Well Scott, we are getting closer to all the factual information, however, lets try and paint just a tad more complete picture.

In calling Allianz (you mentioned them in your article) this morning to get a quote as of today, an immediate annuity to a 65 year old male would be 6.89%, which does beat the 4.50% current payout a living benefit would pay to that same 65 year old male. However, what's not mentioned is,

in the case of the immediate annuity, if you were to die the next day, your wife or heirs would receive nothing! In the case of the living benefit, all remaining money would be returned to the heir.

The immediate annuity would never see a raise in income. In the case of the living benefit with Allianz, even if the value were to drop immediately, the next year would offer a new benefit to receive a raise in income, as would every year after. So while starting out at a lower rate of income, there is a very real possibility that if the value of the annuity were to ever go up in the future, the recipient would get a raise in income, which would continue for the rest of their lives. It is entirely possible in one year's time to increase the income to a number far exceeding that of the fixed immediate annuity.

Of course, there is also the ability to move your money elsewhere in the future. To take out more than the income amount in case of emergency, and the very real chance that your portfolio could increase in value because it is still tied to the market.

All of this is overlooking the real reason to buy this product, and that is to share in potential gains while protecting your income from decreasing.

When a person reaches retirment age, this is their primary concern.

I own a variable annuity with a living benefit and have been very happy thus far with the gains it has made. Perhaps you need delve even further.

You have fallen into the trap that many living benefits buyers fall into, confusing what is possible with what is probable. It is possible that when you buy a life annuity that will produce the amount of income the living benefits contract would produce that you will be hit by a bus the next day and your entire investment will be lost. It is not, however, probable. We need to base our decisions on what is probable, not what is possible.

If you do buy a life annuity and are hit by a bus the next day, you lose the $60,000 committed to the life annuity, but you still have $40,000 of money "left over" because the life annuity was delivering more income. So there is some money for heirs.

But suppose what is probable happens and you don't get hit by a bus the next day? If you buy the living benefits product your income remains the same because the combination of the charges for the product and your withdrawal rate (1) make growth very difficult and (2) subject your actual principal to severe variance sink from withdrawals being made in down markets. So the odds are that your $100,000 is slowly vaporized over time. That is what is probable when you do the math.

On the other hand, if you buy a life annuity and invest the difference and what's probable happens, you'll have the same income for life but your invest the difference account will grow and provide some combination of more income for life or a greater sum for your heirs. What the salesforce sells is what is possible. They neglect both alternatives and what is probable.

Scott

prob·a·ble (prb-bl)

adj.

1. Likely to happen or to be true.

I don't understand how you can state that it's not probable that a 65 year old person can die over the next 15 years (least case of how long it would take to go through all your money in this living benefit example), however, then state it is "probable"  that you won't get a raise in that same 15 year period when it just happened last year!

So, in your scenario, what are you doing with the remaining $40k to invest it? Isn't it just as likely to lose money based on your idea of investing it?

So, you are GUARANTEED to lose the initially invested in $60k if you die in that time period, and the remaining $40k is also at risk.

And...once again there is zero chance of getting a raise from your immediate annuity. Where is the probable in that?

In your case, you'd have to dodge a lot of buses for many years to leave more money to your spouse.

You aren't doing the math or calibrating probable.

For a 65 year old, a large majority will still be alive and collecting annuity payments after 1 years. Also after 5 years, etc. A life expectancy of about 17 years at that age means that half of all people will still be alive.

Meanwhile, the secondary account--- the 35 to 50 percent of your money that doesn't have to go into an annuity to provide the same income as the living benefits offer--- has a high probability of growing.

When all the odds are considered, most people will enjoy some combination of a higher income and larger estate using a buy a life annuity and invest the difference approach than buying any of the living benefits products.

Scott

Actually, I don't think you are calibrating properly. With todays interest rates, your remaining money will earn next to nothing in safe investments, and if you put it into the stock market, the returns  will merely be the difference between the cost of the insurance. In essence, for about 3% per year, you "insure" that if you live an average age span for a man, you will leave more money to your heirs, and if heaven forbid you don't, you won't leave your heirs with much less.

Also, you totally omit from your viewpoint, the chance of the annuity gaining value, which is a very real possibility shown just last year. Your income could rise to the level of the immediate annuity by next year.

