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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76111  
Subject: How to make your own annuity on the cheap Date: 1/23/2012 11:07 PM
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"Banks, brokers and (especially) insurance agents love to sell a product that has a very mouth-watering top line pitch: equity market upside without the risk of losing money. Unfortunately, the reason they love to sell these products is that the commissions to the salesperson are typically fairly generous and the economics of the product are attractive to the bank or insurance company underwriting the paper. These products go by various names, most commonly appearing in the form of an equity indexed CD, equity indexed annuity, or fixed indexed annuity. Due to the very simple construction of these products, they are actually quite easy and cheap to reproduce in under 30 minutes a year in your very own brokerage account, giving you much better returns and offering a lot more flexibility."

http://www.lifeinvestmentseverything.blogspot.com/2012/01/ro...
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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69986 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 9:20 AM
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The only thing I did not see discussed there (I skimmed a bit), is tax deferral.

The cd earning at 2+% is taxable income so you do not get full replacement. The call option is also taxable. I see no way to recreate the tax deferral nature of the annuity.

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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: 69990 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 9:37 AM
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Hawkwin writes,

The only thing I did not see discussed there (I skimmed a bit), is tax deferral.

The cd earning at 2+% is taxable income so you do not get full replacement. The call option is also taxable. I see no way to recreate the tax deferral nature of the annuity.

</snip>


Do it within your IRA.

intercst

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69992 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 12:14 PM
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The cd earning at 2+% is taxable income so you do not get full replacement. The call option is also taxable. I see no way to recreate the tax deferral nature of the annuity.

As mentioned;
Do it tax-deferred in your IRA.
Do it tax-free in your Roth.

Buy the "safe leg" (CD, bond port. etc.) in a marginable account, and you then also have some degree of the tax-free distribution features (margin loans instead of policy loans) of the Indexed Universal Life contracts (except limited to 50% Reg-T loan limits... and more like 30% or less if you're allergic to those unpleasant margin calls ;~)

The primary reasons to have an insurance carrier do it for you rather than DIY is the bottom line performance and extension of features (like 90% tax-free access in the IULs.)

If you want the tax-free access of IULs, and you're not a young 20-something building from scratch, but rather a 40-50-60+something with a significant amount to shelter... you can't "build it yourself" because you can't sweep that much capital out of the jaws of the IRS into tax-free ROTHs due to annual contribution limits.

The insurance carriers can squeeze a 6-8% safe yield* out of their bond and dividend portfolio (* "safe" enough to place their reserves up as a guarantee to principal.) That 6-8% is obviously a significant margin above the 1+% annual chump change available in a CD, and provides a *LOT* more upside capture from option spread placement.

Its *STILL* doable yourself... but its extremely hard to beat (or even come close to matching) the best in the game, even net of their "egregious" loads, fees, or splits. If you can secure a "safe" 6-8% yield on a DIY basis in the current environment... why even bother chasing the home-runs beyond that at all? Do it in a ROTH from the outset, compound that out over 20-40 years, tax-free, and you're sitting pretty.***

Cheers,
Dave Donhoff
Leverage Planner

(*** Now if someone would PLEASE fix the bug in my time machine???)

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69996 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 1:25 PM
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"The insurance carriers can squeeze a 6-8% safe yield* out of their bond and dividend portfolio"

No, they cannot. For new money it simply does not exist.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69997 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 1:56 PM
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"The insurance carriers can squeeze a 6-8% safe yield* out of their bond and dividend portfolio"

No, they cannot. For new money it simply does not exist.


Sure they can, and it does. The financials are audited & public, you can look them up.

Let's say, for argument's sake, that I am wrong by half of the low end range... and the best carriers only get 3% safe yield on their principal guaranteed portfolios. that still gives them an option budget that will *TRIPLE* the upside capture power of a DIY plan on a 1% CD.

Having said that, I have had direct talks with the trading desks, and reviewed the financials, at the 3 best performing IUL companies I'm aware of, and they are all getting 6.5% - 6.9% yields or better on new money, today.

Its doable. I'm not saying its *EASY* for a DIY'er... but its doable, and it *IS* being done.

Cheers,
Dave Donhoff
Leverage Planner

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69998 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 2:20 PM
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Having said that, I have had direct talks with the trading desks, and reviewed the financials, at the 3 best performing IUL companies I'm aware of, and they are all getting 6.5% - 6.9% yields or better on new money, today.

