits, buy you aren’t losing any either. When it comes to annuity death benefits, your heirs will be taxed on the income they receive but the annuity does not have to go through probate to transfer.
Inflation is also addressed by NAFA in their recent paper. We don’t know what will happen with inflation rates in the future, but it is important to address them in some part of your financial plan. Inflation-adjusted annuities are available for those who are looking for a solution to inflation risk in the future. If you are deferring your annuity, you can opt for an inflation-adjusted payout when you start receiving your income. This isn’t always the best way to account to inflation in your retirement planning, but your advisor can help you see the benefits and drawbacks of inflation-adjusted annuities. Whether you have questions about commissions, inflation, taxes or annuity complaints, a reputable annuity advisor can help you understand the ins and outs of choosing an annuity product.
Date posted: December 12, 2014
In The Wall Street Journal article “How to Make Your Savings Outlive You,” Jonathan Clements talks about a recently written paper by two financial experts. Laurence Siegel from the CFA Institute Research Foundation and M. Barton Waring, retired from Barclays Global Investors, warn consumers not to expect fixed income from risky investments. Their advice stems from many experts still recommending the 4% withdrawal method. This retirement financing method says that you should be able to withdraw 4% from your investments yearly and your money should last as long as you live. At the end of each year, you adjust your withdrawals for inflation. The key word here is should. There are a few problems that can arise using this method for financing your retirement. You don’t know how long you will live, what the inflation rate will be, or how much your investments will gain or lose. Betting on the 4% withdrawal method in retirement is pretty risky and could leave you without any retirement savings left while you are still alive.
One option for creating retirement income that Mr. Siegel and Mr. Waring recommend uses a mix of savings, an immediate annuity and Social Security income. They say that you can delay Social Security until age 70, which will make your payments higher. During the time from retirement until you start receiving Social Security income, you can live off of your savings. For any additional income needs with your Social Security payments, you can purchase a fixed immediate annuity with some of your remaining retirement savings. A different option would be to ladder inflation-indexed Treasury bonds to create predictable income. The longest maturity is 30 years out though, so this strategy does not guarantee lifetime income.
For those who really want to keep their money in stocks and bonds, the paper authors recommend recalculating the percentage that you can safely withdraw from your investments each year. They call it an “annual recalculated virtual annuity” that takes into account the inflation rate changes, your expenses and how your investments have changed over the year. The main drawback of this strategy is that it is complex and most consumers would not be able to do it without expert help. Another drawback is that you typically spend less in your early retirement years than you could have because you are preparing for later retirement.
Using that strategy still does not guarantee that your money will last throughout your lifetime. This is why a combination plan using annuities and investments is often a popular choice. You guarantee a stream of income that you won’t outlive, but you can still keep some of your savings in stocks and bonds in the hopes to increase the value. The authors say that you could use 75% of your savings for their so-called virtual annuity and then purchase a deferred income annuity with all or some of the other 25% of your savings. A deferred income annuity is longevity insurance to protect you from outliving your money. Payments typically start at some date far into the future and pay you for the rest of your life. If you still have money left in your investments when you start receiving payments from your annuity, that is extra to spend or pass onto your heirs.
Retirement planning is complex and typically requires the help of an expert. Research all of the possible outcomes before committing to a plan that doesn’t include the guaranteed income from an annuity. Whether you use an immediate annuity with Social Security or a deferred income annuity with investment drawdown, a combination plan usually offers you the best chance to avoid outliving your retirement savings.
Date posted: December 10, 2014
Allianz Life is the latest insurer to join Wells Fargo’s new indexed annuity platform. The purpose of this platform is to highlight simpler indexed annuities that have lower commissions. Darla Mercado of Investment News wrote about this new addition to the platform in the article “Allianz joins Wells Fargo’s new indexed annuity platform.” The other insurers already involved in Wells Fargo’s platform include AIG, Pacific Life, Symetra, Great American and Nationwide. A few weeks ago, Allianz Life added their Essential Income 7 indexed annuity to Wells Fargo’s platform. In addition to the annuity, they also brought their Essential Income Benefit feature as well.