Just curious, but do you make the same argument over the needless value of fire and theft insurance for your home?

@Art

So you are saying that assets invested outside of the immediate annuity will gain nothing, but inside the annuity, there's a 'chance' of gaining value.  Isn't the same chance - i.e., isn't it the same markets?  What magic does the annuity add, besides expenses?

That's good sales speak (and seriously, you sound like a salesman).  But Scott has noted the real odds, over and over, in multiple articles on this site.  What real numbers do you have to offer?  How many people will come out ahead on this deal?

PS - please dump the pointless comparisons with property insurance and the even more pointless dictionary definitions.

Al,

In the immediate annuity, your assets are frozen to you at the time of annuitization. You cannot, nor will not get any increase no matter what the market does from that day forward. So, what the annuity gains is that it's still invested in the market, so the income can go no lower, only higher.

Scott has not noted real odds. In fact, I don't think he actually researched the product he alluded to in his own article. And, if you look above, you'll note I did, in fact, quote very real numbers.

P.S. the discussion of property insurance is not moot. It's Scott's major issue with the cost of a variable annuity. The cost of insurance. Instead of insuring your house, you are insuring your retirement income.

Art,

If you read the collection of columns offered, you'll see that I did do research. Here's the link:

assetbuilder.com/.../living_benefits.pdf

And I did consider the odds. One of the selling advantages for these products is the illusion of having money now and later. If you buy an simple life annuity and invest the difference you could have less estate value at day one but the longevity odds favor having a much higher estate value when you die.

Scott

Thank you Scott for making my point. And while this may seem like I'm recommending a particular product, I am not. I truly doubt there is one product that is right for absolutely everyone. However, you haven't taken the time to research all products. If you had, you would know that not all variable annuities are alike. To mention one company, then state that all have the same features and benefits is doing a great disservice to the overall product.

Normally I would say it's silly to expect a writer to research ALL companies, but since you obviously have spent so much time persuading people to avoid the product, don't you think you owe it to your readers to be better versed on the workings of them?

It so happens Allianz (again, only using them because they were mentioned in your own article), have a better chance to get a raise than most other products due to there not having to hit a new high watermark in order to earn a raise. The opportunities to make more in income are very real in this particular product vs some of the others mentioned in an up and down economy.

Again, I'm not in any way recommending one product over another, I'm just suggesting you do further research before grouping all products as one.

They are NOT all one and the same, as you seem to consistently suggest.

I didn't make your point.

The Allianz product may, or may not, have a slightly better crediting mechanism than some other products, but you are still missing the point. Details of the crediting mechanism are coefficients in the equation. They are not to be confused with the equation itself, the actual financial mechanism.

The real issue is the broad structure of the product (the equation) as a whole. That's why I examine actual investment alternatives rather than comparing products of the same broad type.

A competitive advantage against other products in the same category doesn't make a bad deal a good deal. It makes it a more marketable bad deal.

Your comments have been full of accusation and assertion, while remaining bereft of actual data, analysis or supporting information of any kind. This is absolutely typical of discussions with people who sell product and eventually confuse sales training with actual knowledge and research.

Scott

Scott

Not true at all Scott. When I list examples showing the disadvantage of the annuity owner dying too soon, you argue there's little likelihood he will die too soon and therefore the immediate loss shouldn't be considered.

When I explain in an up market your income will grow, thus increasing the income for life vs the fixed immediate annuity income, you seem to use the logic that the remaining $40k growing without an additional 3% insurance charge will outperform an entire $100k minus the 3% and this is simply not true.

When I try to explain in a down market, you can avoid the market risk at that time, well I'm not really sure what your argument there is since you've stuck to your point that the $40k will grow seemingly no matter what.

When I attempt to explain that peace of mind has some value, you just gloss over it entirely.

While I'm quite open and have taken the time to read all your evidence to the contrary, it seems, rather than you actually taking the time to call companies and inquire, you would rather stick with your assumptions and give a partially blind viewpoint to your readers. I'm sure, if you'd like actual data, any insurance company would be happy to run hypothetical scenarios for you.

P.S. Since you have quoted past articles of yours as evidence. Perhaps you should revisit one of your own articles in which you interviewed Moshe Milevsky who did explain to you the advantages of living benefits.