********************

Insurers' portfolios are 75% bonds in a world where LQD has a sub 4% YTM. They are about 10% commercial mortgages where insurers are very happy to get 350BP over treasuries. Most of the rest of the invested assets for the industry are cash or low yielding investments like common equities. 6-handle yields for new money do not exist. Of course, if you can point me to some outside of insurance contracts, I would be very interested.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69999 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 2:27 PM
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The primary reasons to have an insurance carrier do it for you rather than DIY is the bottom line performance and extension of features (like 90% tax-free access in the IULs.)

Can an IUL lapse?

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70000 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 2:39 PM
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IULs can lapse and the insurer can fail.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70001 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 2:43 PM
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IULs can lapse and the insurer can fail.

That's why I hate hearing advisor calling it tax-free. It's tax-free as long as you keep the product until death without it ever lapsing. If you let it lapse, those policy loans become taxable.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70003 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 2:52 PM
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That's why I hate hearing advisor calling it tax-free. It's tax-free as long as you keep the product until death without it ever lapsing. If you let it lapse, those policy loans become taxable.

*************************

At least the taxable event is under your control. If you don't want to take the tax hit, don't let the policy lapse.

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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: 70005 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 3:17 PM
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brewer12345 writes,

ast the taxable event is under your control. If you don't want to take the tax hit, don't let the policy lapse.

...and what's the annual cost of keeping the policy in force if you live to age 95? Probably pretty expensive.

intercst

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70006 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 3:19 PM
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...and what's the annual cost of keeping the policy in force if you live to age 95? Probably pretty expensive.

intercst
************************

Absolutely. Naturally those who sell these products don't want to discuss policy expenses. I wouldn't even consider an EIUL policy to be an investment vehicle due to the expenses it has.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70008 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 4:07 PM
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6-handle yields for new money do not exist. Of course, if you can point me to some outside of insurance contracts, I would be very interested.

I'll bring links to financials later... but why would you be only interested OUTSIDE of the insurers?

========

Hi intercst,

...and what's the annual cost of keeping the policy in force if you live to age 95? Probably pretty expensive.

Total average annual cost, all inclusive of insurance coverage & all other costs & burdens, can be designed to be 50-100 bips by the 30th year. Of course, the best yields come with time commitments (passed through to the client as declining surrender charges, in such case as early unwind.) That means the short-term costs are front-loaded, and include unrealized early-unwind costs. Fortunately, with easy policy loan liquidity at a wash or positive credit there's virtually no reason for early unwind.

As the time progresses surrender/unwind charges recedes, compounding accrues, and required insurance coverage (as a percentage of principal) drops, bringing the total and annual average costs down with it... WELL below comparable alternatives.

(NOTE: Several of the top IUL carriers offer surrender-waiver terms for corporate-owned contracts, all else the same. The face reason is so that the corporate books can show more cash value up front for reporting purposes, and there's no fee to the corporate owner for this feature... but anybody with any corporate small business can exploit it.)

Properly designed & responsibly treated (not raided below safe levels (50-80% pulled in leverage) prior to retirement, assuming 15-20 years to that point,) the risks of lapse are virtually non-existent as the minimum-guarantee annual credits cover the minimum-required costs of insurance. Further, most carriers offer a no-lapse guarantee from age 70 or 75 onwards at no cost unless actually triggered. That is, a guarantee that the contract will not lapse and trigger a taxable event (conversion of loans to withdrawals) due to outstanding loan balances over-weighting the remaining principal available to cover IRS-required death benefit coverage.

There's nothing available in the market that I've found recently that can provide a similar risk-weighted market participation on a tax-free basis at that low of a cost.

========

Naturally those who sell these products don't want to discuss policy expenses.

I talk about them all day long. As soon as I find something less expensive for the same results, I'll be excited about it!

I wouldn't even consider an EIUL policy to be an investment vehicle due to the expenses it has.

It appears you're unfamiliar with the expenses an EIUL has versus any comparable alternative.

<PEDANTRY> The term "investment" is considered, by the regulatory world, to be defined as a vehicle at risk of loss of principal. Due to this, EIULs are clearly *never* 'investments.' </PEDANTRY>

If we use that term on a lay basis to mean "market-type growth" then EIULs outperform (at least over the last decade) all risk-weighted tax-equivalent passive verhicles.

