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Author: CTkaren Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19414  
Subject: Why do we not like annuities? Date: 7/24/2005 6:10 PM
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I'm not retired yet as I need to keep earning to pay health insurance (will be 65 in three years). Went to a talk on "insurance "packages and the fellow was touting 'Asset protection annuity with LT Health care included".

If you never use the long term care, beneficiaries get twice the principal in a death benefit. A $50,000 lump sum buy-in pays approx. $350,000 in LT health care.The annuity grows and the death benefit and LT care amt increase.

My brother says the small print will mean you will never get what you expect. I could only afford something like this if I sold my home and moved to a less expensive area and property.

I kind of like my home and may not ever sell---but are these annuities all bad?? I think this one was with Lincoln Financial. I don't have alot, but would love to leave something to my three sons.

CTKaren
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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9950 of 19414
Subject: Re: Why do we not like annuities? Date: 7/24/2005 6:57 PM
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Author: CTkaren | Date: 7/24/05 6:10 PM | Number: 9949
I'm not retired yet as I need to keep earning to pay health insurance (will be 65 in three years). Went to a talk on "insurance "packages and the fellow was touting 'Asset protection annuity with LT Health care included".

If you never use the long term care, beneficiaries get twice the principal in a death benefit. A $50,000 lump sum buy-in pays approx. $350,000 in LT health care.The annuity grows and the death benefit and LT care amt increase.

My brother says the small print will mean you will never get what you expect. I could only afford something like this if I sold my home and moved to a less expensive area and property.

I kind of like my home and may not ever sell---but are these annuities all bad?? I think this one was with Lincoln Financial. I don't have alot, but would love to leave something to my three sons.


It never ceases to amaze me how convoluted annuities have become!!

The reason that the insurance industry makes annuities so complex is so they can make them sound like a great deal will actually they usually are not. If they made them simple, you would see instantly that they are usually too expensive. In actual fact, annuities are the single most profitable financial instrument for an insurance company and the sales people who peddle them.

The bottom line with annuities is that you are buying some form of financial insurance, and it isn't cheap. It is described in painful detail in the contract you sign. The insurance can come in the form of guaranteed payments over a period of time, a guaranteed rate of return, a guaranteed return of principal along with payments, a minimum return as compared to some index like the S&P 500, or combinations of these things. Now, they are combining them with life insurance, health insurance, and long term care, yet one more level of confusion.

Now, annuities are not always bad. If you fully understand what you are buying, and you know exactly how much it is really costing, and you agree that the price is OK, then there is nothing wrong with that annuity.

For instance, an immediate annuity is easy to understand and may be right for some people, especially people who are highly risk averse. When you buy an immediate annuity, you give the insurance company a lump sum of money, and they annuitize it back to you minus their fee (guarantee you payments over a specific period of time - often for the rest of your life). You can create a pseudo-pension this way. See http://www.immediateannuities.com to see what amount of income you can get for a certain amount of money.

Then, there are Index Annuities. These start to get more complex. They usually guarantee a minimum return each year or a percentage of the growth of the S&P 500 up to some cap. For instance they may guarantee a 3% return or 80% of the growth of the S&P 500 index up to a maximum of 9%. The thing they gloss over is that when the refer to the S&P 500 growth, they do not include dividends. This reduces the S&P 500 Index growth by nearly 2% per year. Then, at some point in the future, you probably have an option to annuitize the total value for payments over the rest of your life.

The annuity to be really careful of is the Variable Annuity. The insurance company sets up what look like mutual funds and you invest your money into these 'mutual funds' any way you want to. The selling point is that gains are protected from income taxes, just like with a 401(k) or an IRA. What they don't dwell on is that these mutual funds normally have expense ratios over 2%. They also don't dwell on the fact that after you purchase a variable annuity, you cannot sell out of it without huge penalties for the first 7 to 10 years. You are locked in. You may be able to exchange out of one company and into another company's anuity, but it will still be expensive.

Now, they are combining variable annuities with health and long term care insurance. This is getting so complex that it is nearly impossible for an individual to properly evalute it. Oh, and they may throw in whole life on top of the annuity just for good measure.

So, if you are considering an annuity, take a copy of the contract to an independant CPA or fee-only CFP to review it before you sign it. They will be able to spot the hidden costs and tell you what you are really buying. Then, after you fully understand it, you will be able to make an informed decision as to whether or not it is right for you.

And if you are thinking about an annuity, but haven't talked with an insurance salesman yet, be prepared for a hard sell, much like what you'd get if you go to one of those 'free' weekends at a timeshare facility.

