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Author: GollumLives Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Annuities in an IRA Date: 9/21/2003 5:35 PM
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Annuities - are they good for the investor or the advisor? I have a roll-over IRA from an pension plan and my advisor with UBS want me to invest in American Legacy. I hear annuities are a great alternative to CDs - tax deferral, competitive interest rates, safety rated A+, probate avoidance and other advantages. It would only be a part of my investments, from a third to a quarter. Does it make sense inside of an IRA or is it better for UBS than it is for me?
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37241 of 76398
Subject: Re: Annuities in an IRA Date: 9/21/2003 6:00 PM
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GollumLives asks,

Annuities - are they good for the investor or the advisor? I have a roll-over IRA from an pension plan and my advisor with UBS want me to invest in American Legacy. I hear annuities are a great alternative to CDs - tax deferral, competitive interest rates, safety rated A+, probate avoidance and other advantages. It would only be a part of my investments, from a third to a quarter. Does it make sense inside of an IRA or is it better for UBS than it is for me?

It's definitiely better for UBS than you. Putting an annuity inside an IRA just adds another layer of unnecessary fees on top of the excessive fees you're already paying to your full-service broker.

Show me a financial advisor who wants to put an annuity inside an IRA and I'll show you either a quack or a thief. Run away from this guy as fast as you can.

intercst

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37242 of 76398
Subject: Re: Annuities in an IRA Date: 9/21/2003 6:01 PM
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I'm no expert in annuities but in almost everything I have read they are a great deal --- for the broker selling them.
Things to consider:
Your IRA is already tax deferred. There is no additional advantage of having an annuity inside an IRA.
Annuities typically have high fees, expenses, loads, and surrender charges.
Annuities are sometime appropriate for high net worth people that have already exausted all other tax deferred options.
Be very careful and do your homework before you proceed with a suggestion from your advisor.

Bob

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37243 of 76398
Subject: Re: Annuities in an IRA Date: 9/21/2003 6:04 PM
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P.S. Have you read the Motley Fool article about annuities at http://www.fool.com/retirement/annuities/annuities.htm?source=LN

Bob

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37244 of 76398
Subject: Re: Annuities in an IRA Date: 9/21/2003 9:46 PM
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Annuities - are they good for the investor or the advisor? I have a roll-over IRA from an pension plan and my advisor with UBS want me to invest in American Legacy. I hear annuities are a great alternative to CDs - tax deferral, competitive interest rates, safety rated A+, probate avoidance and other advantages. It would only be a part of my investments, from a third to a quarter. Does it make sense inside of an IRA or is it better for UBS than it is for me?

Very rarely does an annuity make sense. IMO inside or outside of an IRA. Usually the most common area of benefit has already been mentioned and doesn't apply for the IRA: tax deferral. Other areas of possible benefits would be creditor-proofing (which an IRA already has) and in the types of insurance protections offered: living benefits and death benefits and step-up benefits for helping with the estate tax burden. In order to get most of these benefits, the annual charges go up correspondingly. The charges will be expressed as percentages (or basis points) of the total principal balance. The added benefits also usually have an extended period that you must own the contract before they kick in (often 7 or 10 years).

The big problem I have with annuities is the performance of the funds within them. Because of the drag of the M & E (Mortality and Expense) charges, and then the added charges and then the added charges for the optional coverages, the upside potential is severely curtailed and the downside is greatly magnified.

My approach to achieving similar goals to an annuity is twofold:

1). I invest the IRA according to whatever prudent standards I have established for myself.

2). If I feel like I want insurance, I go buy that separately.

Sad thing today is that far too many "financial advisors" are really nothing more than insurance salesmen. It seems as though most wouldn't know how to engage in determining for themselves the real value (or lack thereof) of an investment if their lives depended on it.

My vote on this issue? The broker makes 7% or 8%, while you get the shaft.

PosFCF

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37245 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 9:58 AM
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"Run away from this guy as fast as you can.

intercst"


Are you any relation to Carl Stuart? He does a radio show called "Money Talk" on Saturdays from 2:00 to 4:00 PM on 590 KLBJ in Austin. One of his favorite expressions is "...run as fast as you can in the other direction!" when a caller asks him about some sort of shady deal.

-drip

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37246 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 10:23 AM
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In this case; an annuity inside of an IRA, I think the operative word is "sprint"!

TheBadger


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Author: jesserivera67 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37248 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 11:28 AM
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GREAT ALTERNATIVES?!? Definitely good for advisor. My personal opinion having parents who have been completely burned by their advisor is to ABSOLUTELY IN NO WAY SHAPE OR FORM GO FOR AN ANNUITY AND ESPECIALLY DO NOT ROLLOVER YOUR IRA INTO ONE!!!

There is no excuse for this and it should be considered a criminal act. I have learned a tremendous amount from my fellow fools on this issue. Not sure of your situation but if you're trying to prepare for your retirement:

1) Are you maxing out your 401k?
2) Are you maxing out your IRA/ROTH IRA?
3) If you're married are you maxing out your wife's IRA?

If your single this means potentially up to $16,000 saved per year and $19,000 per year if you're married in 2004.