Given the mechanics of them (collared somewhere between 0-2% as an annual floor, and 12-17% as an annual cap, with an annual gain lock & reset,) they'll average somewhere in the range of the mid-6%s to the low-8%s, tax-free. They'll underperform passive direct index investing when the direct index beats the tax-effective (given each investor's tax profile) returns on a consistent basis... which, historically, occurs less than 20% of the time.


You can rail against "insurance peddlars" all you want, and I'll generally join in the harmony. Life insurance, as a death benefit, is significantly oversold and unnecessary. I prefer my folks to bounce their last check to the under-taker, and I believe that my job as a parent is to raise my kid to be exponentially more successful than I am, and scoff the idea of taking unenjoyed money left over when I take my dirt nap.

On the other hand, I would rather retain my growth for enjoyment than bleed or leak it away to taxes, management fees, liquidity traps or volatility.

The fact that there's a veneer of term life coverage wrapped around this product to shelter off taxes is just an opportune quirk the tax code to exploit, as far as I am concerned. The clients that I have set up with these strategies walk in the door certain that they don't need or want any additional life insurance death benefits, and I never have to change their minds... and they walk away *STILL* certain they don't need or want any additional life insurance death benefits... and roll a significant chunk of their assets into this structure.

I'll say this again; I have access to *EVERYTHING* in the world of financial products... there is no available puzzle piece I cannot put into a plan. Whenever I see a realistically competitive/comparable financial product outside the insurance industry, I'll include it in my bag of tricks.

It ain't out there.

Dave Donhoff
Leverage Planner

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70009 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 4:11 PM
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100BP after 30 years? What is the expense ratio in the first 5 and 10 years?

Insurers by and large have to manufacture products like these out of the same instruments available to pretty much everyone. They don't have a magic, giant source of yield to play with. Stop with the outsized sizzle hawking the miniscule steak (or hot dog in some cases).

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70010 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 5:08 PM
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At least the taxable event is under your control. If you don't want to take the tax hit, don't let the policy lapse.

Things happen. You lose your job and can't pay the premiums. You become disabled. You develop a condition like Alzheimer's and family lets it lapse.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70011 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 5:25 PM
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Things happen. You lose your job and can't pay the premiums. You become disabled. You develop a condition like Alzheimer's and family lets it lapse.

***********************

Agreed. I don't like a lot of these types of products in part because of the lack of flexibility.

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70012 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 5:26 PM
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Yah.

People that are proponents of something can handwave and (re-)define things all they want, but that doesn't change anything. Defining away a problem doesn't actually make the problem disappear.

"It is difficult to get a man to understand something when his income depends on his not understanding it." - Upton Sinclair

Papering over potential risks doesn't actually reduce the risk, it just pushes the risk into another direction. You can even push the risk around the corner and out of sight. Doesn't mean the risk is gone, though. It's just, um, out of sight.

LTCM had risk nailed down and fully under control. Ditto Lehman. And then, as Mike Tyson says, "Everyone has a plan .. until they get punched in the mouth."

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70013 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 5:50 PM
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Brewer,

100BP after 30 years? What is the expense ratio in the first 5 and 10 years?

Looking at a specific case in hand;
5th year annual average internal cost; about 7.5%
10th year annual average internal cost; about 3.2%
15th year annual average internal cost; about 1.9%
20th year annual average internal cost; about 1.3%
25th year annual average internal cost; about 0.95%
30th year annual average internal cost; about 0.68%
35th year annual average internal cost; about 0.50%
40th year annual average internal cost; about 0.35%

Can you point to anything comparable in performance that does better on a cost basis?

Insurers by and large have to manufacture products like these out of the same instruments available to pretty much everyone.

We covered that long earlier in this thread... everything the insurers do, you *COULD* try to DIY... except for the tax shelter features on accumulated money beyond qualified contribution limits, and zero to positive credit access to liquidity.

They don't have a magic, giant source of yield to play with. Stop with the outsized sizzle hawking the miniscule steak (or hot dog in some cases).

Zero "sizzle" in my posts here... strictly meat. Maybe you're unable to get these returns but the IUL carriers do.

RayVT brings a prescient quote that applies, I think;
"It is difficult to get a man to understand something when his income depends on his not understanding it." - Upton Sinclair

===================
Hi PSUE,

Things happen. You lose your job and can't pay the premiums. You become disabled. You develop a condition like Alzheimer's and family lets it lapse.

