davephx
Expert
- 57
My current thought is to ignore any income riders based on the following thinking (which I welcome being challenged on)!
When I have recently evaluated up for renewal policies from 10+ years ago that had guaranteed life income riders, I did a side by side spreadsheet of about a dozen SPIA's. Instead of taking the income rider option, it was fairly easy to find a SPIA with a much better payout rate and options. This was even though the original annuity was during much higher interest rates. (and started with a 7.5% S&P pt-to-pt annual cap which declined to 3%).
The SPIA which was life/10 year certain had an IRR of only about 2% ( vs just returning your own money), but still better than in the now surrender free old indexed annuity same income option.
Question:
If you elect the income rider now when take out new policy do you lock in todays near historic low rates? I would think so since they have to use some rate of return to illustrate long-term living benefits and this is about the only variable other than age. But it was surprising how much better I could do with a SPIA at today's low rates vs the income option from 10+ years ago.
Although I have a CPA background and accounting degree its been two many decades to remember how to easily compute a compounded annual or IRR return on an annuity stream. I may do more research on that Use to do stuff like that on an old HP-25 in the 70's. I think the formula is PV = PMT * [(1-(1+r)^-n)/r] ! But my math skills are no longer as sharp as decades ago.
Someone did figure how bad the return was on a variable annuity income option. Example used:
$100k into a variable annuity with a 7% roll-up and a 5% withdraw rate Assumed invested at age 65, waited 10 years and then took withdrawals using the income guarantee. (I assume the 5% was on life certain basis don't recall how those worked).
The returns were sort of what I expected:
If he lived 10 more years to age 85 the real return would be 0.1%/year
Age 90 2.3%/year.
Age 95 3.5%
Age 100 4.2%
This of course is pre-inflation which would reduce the real returns.
Back in the pre-2008 days wrote some great variables when we could be very aggressive in subaccounts and used minimum guranteed rollups of 5-7% on income rider or DB. Then of course after the crash they eliminated gradually most of the aggressive options making it less likely would ever make up the losses which made no sense.
Fortunately, many of the equity options were just locked out for new programs but most clients were able to keep some good equity positions.
The result was no one every took the income options since they had liquidity from other sources and waited out the rebound where contract values are/were greater than the guarantees.
Unfortunately, we don't have those good options today or in many cases if have so much loss they force you into bonds so again, will not likely recover.
There are a few VAs with good equity choices but tend to be very expensive.
Today am looking more at indexed annuities for the 7-10 year save money to lock in some of the last 5 years great equity mutual fund returns for part of portfolio that doesn't need liquidity. But am avoiding income rider fees since even if want to have eventually turn into income want the flexibility to shop of the best SPIA at that time. Does that make sense?
The problem I have with todays indexed annuities is the 1% minimum caps most can go to. Other than that I like some indexed with current caps about 5% (S&P500 annual pt-to-pt).
With interest rates in decline for the past 34 years, we don't have any experience to see if insurance companies might Increase future caps with higher interest rates. The other variable is the cost of the special call options they do which I don't have a handle on trying to predict future relative costs. But in determining caps on indexed products I believe interest rates are more the key issue.
Am also considering some ULs and WL either as a MEC or not (for borrowing) but of course funding enough so no risk of lapse. Have not written a UL or WL for many decades so am just starting to evaluate again. Going to Las Vegas conference in early August - especially interested in the panel about UL vs WL argument.
Most of my clients are older and more concerned about living too long (I plan to age 100) than dying too soon!
When I have recently evaluated up for renewal policies from 10+ years ago that had guaranteed life income riders, I did a side by side spreadsheet of about a dozen SPIA's. Instead of taking the income rider option, it was fairly easy to find a SPIA with a much better payout rate and options. This was even though the original annuity was during much higher interest rates. (and started with a 7.5% S&P pt-to-pt annual cap which declined to 3%).
The SPIA which was life/10 year certain had an IRR of only about 2% ( vs just returning your own money), but still better than in the now surrender free old indexed annuity same income option.
Question:
If you elect the income rider now when take out new policy do you lock in todays near historic low rates? I would think so since they have to use some rate of return to illustrate long-term living benefits and this is about the only variable other than age. But it was surprising how much better I could do with a SPIA at today's low rates vs the income option from 10+ years ago.
Although I have a CPA background and accounting degree its been two many decades to remember how to easily compute a compounded annual or IRR return on an annuity stream. I may do more research on that Use to do stuff like that on an old HP-25 in the 70's. I think the formula is PV = PMT * [(1-(1+r)^-n)/r] ! But my math skills are no longer as sharp as decades ago.
Someone did figure how bad the return was on a variable annuity income option. Example used:
$100k into a variable annuity with a 7% roll-up and a 5% withdraw rate Assumed invested at age 65, waited 10 years and then took withdrawals using the income guarantee. (I assume the 5% was on life certain basis don't recall how those worked).
The returns were sort of what I expected:
If he lived 10 more years to age 85 the real return would be 0.1%/year
Age 90 2.3%/year.
Age 95 3.5%
Age 100 4.2%
This of course is pre-inflation which would reduce the real returns.
Back in the pre-2008 days wrote some great variables when we could be very aggressive in subaccounts and used minimum guranteed rollups of 5-7% on income rider or DB. Then of course after the crash they eliminated gradually most of the aggressive options making it less likely would ever make up the losses which made no sense.
Fortunately, many of the equity options were just locked out for new programs but most clients were able to keep some good equity positions.
The result was no one every took the income options since they had liquidity from other sources and waited out the rebound where contract values are/were greater than the guarantees.
Unfortunately, we don't have those good options today or in many cases if have so much loss they force you into bonds so again, will not likely recover.
There are a few VAs with good equity choices but tend to be very expensive.
Today am looking more at indexed annuities for the 7-10 year save money to lock in some of the last 5 years great equity mutual fund returns for part of portfolio that doesn't need liquidity. But am avoiding income rider fees since even if want to have eventually turn into income want the flexibility to shop of the best SPIA at that time. Does that make sense?
The problem I have with todays indexed annuities is the 1% minimum caps most can go to. Other than that I like some indexed with current caps about 5% (S&P500 annual pt-to-pt).
With interest rates in decline for the past 34 years, we don't have any experience to see if insurance companies might Increase future caps with higher interest rates. The other variable is the cost of the special call options they do which I don't have a handle on trying to predict future relative costs. But in determining caps on indexed products I believe interest rates are more the key issue.
Am also considering some ULs and WL either as a MEC or not (for borrowing) but of course funding enough so no risk of lapse. Have not written a UL or WL for many decades so am just starting to evaluate again. Going to Las Vegas conference in early August - especially interested in the panel about UL vs WL argument.
Most of my clients are older and more concerned about living too long (I plan to age 100) than dying too soon!
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