Source LINK.

A Reporter’s Guide To Fixed Annuities

It seems like whenever some reporters or financial writers attempt to talk about fixed annuities – whether fixed rate or fixed index – they get it really screwed up. They’ll often write about fixed annuity fees – although fixed annuities don’t have fees. Or they’ll say that the consumer is locked into an unchanging income stream – which is not the case. Or they’ll try to balance the story by asking stockbrokers and securities analysts what they think of fixed annuities – which is somewhat akin to asking a Boston Red Sox fan what he thinks the New York Yankees chances are this year.

I was somewhat confused about these reporters and their sometimes negative approach to fixed annuities, so I asked a financial writer I know for his perspective. My friend explained it was possible that these writers, instead of taking the time to thoroughly investigate and learn about fixed annuities, were trying to force this new fixed annuity information to meet the preconceived conclusions they’d already developed from other areas.

Some reporters have done real research on fixed annuities and simply decided they like other alternatives better than fixed annuities. I thank them for their dedication and appreciate their analysis. For the others, in an attempt to increase general knowledge of the fourth estate I have prepared a little piece, designed for reporters, on what fixed annuities are and how they work.

Fixed Annuities Don’t Have Fees
The way a fixed annuity credits interest may best be compared with the way a bank credits certificate of deposit interest. The bank says they will pay 4% interest on the CD. Okay, what are the bank’s fees and expenses on this CD? If your answer is you can’t tell and it doesn’t matter because all you really care about is the final rate you get on your money, the same logic applies to fixed annuities.

The insurance company doesn’t deduct a management fee and share a net return with the customer. Instead, just like the bank, the insurer pays a fixed return, and this may be stated as a fixed rate or as fixed participation in an index.

Might some banks have lower operating costs or higher revenues than another and thus offer a higher rate? Yes, and an insurer could spend less on office supplies than another insurer and thereby ultimately be able to pay a higher rate on fixed annuities. But I don’t know how you translate all of this into fees?

Do some annuities have fees? Yes. These are called variable annuities and they work a lot like mutual funds.

Fixed Annuities Are Not Variable Annuities
A fixed rate annuity pays a stated rate of interest that is no less than the minimum guaranteed rate of interest. A fixed index annuity pays a minimum rate of interest and bases the crediting of excess interest on the movement of an external index. With a fixed index annuity the rate of participation in the index interest crediting for the period is fixed and known; the minimum guaranteed interest rate is fixed and known; the only unknown is how the index will move. Neither fixed rate nor fixed index annuities can lose principal or credited interest if the stock market goes down. And yet reporters always try to segment fixed annuities as variable annuities - let’s look at the differences.
►Variable annuity principal is subject to market risk. Fixed annuity principal is not subject to market risk.
►Variable annuity returns may be lost due to market risk. Fixed annuity credited interest cannot be lost due to market risk.
►Variable annuities have mortality charges and management fees. Fixed annuities do not charge mortality and management fees.
►Variable annuities do not pay minimum interest rates. Fixed annuities do credit minimum guaranteed interest rates.

99% Of Annuities Are Not Annuitized
Every definition of an annuity I’ve read starts out “An annuity is a contract in which an insurance company makes a series of income payments at regular intervals”, but the reality is with a fixed annuity this is almost never the case. And yet reporters often try to dismiss fixed annuities as poorly performing pensions. A consumer can annuitize a fixed annuity and receive an income they can never outlive – and this is a wonderful benefit – but anecdotal evidence says that 99% of annuities are not annuitized, and the owner either spends the accumulated value in later years or passes the entire annuity along to their heirs.

A fixed annuity is an accumulation vehicle. It should be compared on that basis with other savings instruments. Unlike other instruments fixed annuities provide the option of a guaranteed income, but it is a choice not a mandate.

A Maturity Date Is Not Life Without Parole
One of the stranger conclusions I read once was that annuities lock up your money for 40 or 50 years. Fixed annuities have maturity dates that permit the consumer to keep an annuity until age 85 or 95. However, saying that this locks you in is like saying if you get on Interstate 80 in New York you can’t get off until you reach San Francisco. A fixed annuity is a financial highway, and just like on the Interstate the driver can choose to exit at any time.