I'VE RESPONDED IN BOLD TYPE FOLLOWING THE REFERENCED COMMENTS.

Not true at all Scott. When I list examples showing the disadvantage of the annuity owner dying too soon, you argue there's little likelihood he will die too soon and therefore the immediate loss shouldn't be considered.

THE IMMEDIATE LOSS HAS TO BE CONSIDERED, BUT IN A PROBABILISTIC FRAMEWORK. ACCORDING TO THE CDC LIFE TABLES FOR 2005, FOR INSTANCE, THE LIFE EXPECTANCY OF AN AMERICAN MALE (OF ANY RACE) AT AGE 55 IS 24.4 YEARS. THAT'S A LONG TIME. THE PROBABILITY OF DEATH IN ONE YEAR IS 0.8 PERCENT, OVER 10 YEARS IT IS ONLY 11 PERCENT. SO IMMEDIATE DEATH IS NOT A BIG RISK. LONG TERM DRAIN OF ASSETS BY FEES IS A BIG RISK.

THE MORE IMPORTANT THING TO CONSIDER IS WHAT YOU WILL BE HOLDING FOR ABOUT 24 YEARS. OVER A TIME PERIOD THAT LONG IT IS HIGHLY LIKELY THAT A LOW COST FUND WILL GROW TO MORE THAN A COST AND DISTRIBUTION BURDENED INSURANCE PRODUCT. IT MAY SEEM UNLIKELY, BUT THAT IS THE POWER OF COMPOUND GROWTH.

When I explain in an up market your income will grow, thus increasing the income for life vs the fixed immediate annuity income, you seem to use the logic that the remaining $40k growing without an additional 3% insurance charge will outperform an entire $100k minus the 3% and this is simply not true.

DO THE MATH, JUST DO THE MATH. YOU WILL FIND THAT YOU ARE WRONG. AN 8 PERCENT GROSS YIELD PORTFOLIO SUFFERING A 3 PERCENT INSURANCE CHARGE AND A 5 PERCENT WITHDRAWAL RATE WILL NOT GROW. ADD VARIANCE SINK FROM VOLATILITY AND IT WILL SHRINK.

ON THE OTHER HAND, A $40,000 LOW COST BALANCED FUND WITH VERY LOW EXPENSES WILL DOUBLE IN 9 YEARS AND QUADRUPLE IN 18 YEARS. SOMEWHERE IN BETWEEN IT WILL SURPASS THE INSURANCE PRODUCT IN CASH VALUE. PROBABLY AT ABOUT ONE HALF OF ORIGINAL LIFE EXPECTANCY FOR THE 55 YEAR OLD BUYER.

SO IF YOU ARE GOING TO PLAY THE ODDS, YOU'LL TAKE THE LOW COST BUY-AN-ANNUITY-AND-INVEST-THE- DIFFERENCE PATH.

When I try to explain in a down market, you can avoid the market risk at that time, well I'm not really sure what your argument there is since you've stuck to your point that the $40k will grow seemingly no matter what.

THE $40K WON'T GROW NO MATTER WHAT, BUT IT WON'T BE DRAWN DOWN BY DISTRIBUTIONS AND IT IS MORE LIKELY TO SHOW GROWTH THAN THE 8 PERCENT PORTFOLIO BURDENED WITH 8 PERCENT IN DISTRIBUTIONS.

When I attempt to explain that peace of mind has some value, you just gloss over it entirely.

PEACE OF MIND IS A FUZZY CONCEPT THAT ALLOWS RETIREES TO BE SCREWED BY THE INSURANCE INDUSTRY.

MY QUESTION IS HOW MANY PEOPLE WOULD GIVE UP 40 PERCENT OF THEIR INVESTMENT VALUE FOR PEACE OF MIND IF THEY SAW THE COST THAT WAY? NOT MANY, I BET.

THE SALES FORCE, HOWEVER, IS NOT TRAINED TO PRESENT COMPETING ALTERNATIVES BECAUSE THEY WON'T GET PAID FOR SELLING A COMPETING ALTERNATIVE.