Russ

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9951 of 19414
Subject: Re: Why do we not like annuities? Date: 7/24/2005 8:30 PM
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Annuities make tons of money for insurance companies and the brokers who sell the annuities. The money they make comes off the backs of the folks who actually earned it. Keep your money, invest it yourself, and screw the insurance companies and financial planners who peddle these fraudulent investments.

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Author: pauleckler 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: 9962 of 19414
Subject: Re: Why do we not like annuities? Date: 7/25/2005 1:42 PM
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For a run-down on annuities, check out the Annuities board, and especially this Foolish article on the subject.
http://boards.fool.com/Message.asp?mid=20902854

Annuities tend to be pushed by the people who sell them because they are high commission products. But for those who are not able to manage their own investments, they may be useful. Be careful to choose a low cost one if you need them.


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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9963 of 19414
Subject: Re: Why do we not like annuities? Date: 7/25/2005 2:49 PM
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But for those who are not able to manage their own investments, they may be useful. Be careful to choose a low cost one if you need them.

The insurance companies and brokers who peddle annuities don't know how to manage anyone's investments, so why would you want them to manage your's. If you don't know anything about investing, then it's past time to learn. Otherwise, you can't complain when brokers and financial planners steal half your money to pay for their expensive cars, country club memberships, and second and third homes.


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Author: pauleckler 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: 9968 of 19414
Subject: Re: Why do we not like annuities? Date: 7/26/2005 3:26 PM
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I certainly agree that it is best for each of us to learn to manage our own investments. Not everyone can do that.

Some brokers, insurance agents, and financial planners do seem to be in it for themselves rather than their clients. However, some do OK for their curstomers.

Plenty of insurance companies do have professionally managed investment portfolios. Yes, their fees are often high, but companies like Vanguard, Fidelity, and TRowePrice offer annuities. Theirs have low fees.

Fairly priced annuities are possible for those who shop for them.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9977 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 12:41 PM
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Author: pauleckler | Date: 7/26/05 3:26 PM | Number: 9968
Plenty of insurance companies do have professionally managed investment portfolios. Yes, their fees are often high, but companies like Vanguard, Fidelity, and TRowePrice offer annuities. Theirs have low fees.

Fairly priced annuities are possible for those who shop for them.


I fully agree with Paul. Annuities are not always bad! In fact, for some people, a fixed or indexed annuity is exactly the right for them. Even variable annuities are right under certain circumstances.

However, do not buy an annuity of any kind until you fully understand it and all its costs. Most people should have a qualified person evaluate the contract before signing, such as an independant, fee-only, CFP, CPA, etc.

Russ

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9978 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 3:20 PM
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Most people should have a qualified person evaluate the contract before signing, such as an independant, fee-only, CFP, CPA, etc.

Finding a truly fee-only financial advisor is like finding virgins giving birth.


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Author: jg4 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9979 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 4:33 PM
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I have been looking at Vanguard's immediate life annuity as part of my portfolio strategy. The reason? At 65, I can withdraw more than the 3-4% I use now for my portfolio. The inflation indexed annuity they have is about 5% withdrawal rate and the non-inflation indexed is much higher. Lots of arguments to consider on a comparison of these two approaches, but I am aware of them and not proposing a discussion here.

The thing I was wondering about is how they handle taxes. For example, suppose an after tax lump sum is used for an immediate life annuity that is not inflation indexed. How do they calculate the taxable portion of the withdrawal? It would seem they would be incented to keep as much principle as they can and push the taxable gains onto me. Would these gains be ordinary income or dividends? I presume return of principle is not taxable?

Anyone know or have a Vanguard link that discusses?

Thanks,
JG

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9980 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 4:37 PM
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Author: ResNullius | Date: 7/27/05 3:20 PM | Number: 9978
Finding a truly fee-only financial advisor is like finding virgins giving birth.


If you live near a medium or larger size city, it is easy to find a fee-only advisor. Just look one up on http://www.napfa.org/index2.htm . This website also has lots of sound advice on how to choose a fee-only planner who is right for you.

Russ

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9981 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 5:16 PM
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Author: jg4 | Date: 7/27/05 4:33 PM | Number: 9979
The thing I was wondering about is how they handle taxes. For example, suppose an after tax lump sum is used for an immediate life annuity that is not inflation indexed. How do they calculate the taxable portion of the withdrawal? It would seem they would be incented to keep as much principle as they can and push the taxable gains onto me. Would these gains be ordinary income or dividends? I presume return of principle is not taxable?

Anyone know or have a Vanguard link that discusses?


