Annuity Recomendation

[VolAgent]

Right, but that's a given.

You implied otherwise.

So let's break it down.

If you have some serious dough to invest, you could potentially replicate a FIA. However, it would probably take mid to high six figures to do it right. You could potentially do even better than a FIA. However, you trade even high potential for some risks not faced in a FIA.

But for the average consumer, it is unrealistic to "build your own FIA".

Fair enough?

 

[iceco1d]

That's accurate, but I didn't mean to imply that income riders could be replicated. I meant the FIA contract itself, and earned interest, could be replicated more effectively, with the caveat that it would require a lot of money, time, and knowledge.

If you have a client that has a concern that is, "I don't want to run out of money!" (on a nominal basis), an annuity with an income rider is the only thing that can guarantee that (whether you fancy indexed or variable).

 

[scagnt83]

No you aren't. You're doing the same thing the insurer is doing. And because of the leverage provided by the options, you could put 90% in Treasuries, or maybe 95%, and only buy calls with a smaller amount.

My numbers were shooting from the hip.

So you claim that Options are just as safe as Preferred Stock?

You say its not taking on more risk because you are still returned your principle.
But its more risky because you are taking on more risk with that 15% by using options over preferred stock.

And if you increase your fixed position to 90%-95%, thats just reducing your guaranteed minimum and increasing the chance of receiving it. Or in other words, it creates a potential lost opportunity cost.


And the risk difference in Preferred Stock vs. Index Calls is HUGE!!!!!

Risk is more than just protecting your basis. To say that using Options over Preferred Stock would not increase risk is glossing over a lot of the facts.



On a separate note.
Notice all of the financial instruments we have gone through now?? AAAs, GNMAs, Tnotes, Index fund, Preferred stock, options.

Its extremely hard to compete with the offsetting of risk and principle protection that IAs afford you.

 

[iceco1d]

Scant,

No offense, but you don't know what you're talking about. No one said anything about "Preferred Stocks" at any point. I made a glancing comment about using dividend paying COMMON STOCKS because someone implied options were complicated.

My entire point, was that the INTEREST CREDITING STRATEGY going on behind the scenes in a FIA contract can be replicated by private investors, and the insurer and agent could be cut out, and the client could get a higher return. PERIOD. That is a FACT.

Do you need a decent chunk of change to do it? Yeah. Would most people know how to do it, including advisors? No. Would it be annoying as hell to implement? You betcha.

I never said anything about income riders. Posters were insinuating that insurance companies had some type of "magic" that could not be replicated by a FIA contract, and were comparing returns, and I wanted to point out that wasn't the case.

Now, your allegation that increasing your fixed allocation would REDUCE your minimum guaranteed rate, is completely incorrect. Increasing the amount going to bonds would INCREASE the guaranteed minimum return.

Bond Example: $92,000 invested in 10 year Treasuries at 1.85% yield (on a 10 year, which is current), will give you $110,509 after 10 years.

FIA Example: $100,000 invested in a 10 year FIA with a GMR of 1.00%, will give you $110,462 ASSUMING you have a contract that applies the GMR to 100% of the premiums.

The WORST CASE yield to surrender is BETTER on the T-Bonds.

Now the FIA is going to do, whatever it does, based on caps, spreads, etc. in the contract.

On the DIY FIA, you can do WHATEVER YOU WANT with the $8,000 you did not put in T-Bonds. You could literally make a FIA that credits interest based on whether you roll black or red in Vegas. There is no "OMG it's in the stock market!" nonsense, because you are already GUARANTEED $110,500 after 10 years from your T-Bonds.

Now, the REASON you need to buy call options to DIY, is because options contracts are leveraged. They are for 100 shares per contract. So you can get "100% particpation in the market" by investing only say, 10% of your money, because the contracts are leveraged. Now, you also have to worry about Time Value degradation on the option contract, since they expire, whereas there is no time value to worry about when buying common stock.

But the assertion that there is "more risk" in my DIY strategy is not true, there is less risk. The bonds are backed 100% buy the Federal Government, and the options contracts are cleared through the OCC, which is also backed by the Federal Government.

If the evil stock market tanks, your options expire worthless, and your FIA gets no credited interest. At the end of the 10 years, the T-Bond holder gets an extra $50 over the FIA holder.

If there is credited interest because the market goes up, then the DIYer "contract" will earn more because they will hold the appreciated options contracts (which they can either execute, or close the position by purchasing an offsetting option contract).

The DIYer, assuming he/she knows the ins and outs of options contracts (i.e. the Greeks), can essentially create any GMR and crediting method he/she wants, and have their entire strategy back by the Federal Government.

Again, nothing about income riders, that's a different conversation.

I can continue this conversation further if you want, but what I am stating here are facts, no opinion. I have a feeling I'm getting so much push back because you're offended by what I'm saying, and I'm not sure why.

I'm plainly admitting this isn't realistic to do for most clients, and that I don't. And that I have no problem with FIAs, and have solicited them myself. So what's the disconnect here?

 

[Norwayguy]

That's accurate, but I didn't mean to imply that income riders could be replicated. I meant the FIA contract itself, and earned interest, could be replicated more effectively, with the caveat that it would require a lot of money, time, and knowledge.

If you have a client that has a concern that is, "I don't want to run out of money!" (on a nominal basis), an annuity with an income rider is the only thing that can guarantee that (whether you fancy indexed or variable).

Actually a plain old vanilla annuity annuitized will also accomplish this...Its the age olde reason for an annuity.

 

[njh_lfg]

iceco,

Fighting a losing battle my friend.

I agree with you 100% but when you get individuals who only have a insurance license in this type of conversation they are going to attempt to poke holes in everything you say.

Fact of the matter is that those who do not think you can replicate a FIA with minimal risk do not fully understand the market and how to use its tools. Yet another prime example why I believe you should have to have a securities license in order to sell a FIA. How can you recommend allocation in the indexes if you do not understand or believe in the market or have people move money from a security??? Makes no sense!

 

[VolAgent]

iceco,

Fighting a losing battle my friend.

I agree with you 100% but when you get individuals who only have a insurance license in this type of conversation they are going to attempt to poke holes in everything you say.

Fact of the matter is that those who do not think you can replicate a FIA with minimal risk do not fully understand the market and how to use its tools. Yet another prime example why I believe you should have to have a securities license in order to sell a FIA. How can you recommend allocation in the indexes if you do not understand or believe in the market or have people move money from a security??? Makes no sense!

You do realize over half the people who have commented are either securities licensed, or have voluntarily surrendered their license?

 

[Franz Kafka]

You do realize over half the people who have commented are either securities licensed, or have voluntarily surrendered their license?

Yea as if securities license is an accomplishment or something ...

 

[njh_lfg]

Well it doesn't show with all the negative comments regarding the feasibility of the alternative FIA strategy.

I understand that many people who do not hold themselves to a fiduciary standard would rather put a client in a crappy bonus fia that pays a high commission, and I wish they would just say that rather than trying to poke holes in strategies that work if you have the financial know-how.

All the lawsuits against FIA carriers is due to unethical, close-minded agents who prey on individual who fall for their sales tactics. If everyone treated their "clients" like their mother the industry would not have such a bad rap PERIOD
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Yea as if securities license is an accomplishment or something ...

not as easy as in insurance license

 

[Franz Kafka]

not as easy as in insurance license

BULLSHIT! Was much easier than insurance license - at least for me.