Some say after the above you might then want to check into an annuity...I disagree. With the tax law changes in 2003 and if you are a buy and hold kind of guy (which I highly recommend) you have 15% tax on long term capital gains as well as dividend pay outs. Invest is some index funds at Vanguard, diversify, and let it grow. Index funds are very tax efficient due to their low turnover.

I can't emphasize enough to stay away from an annuity. The fees will range anywhere from 2% on up. Why pay that when you can sign up for an IRA at Vanguard and pay an average of say .35%? That's a 600% savings on fees alone!

The advisor will say things like, "Well an annuity will guarantee your return and give out the maximum benefit should you die." Ah, baloney...their "guaranteed" return comes at a hefty price and you can do just as well on you own.

Once you sign up you'll also be stuck for at least 7 years and if you decide to change later you'll get nailed with surrender charges that could be as high as 10%!!!

Best of luck...




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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37249 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 11:39 AM
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Let's forget for a moment that we originally started this thread discussing an annuity inside of an IRA (which is unforgivable on the part of the financial advisor); and let's look toward a more fundamental issue; should one ever by a deferred variable annuity?

Several studies where done (of course, not a one can I put my hands on) that compared a VA with some alternatives:

1. Purchase of the same amount of term life insurance and investing the balance in a regular taxable account investing in indicies: either an index mutual fund or the tradeable index itself; e.g. DIAs, SPRs, QQQs, etc.

2. Same as (1) above ecept the extra investment went into the same mutual funds as offerred by the insurance company; albeit, typically a different class than offerred inside the annuity.

IN EVERY CASE, (1) and/or (2) beat the VA by varying but very wide margins. The only possible explanation is that VAs are loaded up with outrageous fees that hurt the consumer.

I come to the conclusion that, but for the rare circumstance that I can not envision, NO ONE should ever purchase a VA.

TheBadger

(Conversely, in certain markets, and at certain ages, I have a reverse opinion on immediate annuities).


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37263 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 8:28 PM
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TheBadger, you wrote:

<< Let's forget for a moment that we originally started this thread discussing an annuity inside of an IRA (which is unforgivable on the part of the financial advisor); and let's look toward a more fundamental issue; should one ever by a deferred variable annuity? >>

Congratulation, you're the first in this thread to correctly identify the type of annuity everyone seems to be talking about. Apparently everyone else doesn't know the difference between a Variable Annuity and a Fixed Annuity that doesn't have the “high costs” they keep referring to.

<< Several studies where done (of course, not a one can I put my hands on) that compared a VA with some alternatives:

1. Purchase of the same amount of term life insurance and investing the balance in a regular taxable account investing in indicies: either an index mutual fund or the tradeable index itself; e.g. DIAs, SPRs, QQQs, etc.


This comparison is not one of Variable Annuity. It's one of some form of Variable Life type of policy.

<< 2. Same as (1) above ecept the extra investment went into the same mutual funds as offerred by the insurance company; albeit, typically a different class than offerred inside the annuity. >>

That would be an apples to oranges comparison, wouldn't it?

<< IN EVERY CASE, (1) and/or (2) beat the VA by varying but very wide margins. The only possible explanation is that VAs are loaded up with outrageous fees that hurt the consumer. >>

On paper and spreadsheet this is true. In the real world though, some studies have shown that Variable Annuities tend to perform marginally better only because people can't get out of them so easily and so, stay in long. And then there the small advantage of the tax issues as dividends within are not taxed nor are any gains due to asset reallocation.

<< I come to the conclusion that, but for the rare circumstance that I can not envision, NO ONE should ever purchase a VA. >>

When looking at the whole, I might agree to a certain extent. ;-)

<< TheBadger

(Conversely, in certain markets, and at certain ages, I have a reverse opinion on immediate annuities).
>>

Yup, I agree (I assume you're again referring to “immediate variable annuities?).


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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37264 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 9:07 PM
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TTRoberts

Badger
<< Let's forget for a moment that we originally started this thread discussing an annuity inside of an IRA (which is unforgivable on the part of the financial advisor); and let's look toward a more fundamental issue; should one ever by a deferred variable annuity? >>

TTRoberts
Congratulation, you're the first in this thread to correctly identify the type of annuity everyone seems to be talking about. Apparently everyone else doesn't know the difference between a Variable Annuity and a Fixed Annuity that doesn't have the “high costs” they keep referring to.


Since you say everyone, you include me since I was one of the respondents. You are quite incorrect therefore either in your statement or in what you view as "apparent" to you. I, for one, am quite well schooled and versed in the subject of annuities.

The usual default annuity spoken of is the variable annuity with a Fixed annuity usually being qualified by its name (i.e I was looking at such and such a rate on a 5 year Fixed annuity the other day and....)

The original poster to the thread stated:... my advisor with UBS want me to invest in American Legacy...., If you would go to their web site (http://www.americanlegacy.com/), they say "Welcome to American Legacy Variable Annuities".

So perhaps some of us were aware of data (i.e. the discussion being about varaible annuities) that you perhaps overlooked?

Badger
<< Several studies where done (of course, not a one can I put my hands on) that compared a VA with some alternatives:

1. Purchase of the same amount of term life insurance and investing the balance in a regular taxable account investing in indicies: either an index mutual fund or the tradeable index itself; e.g. DIAs, SPRs, QQQs, etc.