If *any* of those events cause a lapse in your IUL contract, it was improperly designed for financial performance in the first place. When designed for financial performance, the costs of maintaining in-force status are stripped to the minimum, and designed to decline as the cash value compounds. An optimum design has no more death benefit than the minimum guaranteed annual credits would cover, making it self-floating from day 1.

OTOH, if you're buying insurance for *any* portion of reasons of the death benefits itself, *THEN* you have maintenance issues to be concerned with.

===================
Brewer,

I don't like a lot of these types of products in part because of the lack of flexibility

I don't think you understand what you are referencing. If IULs "lack flexibility" in your perspective, please bring *anything* forward that provides equivalent results with greater flexibility (let alone lower costs.)


Everyone here seems to be against it... yet nobody can provide a comparable alternative...

Why is that, I wonder?

Dave Donhoff
Leverage Planner

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70015 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 6:30 PM
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Insurers by and large have to manufacture products like these out of the same instruments available to pretty much everyone. They don't have a magic, giant source of yield to play with.

Well, yes and no. They can manufacture these out of stuff available to us average joe types. But they can also lend the money directly.

Insurers do a fair amount of lending for larger commercial properties. Those loans can be as short as 3 years, and are rarely longer than 7. It's secured by the real estate, so there is some level of downside protection. (Not as much as was generally believed in 2005, but still some.) Loans don't typically exceed 80% LTV, and are often more like 50% - 60%.

For this, I would imagine they still get around 7% even today.

So in a way, insurers DO have a source of big yields available to them - a source that you and I can't access. Well, I can't. Perhaps you have a spare $40 or $50 million available to lend. ;-)

--Peter

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70016 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 6:57 PM
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Hi Peter,

Well, yes and no. They can manufacture these out of stuff available to us average joe types. But they can also lend the money directly.

Just to be the devil's advocate, I'll turn my hat backwards & actually argue in Brewer's favor on this point.

Individuals *CAN* make low-LTV (high equity-secured) commercial hardmoney loans, often at yields/rates of 11.99% to 12.99%. But its far from passive... its dirty lending, borderline criminal servicing, and if you're not careful in the current regulatory environment the "anti-predatory lending cops" will rip you a new yield spread ;~)

Pound for compliance pound, though, you are right... its hard to beat the commercial lending yields that the insurers can nab. The absolute dollar servicing costs on a $20 Million shopping mall loan is not all that much more than the servicing costs on a $200,000 hard money office condo loan... and the absolute regulatory risks aren't really any higher on the shopping mall (and arguably lower!)

Ray usually likes to trot out his high yield dividend plays... I know the insurance companies salt their portfolios with those as well.

Dave Donhoff
Leverage Planner

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70018 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 7:46 PM
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I don't think you understand what you are referencing. If IULs "lack flexibility" in your perspective, please bring *anything* forward that provides equivalent results with greater flexibility (let alone lower costs.)


Everyone here seems to be against it... yet nobody can provide a comparable alternative...

Why is that, I wonder?

Dave Donhoff
Leverage Planner

************************

See the blog I linked in the original post for a reasonable alternative.

As for a lack of flexibility, the ridiculous expense table you posted says it all. The reduction in expense ratio makes it painfully clear that the unfortunate buyer of these products gets banged in the bake-hole with enormous costs in the early years of their "investment" and it takes 30 or 40 years to approach Vanguard-like expense ratios because it takes that long to overcome the ridiculous up front costs of this nonsense.

I think the commissions are clogging your ears, Dave.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70019 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 8:11 PM
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As for a lack of flexibility, the ridiculous expense table you posted says it all. The reduction in expense ratio makes it painfully clear that the unfortunate buyer of these products gets banged in the bake-hole with enormous costs in the early years of their "investment" and it takes 30 or 40 years to approach Vanguard-like expense ratios because it takes that long to overcome the ridiculous up front costs of this nonsense.

So.. you hold out Vanguard as an offerer of a comparable alternative. What product, specifically? What gives an equivalent upside-only tax-free (or taxable-equivalent) performance, zero to positive credit access, at a lower real cost?

Bring it, PLEASE... I am all ears (and eyes ;~)

Dave Donhoff
Leverage Planner

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70020 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 8:18 PM
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Again, go read the blog post I linked to. The capped upside version of the strategy would cost, what, $50 a year in commissions? That looks like 5BP of expenses anually and you can collapse the structure any time you like and turn it into cash for the cost of the commissions on the options trades (maybe $50). How much mone would you leave on the table in the first 5 years if you cashed out of an EIUL policy? Ten grand? 15?