Wells Fargo has been pushing for lower commissions on indexed annuity products throughout the life insurance industry. They created this platform to help carry out that goal. There are strict specifications for indexed annuities to be included in the platform. Commissions have to be 4% or lower and minimum cap rates are set at 3%. Surrender periods can be no longer than 8 years. There are also some limits on how the indexed annuities are designed. Each product can only use two indexes and two index crediting strategies. The crediting strategies include monthly averaging and point-to-point.
Allianz made some changes to their Essential Income 7 indexed annuity so that it will fit Wells Fargo’s standards. The Core Income 7 indexed annuity that was released last year through broker-dealers and wirehouses is the base for the Essential Income 7, but it is a little different. Allianz designed the Core Income 7 to be simple and have fewer moving parts than traditional indexed annuities. One difference they had to make when creating the Essential Income 7 was to eliminate the spread. Since spreads are not permitted in Wells Fargo’s platform, Allianz uses a cap instead. The Essential Income 7 uses fee levers during the surrender period, which is not the case with the Core Income 7 product from Allianz. Fees can be adjusted anywhere from the initial fee structure up to 2.5% if the markets make it difficult for the insurer to meet the 3% cap. The current fee is .85%.
It has been less than 2 months since Wells Fargo introduced their new platform aimed at providing simpler, lower cost indexed annuity products. With a lot of big names on board already, we expect many more to join the platform in the months to come. Allianz Life’s Essential Income 7 with an Essential Income Benefit feature is the latest indexed annuity to join Wells Fargo’s platform. If you have any questions about indexed annuity products, an expert at Annuity FYI would be happy to help.
Date posted: December 9, 2014
The Brookings Institution’s article “How to Not Outlive Your Retirement Savings” discusses the importance of the U.S. Treasury ruling encouraging the use of annuities in retirement plans. Author Robert C. Pozen points out that there are many economists who actually suggest putting all of your retirement savings into a lifetime annuity to create an income stream that you cannot outlive. Understandably, most people are wary about putting all of their savings into one place. They want to keep their options open and have money available in the case of a medical or other emergency. It’s also important to some people to leave death benefits to their heirs upon retirement. Some annuity products offer riders that will help meet these goals, but a basic life annuity simply pays you income until your death and that is the end of it.
That is why your best option might be to put part of your retirement savings into a life annuity. Purchasing a deferred income annuity with some of your 401k or other retirement plan savings leaves money available for emergencies or other unexpected expenses. You can even choose to delay receiving income from your annuity until you are 70 or 80, depending on the rest of your retirement plan. The Treasury Department eased regulations and made it more desirable for consumers to purchase annuities from their 401k or IRA plans earlier this year. It is now relatively inexpensive to purchase a deferred income annuity, also known as a longevity annuity. Longevity annuities defer payments until an older age, making them much lower cost than annuities that start paying income at retirement.
Longevity annuities make sense for people who think that their retirement savings will last them a couple decades, but are concerned about what will happen if they live to age 90 or 100. The Treasury Department used to discourage the purchase of longevity annuities from 401k or IRA plans by requiring an annual distribution starting at age 70 1/2. They now allow consumers to use 25% of their retirement account or up to $125,000 to buy a longevity annuity without complying with annuity distribution rules. There is also an optional feature that allows your longevity annuity funds to go back into your retirement account if you die before receiving payments. This feature costs more, but is of value to those worried about dying before receiving any of their longevity annuity income.
Annuities can help relieve people’s anxiety about running out of money in retirement. By the Treasury Department’s encouragement of the use of annuities within 401k and IRA plans, more Americans should have a good start to their retirement planning. The limits placed by the rules demonstrate that putting some of your money into a longevity annuity, rather than all of it, is typically a good strategy. By spreading your wealth over multiple investments, you set yourself up for a successful financial future. Annuities are one part of the puzzle; one which guarantees a lifetime income stream.