TTRoberts
This comparison is not one of Variable Annuity. It's one of some form of Variable Life type of policy.


I'm not sure how you arrive at this conclusion. Are you implying that because the alternative scenario doesn't invest in all mutual funds it is not comparable, and therefore the only possiblity is that the study must be referring to a VUL?

Badger
<< 2. Same as (1) above ecept the extra investment went into the same mutual funds as offerred by the insurance company; albeit, typically a different class than offerred inside the annuity. >>

TTRoberts
That would be an apples to oranges comparison, wouldn't it?


One could say that a fund (Templeton, Janus, etc.)offered inside of an annuity and the same one offered outside might be slightly different, because of the possibly different fee structures to the insurance company and to the investor. Is this why you feel the comparison doesn't hold?

PosFCF






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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37268 of 76398
Subject: Re: Annuities in an IRA Date: 9/22/2003 11:23 PM
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PosFCF, you responded:

<< TTRoberts
Congratulation, you're the first in this thread to correctly identify the type of annuity everyone seems to be talking about. Apparently everyone else doesn't know the difference between a Variable Annuity and a Fixed Annuity that doesn't have the “high costs” they keep referring to.

PosFCF says:
Since you say everyone, you include me since I was one of the respondents. You are quite incorrect therefore either in your statement or in what you view as "apparent" to you. I, for one, am quite well schooled and versed in the subject of annuities.
>>

TTRoberts replies:
That's right, it appeared that you didn't know the difference since you weren't distinguishing the difference. It's good that you're well aware of the difference.

PosFCF says:
<< The usual default annuity spoken of is the variable annuity with a Fixed annuity usually being qualified by its name (i.e I was looking at such and such a rate on a 5 year Fixed annuity the other day and....) >>

TTRoberts replies:
Oh come on . . .”the usual default annuity spoken”??? That's just double talk. There's a LOT of people around here who really don't know the difference. It fine to talk about annuities as just “annuities” when referring to their commonalities. But when talking about “annuities” and their “high expenses”, how is someone who doesn't really know any better to know? People in general don't know if it may be “the usual default annuity spoken.” They might only assume one way or the other. Frankly, that's just a lame argument (for those who know the difference) for being lazy about identifying just what type of annuity one is referring to. It's very easy to say “variable annuity” just as it is to say “annuity” to keep the matter clear.

PosFCF says:
<< The original poster to the thread stated:... my advisor with UBS want me to invest in American Legacy...., If you would go to their web site (http://www.americanlegacy.com/), they say "Welcome to American Legacy Variable Annuities". >>

TTRoberts replies:

The original poster wrote:

Annuities - are they good for the investor or the advisor? I have a roll-over IRA from an pension plan and my advisor with UBS want me to invest in American Legacy. I hear annuities are a great alternative to CDs - tax deferral, competitive interest rates, safety rated A+, probate avoidance and other advantages. It would only be a part of my investments, from a third to a quarter. Does it make sense inside of an IRA or is it better for UBS than it is for me?” >>

“Alternative to CD's”, “competitive interest rate”

Does any of that sound like a Variable Annuity? Could the poster be a little confused about the differences? Did anyone address this?

PosFCF says:
<<So perhaps some of us were aware of data (i.e. the discussion being about varaible annuities) that you perhaps overlooked? >>

TTRoberts asks rhetorically:

. . . or perhaps “some of us” were making biased assumptions?

PosFCF askes:

<< TTRoberts
This comparison is not one of Variable Annuity. It's one of some form of Variable Life type of policy.

I'm not sure how you arrive at this conclusion. Are you implying that because the alternative scenario doesn't invest in all mutual funds it is not comparable, and therefore the only possiblity is that the study must be referring to a VUL?
>>

TTRoberts answers:

No. I am suggesting that a comparison using term life insurance with mutual funds is comparable to variable life contracts (not just one type of variable life contract like a VUL) . . . . not to variable annuities.

PosFCF askes:

<< Badger
<< 2. Same as (1) above ecept the extra investment went into the same mutual funds as offerred by the insurance company; albeit, typically a different class than offerred inside the annuity. >>

TTRoberts
That would be an apples to oranges comparison, wouldn't it?

One could say that a fund (Templeton, Janus, etc.)offered inside of an annuity and the same one offered outside might be slightly different, because of the possibly different fee structures to the insurance company and to the investor. Is this why you feel the comparison doesn't hold?
>>

TTRoberts answers:

Perhaps the ambiguity is in what Badger refers to as “different class.” The way you describe it is quite accurate and if that is what Badger is referring to, then the comparison would indeed hold. But if “different class” refers to something materially different (e.g. a similar class as in a value or growth posture for equity index of some kind), then that's where I don't feel the comparison holds. I took it to be the latter.


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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37271 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 1:16 AM
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TTRoberts

No. I am suggesting that a comparison using term life insurance with mutual funds is comparable to variable life contracts (not just one type of variable life contract like a VUL) . . . . not to variable annuities.