Fixed Annuities Are Not Subject To Capital Gain Taxes
I once saw a reporter argue that fixed annuities had higher taxes than mutual funds. I think the argument the writer was trying to make is that money taken out of fixed annuities is taxed as ordinary taxable income while long-held mutual funds may be taxed at lower capital gain rates. Let’s not respond by showing how grossly tax-inefficient some mutual funds are, or how a long-term comparison of tax-deferral versus capital gains often tilts the scales in favor of tax-deferral, because the real problem here is that the reporter was trying to compare two entirely different things.

Savings vehicles are subject to ordinary income tax, not capital gain tax. One wouldn’t tell someone that they shouldn’t open a bank savings account or buy a CD or purchase Savings Bonds because the earnings were taxed at a higher rate than if they invested in a growth fund. Fixed annuities aren’t a capital investment; they are interest paying savings instruments.

Fixed Annuities Are Almost Always Appropriate For Seniors
Let’s understand what a fixed annuity is. A fixed annuity is a savings vehicle. A fixed annuity pays a fixed interest rate or index-linked interested based on fixed participation for the period. A fixed annuity gives the annuity owner control over when taxes are paid on interest earned. If your goal was to maximize portfolio growth you wouldn’t put all of your money into a fixed annuity.

But let’s compare fixed annuities to other savings vehicles. A fixed annuity – whether it is a fixed rate or fixed index – offers the potential for higher interest than you might receive from a bank or savings bonds.
●Neither principal nor credited interest is subject to market risk.
●Although fixed annuities aren’t federally insured, their track record of principal protection and safety is extraordinary.

And unlike bank accounts or taxable bonds fixed annuity owners decide when to take the interest and pay the tax – not the IRS. If seniors want an instrument that is very safe, may pay higher interest than other savings vehicles, and gives them control over their taxes, then fixed annuities are appropriate.

Fixed Annuities Pay Fixed Annuity Returns
A couple of years ago I saw reporters criticize fixed annuities because they were “only” paying 7%, 8% 9% interest and instead reporters trumpeted the double-digit returns of mutual funds. It’s 2002. No fixed annuity has given back any credited interest and we know what happened to the double-digit mutual fund gains.

Fixed annuities aim for savings instrument-like returns while providing savings instrument-like protection of principal. Once again, variable annuities and mutual funds are investments; certificates of deposit and fixed annuities are savings instruments. Reporters should keep any comparisons valid and consistent.

Fixed Annuities Aren’t Perfect
As savings vehicles fixed annuities have imperfections. If you’re under age 59½ the IRS will hit you with a 10% penalty in additional to normal taxes on interest taken. Although fixed annuity surrender periods can be as short as one year, you could find yourself facing some stiff charges if you want to get out of some fixed annuities early. And although there is a minimum return, there’s no guarantee that the insurance company will always be able to credit a competitive interest rate – future rates to a large part depend on the economy and the management decisions of the insurance company.

In Short
Fixed annuities are a valid saving vehicle with strengths and weaknesses and should be explored and written about in that context. Variable annuities are investments. And frankly, if a reporter is not going to take the time to understand the basic difference between investments and savings instruments they shouldn’t write the article.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Good stuff.

Thanks Mynion.

and according to Chuck.....

Click Source Link.

Charles Schwab & Co., Inc., a licensed insurance agency, offers annuity products that are issued by non-affiliated insurance companies.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Click HERE for convoluted and INCORRECT information on annuities from Albert B. Crenshaw who wrote for the Washington Post business section for 24 years.

It bears repeating from my first post above, "...if a reporter is not going to take the time to understand the basic difference between investments and savings instruments they shouldn’t write the article."


Mr. Crenshaw wrote:
Payments from or annuitizing an annuity are NOT what determines whether it's a FIXED or Variable Annuity.
Mr. Crenshaw's statement is a total misguided characterization.


NOBODY buys an Immediate Annuity UNLESS there is a compelling reason to do so.
NOBODY.
PERIOD.
END of STORY.

Quote:

What if I die soon? Typically, payments from a life annuity end when a person dies. Thus, a premature death could mean that you don't get back all the money you paid in.

Totally false because NOBODY selects the LIFE ONLY annuity option.

NOBODY.

The most typical annuitization option is 10 year certain and LIFETIME thereafter.

Quote:

What about my heirs? Since most annuities end with the death of the contract holder, your heirs would get nothing.

Totally FALSE. The beneficiaries get the full accumulation value at death. Some contracts require payment over 5 years to get the highest payout.


