Why Bother with Fixed if Variables Have Lock-ins?

jtrigowski

New Member
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I'm still new to understanding all the complexities of annuities. My main understanding is variable annuities allow you to hedge inflation risk but expose you to the risk of market fluctuations, while fixed annuities expose you to inflation risk, but avoid market fluctuations and grow at a steady rate.

With that being said, I'm reading a lot about these Prudential HD annuities which lock in the highest daily value and provide a 5% guarenteed return off that. Now if the product truely functions like that, can someone explain what risk I would still have by choosing one of these over a fixed annuity??? Do fixed annuties in the current low interest rate environment offer higher fixed rate of returns than 5%?

I know I'm missing something here...
 
I'm not real sure about that product but I do know a rep who just wrote himself one for 250k right before he wrote one for 1.2 million on a client. He also put 900k into a fixed annuity for same client.

Word on the street says that is the HOT VA right now. I know guys writing boatloads of it. I've been curious but haven't been able to get anyone to sit and splain it to me.

One rep I know was writing a lot of fixed business but with rates where they are can't pull himself to do it unless it is CD type monies not saying he doesn't.

No fixed products are paying 5% and just like other securities you are risking your principal. I don't know enough about that product though. There was another HOT VA but apparently it got too hot and they had to tweak it since too much money was flowing into it. I suspect the same might happen with this product because everyone jumped to it when the other one went poo poo.
 
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I dropped my securities registration beggining of the year but are you able to pull out more than 5 or 10 percent at a time without having that guaranteed percent return disappearing?
 
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Well I had review prudential VA sales presentation geared toward the client. In order for you to get that %5 you have to Annuitized .
It's a very complicated product to explain to the senior market.

I did a presentation with a EFS from my company on that product. He showed them the CD presentation and went to explain it. Then the client had questions. Not only we lost the sale they also moved there fixed annuity that they had with me $139k annuity. Lost the sale and the client. :no:
 
My main understanding is variable annuities allow you to hedge inflation risk but expose you to the risk of market fluctuations, while fixed annuities expose you to inflation risk, but avoid market fluctuations and grow at a steady rate.

Historically fixed annuities have exceeded inflation. FAs are an inflation hedge too, but with current rates, not much of one.
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Well I had review prudential VA sales presentation geared toward the client. In order for you to get that %5 you have to Annuitized .

Not true.


The HD is just an Income Rider on their VAs. You do not have to annuitize.

It gives a third option to take income from the product INSTEAD of Annuitizing or taking normal free withdrawals.

The rider Guarantees a set accumulation (5% now I guess.. it used to be 6%) and then a set lifetime income % based on age.

It does not annuitize the contract. The Income can be turned off and on, and payments are deducted from your base account (market linked account); so if you stopped income, you could hypothetically still have a lump sum available for use.


HD means highest daily. It "steps up" (increases) your Income Base if the highest day of the year is greater than the guaranteed accumulation.
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It's a very complicated product to explain to the senior market.

Sometimes it can be, but not if you know the product well.
 
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jtrigowski,

There are a lot of folks going around selling VA's and specifically Pru VA's just like you said. It will be lawsuit city in 10 years.

The 5% is an INCOME RIDER...not cash value. 5% is not credited to your money that you can cash in but to a hypothetical INCOME ACCOUNT that you can not cash in or pass to beneficiaries.

With many of these VA's, you cannot touch the money in the annuity for years to get the 5%. Prudential's VA's cannot be touched whatsoever for 10-12 years depending on the contract.

If you die or have to cash in the account to pay for a nursing home, not only do you not get the 5%, but you get whatever the stock market and the fees for these riders have done to your account.

I have talked to many prospects who own something like this. None have any clue about the restrictions and loopholes and almost all of them think the 5% is on their cash value.

In order to get the 5%, you have to not touch the money for a decade or more, and withdraw 5% of the income account value annually for the rest of your life. A side note, accumulation rates are less important than distribution rates...Pru's 5% withdrawal rate is poor compared to other companies' 6% or 7%...Heck, for the same fee as Pru, some indexed annuity companies will give you 7 or 8% instead of 5.

Sorry for the long answer, but IMHO, I feel that many VA's are misleading and not understood by the brokers that sell them, let alone by the clients.
 
Now if the product truely functions like that, can someone explain what risk I would still have by choosing one of these over a fixed annuity??? Do fixed annuties in the current low interest rate environment offer higher fixed rate of returns than 5%?

I know I'm missing something here...


The risk of the Pru HD is in your liquidity.

The Guaranteed % is not liquid. It is only a value used to calculate a yearly income.
You cannot take anymore per year than your age based income percentage (5%-8%)

In other words, you cant lump sum out at that amount.
Your liquid account (the one you may use as you wish) is the account that is based on the market.


So it all just depends on your needs. It can be great for a portion of your portfolio.


But if the market tanks then you are basically forced into a lifelong contract unless you want to take a loss.



On a separate note; there are much better Income Riders than Pru's. Mostly on Indexed Annuities.

American Equity has an 8% accumulation Income Rider, with 5%-8% lifetime payouts.

Aviva has 7% and it doubles if you need LTC


The thing about the Indexed product is that it will never be underwater.
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I feel that many VA's are misleading and not understood by the brokers that sell them, let alone by the clients.

That is very true! This board is a perfect example of that!
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There was another HOT VA but apparently it got too hot and they had to tweak it since too much money was flowing into it. I suspect the same might happen with this product because everyone jumped to it when the other one went poo poo.

Pru had an old HD rider that had better rates.

JN has the best VAs (imo), both the subaccounts and income rider are better. (last time I checked)


The bad thing about Pru is that the subaccounts are not great, and they force you into bond allocations once you start income. In other words; your base account will not perform very well compared to others. (especially once you take out 3%-4% in total fees)

It basically forces the product to be a deferred SPIA.
 
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JN has the best VAs (imo), both the subaccounts and income rider are better. (last time I checked)

Yeah you might want to check again. The subaccounts are still great but the rider changed recently. Still a good product. From what I have heard some are more suitable for different reasons. For instance, for a married couple, the MetLife VA might be a better fit than a JN.
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The bad thing about Pru is that the subaccounts are not great, and they force you into bond allocations once you start income. In other words; your base account will not perform very well compared to others. (especially once you take out 3%-4% in total fees)

It basically forces the product to be a deferred SPIA.

I'll have to ask my buddy about this. He's wrote a dozen of them or so in just the last couple of months, he should know. His favorite fixed products right now are a couple of JN products and the ING PREM 3

They were writing a boatload of G.A. but not anymore with caps and minimums where they are on their products.
 
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If you want a "phantom" guarantee that is based solely on the claims-paying ability (to charge higher M&E on your investment values in the VA)... then get the Variable Annuity.

My guarantee to you is that you won't be able to move that money back out of that annuity to anything else.

If you want real cash value guarantees, then you'll want a fixed or fixed indexed annuities.

JFBAgent has it right. Read his post carefully.
 
To paraphrase Franz, buying a VA with an income rider is like a marriage. Till death do us part. If you want out early, it will be ugly. You give up all guarantees and just take the cash value, which may or may not have kept up with inflation after account performance and fees.

Also, back when I surrendered my securities registration, management fees, M&E and rider fees were in the 3% range. It may be even higher now. That is a big drag.

Now, if all you ever want is income, there are some good products out there, but there are also some FIAs will good riders too. At least with an FIA you can walk away with something.
 
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