Actually, an annuity....um, er excuse me, a VARIABLE ANNUITY, is nothing more than a life insurance product with an investment product inside of it. Therefore, if one wishes to see what alternatives one might have, then it is logical to include in the universe of possible comparisons a life insurance product (i.e. Term life) and an investment product (i.e index mutual, index funds, etc.).

Does any of that sound like a Variable Annuity? Could the poster be a little confused about the differences? Did anyone address this?

Perhaps the poster was, and apparently so was his "advisor". Your attacking the credibility of other posters does little to clear up the picture, however. Again, had you taken but a moment to do a "Google" search, you would have found the link I referenced and actually seen the specific product he mentioned and been able to fine tune your response.

PosFCF


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37273 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 3:30 AM
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PosFCF, you wrote:

<<Actually, an annuity....um, er excuse me, a VARIABLE ANNUITY, is nothing more than a life insurance product with an investment product inside of it. Therefore, if one wishes to see what alternatives one might have, then it is logical to include in the universe of possible comparisons a life insurance product (i.e. Term life) and an investment product (i.e index mutual, index funds, etc.).>>

That kind of logic escapes me. That's like saying that because bond funds, equity funds or merging market funds, etc., are in the universe of possible comparisons a mutual fund and so one can make comparable comparisons. Or would you suggest that one can make a comparable comparison between something like a merging market fund and a short-term bond fund?

Just what insurance part of a deferred Variable Annuity is comparable to a term life contract . . . . as you see it?

<<Perhaps the poster was, and apparently so was his "advisor". Your attacking the credibility of other posters does little to clear up the picture, however. Again, had you taken but a moment to do a "Google" search, you would have found the link I referenced and actually seen the specific product he mentioned and been able to fine tune your response.>>

I didn't have to do the Google search to have an idea about the type of annuity being referred to. And I'm not saying that what's been said by many about variable annuities is wrong. My “attack”, as you've put it, is really only about the use of the term “annuity”, which is an all inclusive general term where variable annuity is a specific type which has the high costs that is so often the butt of criticisms. In the annuity “universe”, variable annuities are NOT the majority being used or sold. As I've suggested before, when we talk about such specifics as expenses and charges, for clarities sake, we should differentiate as to just which kind of annuity we are referring to – as a great many people really don't know there's a difference.


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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37279 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 9:21 AM
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TTRoberts

Just what insurance part of a deferred Variable Annuity is comparable to a term life contract . . . . as you see it?

Gee.....I don't know.....could it be the DEATH BENEFIT?

In the annuity “universe”, variable annuities are NOT the majority being used or sold.

Could you substantiate that, please? Do you have any facts to back up this assertion?

PosFCF



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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37280 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 10:05 AM
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PosFCF, you write:

<< "Just what insurance part of a deferred Variable Annuity is comparable to a term life contract . . . . as you see it? >>

Gee.....I don't know.....could it be the DEATH BENEFIT? >>

So, you're saying a deferred Variable Annuity has a Death Benefit? If I put $10,000 in a deferred variable annuity and the investment(s) go down where it's value is now $8,000 at the time I die, how much "death benefit" is my beneficiary(s) going to get? Typically, they're only going to get the $8,000 - unless I actually chose to buy the coverage as a rider.

<< "In the annuity “universe”, variable annuities are NOT the majority being used or sold.

Could you substantiate that, please? Do you have any facts to back up this assertion?
>>

I wish I could remember which issue of AM Best the article was in. But it's been at least a couple of years since I read it. It's not an issue of such great important that I kept track. After all, I'm not an apologist for the annuity or variable annuity industry. It seems to me the article was published by AM Best in the heyday of variable annuities in the late 90's.

In any case, though this is not the article I recal, to some extend the following my give you some idea:

http://www3.ambest.com/Frames/FrameServer.asp?Site=news&Tab=1&altsrc=18&RefNum=48972


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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37281 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 12:28 PM
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TTRoberts

So, you're saying a deferred Variable Annuity has a Death Benefit? If I put $10,000 in a deferred variable annuity and the investment(s) go down where it's value is now $8,000 at the time I die, how much "death benefit" is my beneficiary(s) going to get? Typically, they're only going to get the $8,000 - unless I actually chose to buy the coverage as a rider.

Yes, all annuities that haven't been annuitized have a death benefit. You are incorrect though in what would be paid to your beneficiaries in your example. If there have been no withdrawals from the VARIABLE ANNUITY, the typical standard death benefit (for VARIABLE ANNUITIES purchased at the retail level as indicated in your example), will be at least a return of the original principal. Optional death benefits may provide enhancements to that coverage (i.e. annual step-ups to high water marks, guaranteed minimum rate of return if held for at least 10 years, etc.). In your example, on a typical VARIABLE ANNUITY, your beneficiary would get $10,000 if you had not made any withdrawals.

I added the "retail" caveat above because employer-based VARIABLE ANNUITIES, such as those contained in some 401(k) and all 403(b) plans may have a death benefit that is only the principal value at death of participant.

After all, I'm not an apologist for the annuity or variable annuity industry.

I haven't seen too many of these here, including myself, but I don't see what this has to do with your ability to back up statements that you make.

From the website that you provided a link to:

"Survey: Variable Annuity Sales Stir at Banks"
Fixed annuities sold through banks continued to outsell variable annuities in February by a nearly four-to-one margin, but banks are beginning to see signs of a recovery in variable annuity sales, . . .


