Date posted: February 28, 2011
Our series of Real World Scenarios continues:
The guy on the radio says to buy the Vanguard annuity, and that it is the best because the fees are so low. What should I do?
I don’t know that he said it was the best, but I’ll take your word for it. I’ve heard several people on the radio and read several newsletters making similar claims, and personally it bothers me when I hear it. Vanguard is a very good company in my opinion, and second-to-none when it comes to indexed funds (i.e. S&P’s 500 Index, Mid Cap Index, etc). I say second-to-none because all indexed funds are essentially the same, and Vanguard’s are the least expensive.
But when it comes to annuities as with most things in life, I believe you usually get what you pay for. Many people get very caught up in fees and fail to focus on the bottom line. The cheapest is rarely the best. If someone’s rate is low and they are good at what they do, it won’t be long before their rate goes up. That’s simple supply and demand. The opposite is true also. If someone’s rate is higher and they aren’t doing a good job, they will lose business and their price will have to fall in order to attract more business. My father always said, “There’s no such thing as cheap quality.” I’ll add one more t o that: “Price is only an issue in the absence of value.” If you needed brain surgery, would you go to the cheapest doctor you could find? If you hit someone in your car and they were suing you for everything you own, would you shop for an attorney by using their hourly rates as your main criteria?
When it comes to your retirement nest egg, very few things are more important and demand more attention and careful consideration. Search for performance, fund selection, management tenure, fund features, and benefits, but don’t get overly hung-up on fees. If one variable annuity is charging 2.25% in annual fees (the industry average) and has a 5-year track record of 30% per year (net of fees), all with the same management team, and another variable annuity is charging 0.50%, but they’re averaging 20% per year net of fees, which would you rather own? Seems like a simple answer, but you may be surprised by how many people would say the latter.
Date posted: February 27, 2011
Allianz Life Insurance Company of North America reported strong financial statistics for 2010, according to their press release. Their operating profit was $472 million, based partly on strong sales of fixed indexed annuities. These fixed annuities that are tied to a market index have become increasingly popular because they protect investors from market risk and guarantee future income. Allianz Life’s $10.8 billion of premium was an increase from 2009 of 20%. They were able to keep expenses down while building capital strength and showing increases in sales and operating profit.
Fixed indexed annuities accounted for $7.1 billion of their premiums last year, a 19% increase from the previous year. Variable annuities also saw an increase of 27% from 2009 and accounted for $3.2 billion in premiums. Allianz LIfe’s total assets went up 14%, to $87.4 billion. They believe that Americans view their deferred and immediate annuities as financially secure investments, and statistics show that to be the case. A.M. Best affirmed Allianz Life’s financial strength rating of A (Excellent) and gives the company a stable outlook going forward. They were the industry leader in fixed indexed annuity sales, received awards for the “best place to work” and “healthiest employer”, and met many other charitable and financial goals last year.
Date posted: February 25, 2011
Equity linked CDs are like a combination of traditional CDs, or certificates of deposit, and stocks. According to Money-Rates Columnist Richard Barrington, equity linked CDs are somewhat of a hybrid between the two products. In a volatile stock market investors can either lose a ton of money or manage to buy low and grow their wealth significantly. Investors looking for a bit of the best of both worlds may be interested in equity linked CDs. They offer investors the same stability of traditional CDs because they are FDIC insured and guarantee your principal as long as you hold them to their maturity date. Since equity linked CDs are also tied to a specific stock market index, investors receive part of that index’s return over the period they held the CD. While it seems like you are getting the best of both worlds, there are terms with each equity linked CD of which to be aware.
The author states that there are five factors you need to look at when you compare equity linked CDs. The investments can be tied to many different equities, so you should look for one tied to the specific index with the type of return you are seeking, for example the S&P 500. You want to get a participation rate as close to 100% as possible because that rate dictates what percentage of the actual market return you will receive. Some equity linked CDs have a cap on the amount of money they will pay out to you as a return, so make sure you only purchase one with a cap in which you are comfortable. Check into how your gain will be calculated because some are averaged and can lessen the amount of your return. Make sure that FDIC insurance will cover the entire amount of your investment when you have a significant amount of money to spend. Fixed indexed annuities are a similar type of investment, but there are some tax benefits to the annuities. Both products are definitely worth investors checking out.
Date posted: February 23, 2011
The Retirement Income Max rider is now available for purchase with Transamerica’s variable annuities. According to Insurance News Net’s “Transamerica Broadens Suite of Retirement Income Solutions with Retirement Income Max,” the rider is meant to help investors make the most of their retirement. This living benefit rider will cost more for annuity investors, but should help maximize their retirement income. Transamerica Capital’s Chief Sales Officer says that the rider looks to meet the demand from investors to maximize their reliable stream of lifetime income and also protect it from downturns in the market.
Depending on your age at the time withdrawals begin, your withdrawal percentage will be 4.5%, 5.5%, or 6.5%. This is for the single life option. You also have growth on growth potential with the Retirement Income Max. Transamerica’s popular Monthiversary and their 5% growth rate features give investors the potential for significant growth when you compare annuities. When the markets are up, your highest Monthiversary level is locked in and your withdrawal base is automatically increased to this level. If the market happens to be down, an annual compounding growth rate of 5% is given on the withdrawal base for up to 10 years. This is only in years when a withdrawal is not taken. If this new variable annuity rider appeals to you, speak with an annuity expert to find out more details.
Date posted: February 21, 2011
Moody’s Investors Service likes that Western & Southern Financial Group Inc.’s Varoom variable annuity offers investment options based on exchange-traded funds. According to Investment News’ Darla Mercado, Moody’s sees a hedging benefit for Western & Southern by using this basis and views it as a positive aspect towards the company’s credit rating. In the article “All-ETF VA gives a hedge edge, Moody’s says,” Mercado reports that the ETF basis allows companies to better manage their market risk for these variable annuities. Varoom is a variable annuity product solely used for rollovers from other annuities like 401k annuities. Investors are offered a multitude of ETFs from Vanguard and iShares along with international and alternative funds.
Guaranteed living benefits and a wide selection of managed funds from which to choose are the main selling points of variable annuities. Insurance companies selling these products and features have to hedge the risk they are taking on if equity markets become volatile. This usually leads to increased cost for the benefits investors seek in the best annuities. By offering ETF investment options that are index based like the hedges, Western & Southern’s Varoom is much less complicated for the company to hedge. Their are still hedging risks associated with an ETF-based variable annuity though. In volatile markets, the difference between the market price of the ETF and the net asset value, which more closely tracks the index, can be much more pronounced. It is not likely that many carriers will follow this ETF base, but it can give Western & Southern a “hedge edge”.