Vanguard provides a link to AIG which is the insurance company they use for their annuities:

http://www.aigretirementgold.com/vlip/VLIPController?page=FAQ

Excerpt:

*** quote
In general, there is no taxable event at purchase. When you purchase an income annuity using qualified (pre-tax, such as from an IRA, 401(k), or 403(b) plan) money, the income you receive is taxed as ordinary income in the year it's received. If you purchase an annuity on an after-tax basis (savings that have already been taxed), a portion of each annuity payment will be excluded from taxation until your after-tax purchase amount has been returned to you.
*** unquote

So, assuming you own an immediate annuity on your life alone, purchased with after tax money, and based on your age, a certain percentage of each payment you receive will be return of principal, which you will receive tax free. The remainder will be ordinary income taxed at your marginal rate. For example, at my age, 58, I would receive about 58% return of principal and 42% ordinary income. If I were to live past my actuarial age limit, the principal payments would become exhausted and the payments from then on would become 100% ordinary income.

Just like with an IRA, there is no special tax treatment for capital gains or dividends that occur inside an annuity.

Russ

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9982 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 6:19 PM
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This website also has lots of sound advice on how to choose a fee-only planner who is right for you.

I'm sorry to say that I have no faith at all in financial planners, regardless of how they claim their fees are based. I think folks are just as well off putting using the Wall Street Journal's monkey to throw darts.


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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9983 of 19414
Subject: Re: Why do we not like annuities? Date: 7/27/2005 9:14 PM
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Author: ResNullius | Date: 7/27/05 6:19 PM | Number: 9982
I'm sorry to say that I have no faith at all in financial planners, regardless of how they claim their fees are based. I think folks are just as well off putting using the Wall Street Journal's monkey to throw darts.


I'm not sure why you are so negative about fee-only planners. Have you ever talked with a NAPFA planner? Unless you have, I don't think it is fair to judge them like you have.

All of the NAPFA planners I have met, are very reputable, knowledgeable, and adhere to asset allocation principles that most of us follow here on TMF. All are required to have earned one or more of the accepted planner certifications, usually CFP. They recommend mainly low cost, no-load mutual funds or ETFs, unless you want something else (for whatever reason). They know details of 529 plans, bypass trusts, generation skipping trusts, Q-Tips, charitable remainder trusts, family limited partnerships, wills, codecils, IRAs, 401(k)s, 403(b)s, 72t withdrawals, 72q withdrawals, taxes, term life vs whole life, mortgages, loans, etc, etc. They recommend low cost online brokerages for those who use the internet and want to buy stocks. They do not sell annuities, but they know where to get them. They work with estate lawyers to set up your estate plan, and CPAs on your taxes - if you hire them to.

But, that doesn't mean they give away their services. You pay for them in an hourly fee, and it isn't cheap. Or, you can hire them to totally manage your money using low cost no-load funds if you want - anything you want them to use. Many high net worth people hire them to manage their finances full time.

Hiring a fee-only planner for a one-time checkup can be a very smart thing to do whether you are just planning for retirement or already retired.

Even if you fully understand investing, what about all the other things involved with financial planning?

Here is the Code of Ethics that all NAPFA members must agree to:

*** quote ***
NAPFA Code of Ethics

Recognizing our fiduciary responsibility to clients and the public, NAPFA Members uphold the highest standards of care in the industry by espousing and practicing:

Objectivity
Complete Disclosure
Integrity and Honesty
Competence
Confidentiality
Fairness and Suitability
Professionalism, and
Regulatory Compliance.
NAPFA Fiduciary Oath


The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.

The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client's purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client's business.

What the Fiduciary Oath means to you - the client

I shall always act in good faith and with candor.
I shall be proactive in my disclosure of any conflicts of interest that may impact you.
I shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.
*** unquote ***

Russ

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Author: jg4 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9987 of 19414
Subject: Re: Why do we not like annuities? Date: 7/28/2005 5:49 PM
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So, assuming you own an immediate annuity on your life alone, purchased with after tax money, and based on your age, a certain percentage of each payment you receive will be return of principal, which you will receive tax free. The remainder will be ordinary income taxed at your marginal rate. For example, at my age, 58, I would receive about 58% return of principal and 42% ordinary income. If I were to live past my actuarial age limit, the principal payments would become exhausted and the payments from then on would become 100% ordinary income.

Thanks Russ. Interesting. The annuity would increase my taxable income over managing the money myself. So without the annuity I have much more control over taxable income. This is a big consideration for me.

The higher withdrawal rate and income for life features are nice, but this must be weighed against the increased taxable income.

A downside for an annuity that I hadn't seen before.

JG

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Author: frankjr101 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9994 of 19414
Subject: Re: Why do we not like annuities? Date: 8/17/2005 5:38 PM
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Finding a truly fee-only financial advisor is like finding virgins giving birth.

That is the absolutely the most belly-laugh statement I've read. Thank you; we do need a good laugh.

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