It is true that banks made a big push into selling fixed annuities when their money market rates started becoming so ridiculously low, but that does not mean that Fixed Annuities are more abundant than VARIABLE ANNUITIES either in availability or in total sales.

The largest commissions are paid on VARIABLE ANNUITIES, therefore they will always have the most appeal to those licensed to sell them, and those licensed to sell them are also licensed to sell the FIXED ANNUITIES. Because of the money incentives, VARIABLE ANNUITIES will always have larger sales numbers. It is the way of capitalism.

If you were a broker and you could offer a client a straight FIXED ANNUITY that paid a rate of 3% to the client, and if you did, your commission was 2% of the principal; or you could sell the client a VARIABLE ANNUITY that had a fixed bucket within it that also paid 3% to the client, but would pay you 7% in commissions, which would you sell? I don't mean this personally, but rather, as a rhetorical question to illustrate what the real choices for brokers are and why VARIABLE ANNUITIES are presented (and sold) so often.

PosFCF

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Author: Hypnosis One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37284 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 2:46 PM
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PosFCF, Can you help me understand?
My banker had me roll over some IRAs into a variable annuity back in 1995. The amount was $17,000. I turned the annuity into a Roth in 1998 at a $25,000 value and paid the taxes on it over 4 years.
Of course everything crashed and it is now worth something like $20,000 and climbing, but its highest anniversary level is $42,000 and that is the amount my heirs get if I die.
My accountant has told me to leave it there until it approaches a value of $42,000.
Isn't this one time when leaving a variable annunity alone is the best case senario, seeing as I have already made so many mistakes?
I am 62 and semi retired.



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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37285 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 3:14 PM
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Hypnosis

Excellent questions!

One way of looking at the difference between your high-water mark of $42,000 and the current approximate value of $20,000 is that the $22,000 difference represents additional paid up life insurance. So you would lose that value if you cashed in the VARIABLE ANNUITY at this time.

Your accountant appears to have given you sound advice, as far as it goes. Do you have a strategy for how you are going to maximize your potential to close the gap between current value and death benefit?

Your case illustrates a perfect example of what is very common today. Holders of VARIABLE ANNUITIES with cash surrender values far below the death benefit are trapped in the annuity, even though there would, perhaps, no longer be an early withdrawal penalty. On one hand they have a product that they may no longer wish to own as part of their investment holdings, and on the other, it makes the most sense (because of the death benefit) to leave the annuity intact.

I hope you don't have to take withdrawals from this account to support you in your retirement.

PosFCF

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Author: Hypnosis One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37289 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 8:45 PM
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Thank you for your prompt and very clear response. There is no early withdrawal penalty as the time is up as you suggested and I do not need to take withdrawals to support myself.
"Your accountant appears to have given you sound advice, as far as it goes. Do you have a strategy for how you are going to maximize your potential to close the gap between current value and death benefit?" (Sorry I don't know how to bold this)

No, she hasn't said anything about that yet. Any suggestions you might have would be greatly appreciated. (I have high hopes that Putnam does better again in the future.)




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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37290 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 9:52 PM
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Hypnosis

There's too much about you and the specific VARIABLE ANNUITY contract you have that I don't know for me to be able to give you any specific advice.

One thought I might present is: "Why not roll the dice a bit?" Since you don't need to make any withdrawals, and since you are guaranteed the death benefit, what do you have to lose? If you consider this strategy, I would urge you to call the VARIABLE ANNUITY company and ask if they have a minimum balance, under which, they can force liquidation of the contract. Some do. Let's say, somewhere in the fine print is a phrase that says something like: "If account balance falls below $5,000, then the company, at its option, may force liquidation of the contract". If your VARIABLE ANNUITY contract has a clause like this, then a "roll the dice" strategy must keep it in mind.

Another thought is: "If you liquidated the VARIABLE ANNUITY, then using the proceeds, how much fully paid up life insurance will this $20,000 buy you?" If you are healthy, you may be able to buy as much (or more) whole life insurance as what your VARIABLE ANNUITY contract promises. A physical would be required, in all likelihood. But....if you were able to have a paid up policy for the $42,000 then perhaps you could take a loan against the policy for most of the $20,000 and invest it anyway you really want to and not lose the other $22,000 for your heirs [caution, one has to be careful of the policy loan amount not being so high as to kick the policy into being considered as a MEC, by the IRS. Your insurance agent and accountant can help explain this and steer you clear of it]. If this strategy is considered at all, the advice of an insurance professional should be sought. One could apply for the new policy, go through the physical and insurance underwriting to get an answer before having to liquidate the VARIABLE ANNUITY contract. If asked for, life insurance rate quotes based on full underwriting can be held for 30-60 days, more than long enough to get the cash from the old contract.

There are flaws with both lines of thinking, but I just thought I'd present them since you asked for ideas.

PosFCF

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Author: Hypnosis One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37291 of 76398
Subject: Re: Annuities in an IRA Date: 9/23/2003 10:30 PM
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Wow, I never thought of any of this. Thanks for the info!
I will certainly read my policy and I will call about the minimum balance liquidation.
I will also find out what $42,000 worth of paid up life insurance would cost as you suggest. I do not know about MEC so I will check the IRS site.
I am so glad I met you. Information is a beautiful thing. Thanks.