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70021 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 9:14 PM
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Again, go read the blog post I linked to. The capped upside version of the strategy would cost, what, $50 a year in commissions?

I read it from the outset, and the best it offers is 27% participation to the upside, and no way to shelter from taxes in any large account. Further, if it *DID* begin to perform nicely and you wanted liquid access to some of it, you'd have to collapse it all and surrender the CD yield. Do you have a better way to make it work?

How much mone would you leave on the table in the first 5 years if you cashed out of an EIUL policy? Ten grand? 15?

You have 80-90% liquid access on an annually increasing balance, guaranteed against market downside... why would you cash it out rather than borrow it? Policy loans run from a net cost of 1%, to a wash, to a positive credit (arbitrage) of up to 3% on average (and a positive potential arbitrage of up to 9% on maximum-gain years.) That is to say that, counter-intuitively, you can usually actually MAKE money on the funds borrowed AGAINST the cash value, rather than paying interest costs in.

Even at the bare annual minimum credits assuming worst-case years, borrowing against the IUL would yield you more capital at less costs than cashing out the DIY annuity.

Again... I'm nothing but a market opportunist. Bring me something that actually competes, and I'm all over it!

Nothing serious showing up yet....

Cheers,
Dave Donhoff
Leverage Planner

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70022 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/24/2012 9:32 PM
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There's none so blind as those who refuse to see.

As for accessing the cash value, one would not need to cash in the CD. Every bank I know of would be thrilled to make a deposit-secured loan at a very modest spread above the rate on the deposit, just like insurers do with a policy loan.

How would I do it? I think this is a silly investment strategy, personally, so I would not do it at all. However, if I did want to do this silly strategy, I would use a medium term, BBB to A rated corporate bond portfolio that would yield on the order of 4.5% to 5% now and I would use the coupons to put on a capped bull call spread with maybe a 10% max upside. At current option prices that would give me a participation rate of 100% or slightly more. I would structure the option package to last long enough to be able to qualify for LT cap gains if it were in a taxable account, but would prefer to stick it in an IRA.

In all of this we have not even touched upon carrier risk with EIULs.

But like I said, I think this is a silly strategy mostly marketed by the unscrupulous to unsophisticated investors who probably do not have enough risk tolerance to really withstand equity market volatility but who are too greedy or dumb to realize it.

If you want the last word, you are welcome to it. You are clearly motivated by commissions more than anything else.

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70024 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 12:08 AM
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Ray usually likes to trot out his high yield dividend plays... I know the insurance companies salt their portfolios with those as well.

Yup. I just grabbed me some HPT-D (yahoo: hpt-pd) new preferred issue, at a yield of 7.17%, non-callable for 5 years.
Life is good!

(And to think -- I could instead have used that money to pay off my 4.00% mortgage, like all the retirement guru's recommend. *WHAT EVER* was I thinking? :facepalm: ) </snark>

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70025 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 12:46 AM
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How would I do it? I think this is a silly investment strategy, personally, so I would not do it at all. However, if I did want to do this silly strategy, I would use a medium term, BBB to A rated corporate bond portfolio that would yield on the order of 4.5% to 5% now and I would use the coupons to put on a capped bull call spread with maybe a 10% max upside. At current option prices that would give me a participation rate of 100% or slightly more.

Again, that's all fine, but it still underperforms the 12-17% caps the pros offer.

I would structure the option package to last long enough to be able to qualify for LT cap gains if it were in a taxable account, but would prefer to stick it in an IRA.

Again, fine as long as you're only talking small enough balances that you *CAN* get it into qualified accounts.

But like I said, I think this is a silly strategy mostly marketed by the unscrupulous to unsophisticated investors who probably do not have enough risk tolerance to really withstand equity market volatility but who are too greedy or dumb to realize it.

That's not a very nice thing to say about all those people who insist on FRMs for home financing for the exact same reasons ;~)

If you want the last word, you are welcome to it. You are clearly motivated by commissions more than anything else.

Oh really? You're pulling that out of your arse as the best cowardly escape/attack you can think of. If you understood anything about what I've described you'd know the revenues are a fraction of AUM fees for a similar balance, at far more risk.