Then later in the article he writes:

Quote:

Such issues, including the what-ifs and the added costs for features that address them, may explain why immediate annuities are less than 5 percent of the more than $200 billion worth of annuities sold annually.

In fact, IMMEDIATE annuities are less than 2% of the more than $200 billion worth of annuities sold annually BECAUSE NOBODY BUYS AN IMMEDIATE ANNUITY UNLESS THERE IS A COMPELLING REASON TO DO SO.

For the General Public who may read this thread Mr. Crenshaw has convoluted and mixed together Fixed Annuities, Variable Annuities, Immediate Annuities and then thrown into the mix is the LIFE ONLY settlement option that is available on ALL annuity contracts that NOBODY would EVER select.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

More FIXED annuity facts.

A fixed annuity is a contract issued by an insurance company that guarantees fixed payments for a specific time period. Income payments can begin immediately with an immediate annuity or they can be deferred to begin at a later date with a deferred fixed annuity or fixed indexed annuity.

Safety and Guarantees
For reliable growth, all fixed annuities offer a minimum interest rate guarantee. A fixed annuity can provide much greater security than many non-guaranteed investments because the value of your annuity is backed by the assets of the issuing insurance company.

Only an annuity can guarantee income you can never outlive, and annuities are available only through life insurance companies.

Death Benefit
Should you pass away before taking income, a death benefit equal to the full accumulation value of your annuity is payable to your beneficiary. Because the payment is to the beneficiary, it avoids the costs, delays and publicity of probate court.

Some contracts must be paid out to the beneficiaries over a 5 year period to get the highest payout. Those type contracts pay the highest bonus, indexed interest credits and income stream to the contract owner.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Very good information. If he really wanted to talk about what is new, he might have studied up on variable annuities that have optional riders giving guaranteed growth+market participation+second life and all the other good stuff you pointed out.

Fixed Annuities Are NOT Variable Annuities

A fixed rate annuity pays a stated rate of interest that is no less than the minimum guaranteed rate of interest. A fixed index annuity pays a minimum rate of interest and bases the crediting of excess interest on the movement of an external index.

With a fixed index annuity the rate of participation in the index and interest crediting for the period is fixed and known; the minimum guaranteed interest rate is fixed and known; the only unknown is how the index will move. Neither fixed rate or fixed index annuities can lose principal or credited interest if the stock market goes down.

And yet reporters always try to convolute and mix together fixed annuities with variable annuities - let’s look at the differences.

►Variable annuity principal is subject to market risk.
Fixed annuity principal is NOT subject to market risk.

►Variable annuity returns may be lost due to market risk.
Fixed annuity credited interest cannot be lost due to market risk.

►Variable annuities have mortality charges and management fees.
Fixed annuities do not charge mortality and management fees.

►Variable annuities do not pay minimum interest rates.
Fixed annuities do credit minimum guaranteed interest rates.

►Variable annuities are investments.
Fixed annuities are a valid savings vehicle with strengths and weaknesses and should be explored and written about in that context.

And frankly, if a reporter is not going to take the time to understand the basic difference between investments and savings instruments they shouldn’t write the article.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Hi,

But I've heard that at times it involves a lot of hassles for the beneficiary!
Also, would like you to give instances of such publicities made by probate courts.

Regards,
Jeff

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Resolve your queries through the insurance forums

Hi Jeff,

Quote:

But I've heard that at times it involves a lot of hassles for the beneficiary!

The death benefit is paid within days of the company receiving the claim form along with an original certified death certificate. The only "hassles" would be if claim form information was left blank or a failure to submit the death certificate with the claim form or if there are multiple beneficiaries ALL claim forms must be in order before any money will be paid.

Those problems above would be the claimant's errors not the fault of the insurance company.

Quote:

Also, would like you to give instances of such publicities made by probate courts.

Probate records are PUBLIC RECORDS. That means that anyone can go to the court house or official county records clerk to see and review those records.

Anyone can find out how much money you had and who you are leaving it to. In fact there are firms out there who routinely review probate records to see who the beneficiaries are that may be receiving a large inheritance and/or real estate investors looking to buy homes well under market value before they are ever listed for sale.

Probate cases are also advertised in the local paper for three (3) weeks in a row.

If by your use of the word publicity you meant the case file documents are advertized that's not the case. You must go down to the records clerk. But for a small subscription fee the case file documents are available on-line.

See THIS thread.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

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Resolve your queries through the insurance forums