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37293 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 1:15 AM
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PosFCF, you responded:

<<Yes, all annuities that haven't been annuitized have a death benefit. You are incorrect though in what would be paid to your beneficiaries in your example.>>

You ARE correct here . . . I was wrong.

To get back on track - the structure of the life insurance protection benefit in a variable annuity is so different from term insurance; I don't see how anyone can do a valid comparison analysis. For Variable Life contracts, using term insurance for such an analysis is pretty straight forward.

If you know it can be done, then please share that . . . . I'm all ears. ;-)

<< The largest commissions are paid on VARIABLE ANNUITIES, >>

True

<< therefore they will always have the most appeal to those licensed to sell them, >>

False

<< and those licensed to sell them are also licensed to sell the FIXED ANNUITIES. >>

True

<< Because of the money incentives, VARIABLE ANNUITIES will always have larger sales numbers. >>

Can you substantiate this? Does your conclusion consider that there may be more people licensed to sell Fixed Annuities than Variable Annuities?

<< It is the way of capitalism. >>

But not EVERYBODY is so commission driven.

<< If you were a broker and you could offer a client a straight FIXED ANNUITY that paid a rate of 3% to the client, and if you did, your commission was 2% of the principal; or you could sell the client a VARIABLE ANNUITY that had a fixed bucket within it that also paid 3% to the client, but would pay you 7% in commissions, which would you sell?
I don't mean this personally, but rather, as a rhetorical question to illustrate what the real choices for brokers are and why VARIABLE ANNUITIES are presented (and sold) so often.
>>

Well, I can tell you that I HAVE had these kinds of choice many times (not the 7% of course, since that's not nearly how high a typical variable annuity commission is . . . especially on a fixed rate "bucket"). And I can tell you that in EVERY CASE, it's been the Fixed Annuity sold, as expenses in a Variable Annuity were just too great. It's actually a no-brainer!






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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37294 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 1:25 AM
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PosFCF, you wrote:

<< Hypnosis

There's too much about you and the specific VARIABLE ANNUITY contract you have that I don't know for me to be able to give you any specific advice.

One thought I might present is: "Why not roll the dice a bit?" Since you don't need to make any withdrawals, and since you are guaranteed the death benefit, what do you have to lose? If you consider this strategy, I would urge you to call the VARIABLE ANNUITY company and ask if they have a minimum balance, under which, they can force liquidation of the contract. Some do. Let's say, somewhere in the fine print is a phrase that says something like: "If account balance falls below $5,000, then the company, at its option, may force liquidation of the contract". If your VARIABLE ANNUITY contract has a clause like this, then a "roll the dice" strategy must keep it in mind.

Another thought is: "If you liquidated the VARIABLE ANNUITY, then using the proceeds, how much fully paid up life insurance will this $20,000 buy you?" If you are healthy, you may be able to buy as much (or more) whole life insurance as what your VARIABLE ANNUITY contract promises. A physical would be required, in all likelihood. But....if you were able to have a paid up policy for the $42,000 then perhaps you could take a loan against the policy for most of the $20,000 and invest it anyway you really want to and not lose the other $22,000 for your heirs [caution, one has to be careful of the policy loan amount not being so high as to kick the policy into being considered as a MEC, by the IRS. Your insurance agent and accountant can help explain this and steer you clear of it]. If this strategy is considered at all, the advice of an insurance professional should be sought. One could apply for the new policy, go through the physical and insurance underwriting to get an answer before having to liquidate the VARIABLE ANNUITY contract. If asked for, life insurance rate quotes based on full underwriting can be held for 30-60 days, more than long enough to get the cash from the old contract.

There are flaws with both lines of thinking, but I just thought I'd present them since you asked for ideas.
>>

Outstanding! . . . . all of it, even though you may be overdoing it a little for the emphasis on “VARIABLE ANNUITY”. ;-)


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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37296 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 9:16 AM
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TTRoberts

PosFCF
<< therefore they will always have the most appeal to those licensed to sell them, >>

TTRoberts
False


We may have to agree to disagree here. I believe the VARIABLE ANNUITY will always have more appeal because it is the sweetest fruit from the commission perspective. It does not mean it will always be chosen, but it will always be more appealing to those who work for a living.

PosFCF
<< Because of the money incentives, VARIABLE ANNUITIES will always have larger sales numbers. >>

TTRoberts
Can you substantiate this? Does your conclusion consider that there may be more people licensed to sell Fixed Annuities than Variable Annuities?


No, I have not had time since we began this discussion to do a search for a good quality database that might provide a breakdown that would answer this question. Yes, I have considered that more may be licensed to sell FIXED ANNUITIES. But until the last few years, CDs were always paying higher interest so had more appeal.

Well, I can tell you that I HAVE had these kinds of choice many times (not the 7% of course, since that's not nearly how high a typical variable annuity commission is . . . especially on a fixed rate "bucket"). And I can tell you that in EVERY CASE, it's been the Fixed Annuity sold, as expenses in a Variable Annuity were just too great. It's actually a no-brainer!