You *ARE* right about one thing though; This is not the strategy for DIY'ers who like speculation and have a tolerance (financial and emotional) for loss. I've never implied it was.

Its not for salespeople who like padding & racking up commission income either. Selling managed securities accounts, variable products & rebalancing services is far more lucrative to salespeople pitching risk-averse investors.

=============

Hey Ray,

You've previously posted a link for hunting those beauties you love... can you bring it again?

Cheers,
Dave Donhoff
Leverage Planner

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70026 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 12:53 AM
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But like I said, I think this is a silly strategy mostly marketed by the unscrupulous to unsophisticated investors who probably do not have enough risk tolerance to really withstand equity market volatility but who are too greedy or dumb to realize it.

Dwdonhoff responded: That's not a very nice thing to say about all those people who insist on FRMs for home financing for the exact same reasons ;~)

What a riot! Sounds like a strategy for the schizophrenic investor.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70027 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 12:56 AM
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How much mone would you leave on the table in the first 5 years if you cashed out of an EIUL policy? Ten grand? 15?

Dwdonhoff responded: You have 80-90% liquid access on an annually increasing balance, guaranteed against market downside... why would you cash it out rather than borrow it? Policy loans run from a net cost of 1%, to a wash, to a positive credit (arbitrage) of up to 3% on average (and a positive potential arbitrage of up to 9% on maximum-gain years.) That is to say that, counter-intuitively, you can usually actually MAKE money on the funds borrowed AGAINST the cash value, rather than paying interest costs in.

I saw this demonstrated several times. It's true that one can make money through interest rate arbitrage.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70028 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 1:22 AM
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Individuals *CAN* make low-LTV (high equity-secured) commercial hardmoney loans, often at yields/rates of 11.99% to 12.99%.

Of course. But how many of these high-risk loans can a typical person make at once? One? Two? You're usually talking a six figure loan at a minimum. So that's going to limit how many loans you can make.

Which brings up the issue of diversity. The insurance company is making hundreds of these loans, spreading the risk of default out over their entire portfolio. If one (or two or two dozen) go bad, well that's just priced in to things. Their portfolio yield loses a few basis points.

When the individual makes one or two loans (or even a dozen), if one goes bad its a disaster for the whole portfolio. With the costs of foreclosure and such, the "portfolio" yield can quickly drop to zero - or less!!

You also hinted at another issue. You mentioned hard-money loans. The insurance company is not really making hard money loans. They're making loans to reasonably well qualified borrowers who have solid security. The hard money loans you're talking about are to risky borrowers or where the security might not be all it seems to be. Those are two very different markets, as I'm sure you know - and probably have horror stories to boot.

--Peter

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70029 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 1:45 AM
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Those are two very different markets, as I'm sure you know - and probably have horror stories to boot.

Yes indeed... and my devil's advocacy was really a back-arsed way of further supporting your point. Direct lending small amounts (under $5 MM, say) for yield is a very hard row to hoe, and far moreso since private lending to residential borrowers is functionally outlawed. An individual who may want to lend secured on real estate is hard-pressed to find good borrowers (its not like there's an easily accessed high-volume market of borrowers to choose from & write loans to.)

At present, those who really wish to do this are getting just 2-4% from sophisticated residential real estate portfolio investors... and even that is very much "up in the air" gray area in the current regulatory environment.

Dave Donhoff
Leverage Planner

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70038 of 76111
Subject: Re: How to make your own annuity on the cheap Date: 1/25/2012 5:54 PM
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1. Slightly off topic, but it is possible to better immediate annuity results by buying a ladder of treasury STRIPS (out 32 years by my calculation to equal the result gotten on Vanguard) and if you augment every other year with corporate zero coupons it extends it lots further. There are workarounds to the survivor aspects through life insurance. With Vanguard free trades you can do that in two years at no cost. I think I first read about that from Intercst, but have done my own calculations.

Personally, when both of us are retired, I intend to start it for five years in a low interest environment, and then extend it as inflation (and interest rates) increase.

2. The original example IMO shows the problem that insurers face -- Variable options suck in a sideways or down market.

3. There are some advantages to some of the "stable value" options for "goosing" guaranteed returns, but any time you add insurance wraps the cost goes up. Using real estate, which is how I think TIAA does it, is currently working in this environment.

Interesting discussion.

Hockeypop ... back to lurking

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