Well, I've seen as high as 9% commissions on VARIABLE ANNUITIES and 7% is still quite frequently offered.

I commend you on applying principles above principal. That should be the Standard and the Common Practice. There are cases where FIXED ANNUITIES are the better choice for an individual's portfolio, there are cases where a VARIABLE ANNUITY can and does make sense. The problem is that the incentive structure in the "investment" community is such that "VARIABLE ANNUITIES" are often the first and most presented. The applicability logic is crafted to suit the offering rather than being dictated by the clients best interests.

PosFCF








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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37297 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 9:54 AM
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Hypnosis

Take your time. There's no need to act before thoroughly understanding the pros and (most especially) the cons of the alternatives.

By the way, MEC stands for Modified Endowment Contract. In essence it is an IRS ruling (perhaps based on a change in law?) that eliminated some of the loopholes where folks were using life insurance loans to avoid certain taxes. The average bear doesn't run into often, but it might have applicability when one plans to take policy loans soon after establishing a policy. I've about exhausted my understanding of the MEC so I would just suggest that a combination of insurance agent and accountant working on your behalf should help steer you clear of any problems.

PosFCF

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37298 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 10:05 AM
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TTRoberts

Outstanding! . . . . all of it, even though you may be overdoing it a little for the emphasis on “VARIABLE ANNUITY”. ;-)

Thank you for the compliment.

I'm not sure how to approach the issue of delineating "fixed" vs. "variable" to not offend your sensibilities, but am open to suggestions.

For me, as I may have indicated before, the conversation is almost always about the VARIABLE product as that seems to have the most issues attendant to it.

PosFCF

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37299 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 11:38 AM
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PosFCF, you wrote:

<< I'm not sure how to approach the issue of delineating "fixed" vs. "variable" to not offend your sensibilities, but am open to suggestions. >>

As I've suggested before, if the issues (e.g. expenses and charges) that are unique to variable contracts, then that product that has those unique traits should be identified accordingly. Using a generic term like "annuities" when discussing product specific issues only confuse people who don't know any better.

<< For me, as I may have indicated before, the conversation is almost always about the VARIABLE product as that seems to have the most issues attendant to it. >>

In the Motley Fool forums, yes . . . it tends to be the primary focal point when discussing annuities. But over the years I've seem MANY people get responses in these forums that were about variables when the issue(s) had nothing to do with variables. And so, to those who don't know the difference, it muddies up the waters rather than making it clearer.

Since there are many material differences between annuities such as Variable, Fixed and Equity Indexed, it shouldn't just be assumed that when someone in a forum is asking about and using only the term "annuity" that they must surely be referring to Variables. If there were no clear indication as to what type of annuity is being referred to, then it would seem prudent to simply ask for clarification so a proper response might be made.


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37301 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 12:04 PM
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PosFCF, you wrote:

<< By the way, MEC stands for Modified Endowment Contract. >>

Correct

<< In essence it is an IRS ruling (perhaps based on a change in law?) >>

Actually, it's really not an IRS "ruling." It is a part of the change in the tax code with regard to what is defined as "life insurance." So, it's by the definition in the tax code that if a life insurance contract doesn't meet certain conditions, it is considered a Modified Endowment Contract and NOT a Life Insurance Contract. And so, the rules that apply to life insurance don't apply to a Modified Endowment Contract. Then there's a set of rules for Modifeied Endowment Contracts.

<< that eliminated some of the loopholes where folks were using life insurance loans to avoid certain taxes. The average bear doesn't run into often, but it might have applicability when one plans to take policy loans soon after establishing a policy. >>

Yes, it closed some of the loopholes. However, it really wasn't about policy loans. It was really about the introduction of Universal Life contracts (and later, variable life contracts) where, at the time, there was no limit as to how much money could be put into its reserve account. Then the policyholder could, as you've suggested, then use policy loans features of a life insurance contract to take advantage.

Now with the changes is the tax code, there are specific limits as to how much can be put in. If that amount is exceeded, it becomes a Modified Endowment Contract, which no longer has the tax-favored treatment that a life insurance contract does. The rules concerning the policy loan provisions have not really changed – except maybe for when a policy is surrendered or lapses.

<< I've about exhausted my understanding of the MEC so I would just suggest that a combination of insurance agent and accountant working on your behalf should help steer you clear of any problems.</> >>

I would agree.


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37302 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 12:38 PM
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PosFCF, you wrote:

<< Yes, I have considered that more may be licensed to sell FIXED ANNUITIES. But until the last few years, CDs were always paying higher interest so had more appeal. >>

<g> You're pretty free with your absolutes, huh?

Even if CD were “always” higher, tax considerations could often mitigate and even eliminate that advantage.

<< Well, I've seen as high as 9% commissions on VARIABLE ANNUITIES and 7% is still quite frequently offered. >>

Which companies offer such high commissions on variable annuities? Unless there's been a recent change in the SEC's rules on commissions, that would be higher than what was allowed just a couple of years ago. I don't stay very current on that kind of thing since I gave up my registration two years ago.

Are you sure you're not referring to the SEC's maximum allowable sales charge? It used to be 8.5%. I've NEVER seen a variable annuity contract that high. I've seen a couple at 7% and that seemed VERY high. But the vast majority, which includes quite a few, that I've see, are typically around 4-5% and it goes downward as amounts deposited get large (much like breakpoints with mutual funds).

<< There are cases where FIXED ANNUITIES are the better choice for an individual's portfolio, there are cases where a VARIABLE ANNUITY can and does make sense. The problem is that the incentive structure in the "investment" community is such that "VARIABLE ANNUITIES" are often the first and most presented. The applicability logic is crafted to suit the offering rather than being dictated by the clients best interests. >>

I would argue that this is true between Variable Annuities and Mutual Funds, but not really between Variable Annuities and Fixed Annuities. Fixed annuity commissions are not limited to the SEC's regulations. In fact, Fixed Annuities can often have commissions as high as 10 –15%. If someone is so commission driven as to only look for the higher profit product, then they'd go with a high commissioned Fixed Annuity, not a variable annuities.


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Author: Hypnosis One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37303 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 1:04 PM
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I don't have to worry about MEC, thanks for the heads up.
I will certainly follow your advice. I appreciate your help.

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37306 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 2:52 PM
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TTRoberts

PosFCF
<< Yes, I have considered that more may be licensed to sell FIXED ANNUITIES. But until the last few years, CDs were always paying higher interest so had more appeal. >>

TTRoberts
<g> You're pretty free with your absolutes, huh?


No, actually, I'm pretty deliberate in most of what I say. Can you point to a time (other than the qualifier of the current period that I did make) where this statement of mine is incorrect?

Which companies offer such high commissions on variable annuities?
While I can say, I won't say. I take this position for a number of reasons. First, if I said, I would be disclosing some proprietary information that I have contracted not to divulge. Second, because I don't wish for the conversation to become about who offers the best pay, as that changes month to month. I will say that the companies I see offering these commissions are well known, not some back-corner fly-by-night outfit.

The real issue here isn't how many do or don't offer high commisssions, it is who do you think will have their product most often presented by the salesmen who are after getting the higher commissions? So, even if only 10% of the insurance companies offer high commissions, it will likely be those who garner the highest sales volumes.

A quick review of 20 or so companies indicates one that offered 15%, one at 10%, and several at 7%. These are on VARIABLE products, and the list is current. Since my hands are tied vis-a-vis supporting documentation, if you wish to take an opposing viewpoint we will just have to agree to disagree again.

PosFCF



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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37307 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 3:32 PM
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PosFCF, you wrote:

<< Can you point to a time (other than the qualifier of the current period that I did make) where this statement of mine is incorrect? >>

Nope. I don't hang onto that kind of information and much like you (probably) have better things to do with my time than do research for that kind of thing. Besides, that wasn't my point. You've used "always" before where is wasn't so. (e.g. "therefore they will always have the most appeal to those licensed to sell them") And so that prompted my comment/question.

<< A quick review of 20 or so companies indicates one that offered 15%, one at 10%, and several at 7%. These are on VARIABLE products, and the list is current. Since my hands are tied vis-a-vis supporting documentation, if you wish to take an opposing viewpoint we will just have to agree to disagree again. >>

For variable annuities, I find these commission rates/charges quite shocking. Especially shocking when the SEC limits commissions to 8.5%. Without supporting documentation you only leave me with but one avenue . . . to agree to disagree.

I can only conclude that there much more to these numbers . . . much more to this than you can or are willing to divulge. Maybe one day when I have the time and/or its convenient, I'll investigate this to see what's really going on with such numbers.

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37308 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 5:11 PM
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TTRoberts

For variable annuities, I find these commission rates/charges quite shocking. Especially shocking when the SEC limits commissions to 8.5%. Without supporting documentation you only leave me with but one avenue . . . to agree to disagree.

I think, perhaps, you are referring to the 8.5% limitation on mutual funds. As you know, a VARIABLE ANNUITY is an insurance product which may offer mutual funds within it as investment vehicles. Therefore, while those mutual funds may be limited to that 8.5%, the insurance company must be able to add their own charges for the cost of insurance protection, management, cost of sales, etc.

The annuity companies have well researched their limits and are operating within the limits of what is allowed. They ought to know what is allowed as their lobbyists have crafted most of the applicable legislation.

PosFCF


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37309 of 76398
Subject: Re: Annuities in an IRA Date: 9/24/2003 5:34 PM
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PosFCF, you wrote:

<< I think, perhaps, you are referring to the 8.5% limitation on mutual funds. As you know, a VARIABLE ANNUITY is an insurance product which may offer mutual funds within it as investment vehicles. Therefore, while those mutual funds may be limited to that 8.5%, the insurance company must be able to add their own charges for the cost of insurance protection, management, cost of sales, etc.

The annuity companies have well researched their limits and are operating within the limits of what is allowed. They ought to know what is allowed as their lobbyists have crafted most of the applicable legislation.
>>

Actually, this limitation was not just for mutual funds, it used to be applied to variable annuities as well. If what you are suggesting and the numbers are correct, then this is a change in the SEC rules or how they're applied that's come about in the last couple of years that I haven't heard about. I'll ask a couple B/D's I know the next chance I get.




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