While I'm quite open and have taken the time to read all your evidence to the contrary, it seems, rather than you actually taking the time to call companies and inquire, you would rather stick with your assumptions and give a partially blind viewpoint to your readers. I'm sure, if you'd like actual data, any insurance company would be happy to run hypothetical scenarios for you.

FOR THE RECORD, I'VE GOTTEN HYPOTHETICALS FROM A NUMBER OF VENDORS. WITHOUT THEM, AND WITHOUT AN UNDERSTANDING OF THE PRODUCTS, I WOULD NOT BE ABLE TO WRITE COLUMNS.

I DON'T THINK YOU HAVE ANY IDEA OF WHAT WRITING A NEWSPAPER COLUMN IS ALL ABOUT. WHILE MANY READERS KNOW LITTLE, QUITE A FEW OF THEM ARE VERY SMART. SOME KNOW A LOT AND ARE VERY SMART. I'VE WRITTEN MY COLUMN FOR 33 YEARS. IT HAS BEEN SYNDICATED FOR 30 YEARS. WHEN YOU REACH MORE THAN 2 MILLION READERS, SOME ARE GOING TO FIND EVERY SINGLE ERROR. THEY WILL HAPPILY BEAT YOU TO DEATH WITH ONE.  IF YOU MAKE TOO MANY, YOU WILL NO LONGER BE SYNDICATED OR PUBLISHED.

PEOPLE WHO SELL INSURANCE CAN GO FROM ONE INNOCENT TO ANOTHER. IF A PERSON KNOWS TOO MUCH OR ASKS TOO MANY QUESTIONS, HE JUST BECOMES A NON-CUSTOMER AND THE SALESMAN MOVES ON. HE CAN ALWAYS FIND ANOTHER PROSPECT BY OFFERING A FREE SEMINAR DINNER.

P.S. Since you have quoted past articles of yours as evidence. Perhaps you should revisit one of your own articles in which you interviewed Moshe Milevsky who did explain to you the advantages of living benefits.

I DON'T RECALL INTERVIEWING HIM SPECIFICALLY ABOUT THE ADVANTAGES OF LIVING BENEFITS. I DO RECALL THAT HE WROTE A PAPER IN WHICH HE FOUND THAT LIVING BENEFITS MIGHT BE UNDER-PRICED. THIS FINDING WAS THE OPPOSITE OF HIS CONCLUSION ABOUT THE OVERPRICING OF DEATH BENEFITS.

IT IS POSSIBLE FOR LIVING BENEFITS TO BE UNDER-PRICED FOR THE INSURANCE COMPANY BUT STILL BE A BAD DEAL FOR THE CONSUMER. WHAT HAS TO BE CONSIDERED IS THE IMPACT LIVING BENEFITS CAN HAVE ON THE RESERVE REQUIREMENTS OF THE INSURANCE COMPANY. THEY CAN BE DRACONIAN. INDEED, THE RECENT MARKET DECLINE AND RELATED INSURANCE COMPANY RESERVE REQUIREMENTS IS THE MAIN REASON INSURANCE COMPANIES HAVE BEEN DIALING BACK ON THEIR LIVING BENEFIT OFFERS.

SCOTT

{sigh} I can see this going nowhere and since it's on your own website my points are wasted, but nonetheless I will try once more. I will answer your questions in small print and your points are in caps.

THE IMMEDIATE LOSS HAS TO BE CONSIDERED, BUT IN A PROBABILISTIC FRAMEWORK. ACCORDING TO THE CDC LIFE TABLES FOR 2005, FOR INSTANCE, THE LIFE EXPECTANCY OF AN AMERICAN MALE (OF ANY RACE) AT AGE 55 IS 24.4 YEARS. THAT'S A LONG TIME. THE PROBABILITY OF DEATH IN ONE YEAR IS 0.8 PERCENT, OVER 10 YEARS IT IS ONLY 11 PERCENT. SO IMMEDIATE DEATH IS NOT A BIG RISK. LONG TERM DRAIN OF ASSETS BY FEES IS A BIG RISK.

THE MORE IMPORTANT THING TO CONSIDER IS WHAT YOU WILL BE HOLDING FOR ABOUT 24 YEARS. OVER A TIME PERIOD THAT LONG IT IS HIGHLY LIKELY THAT A LOW COST FUND WILL GROW TO MORE THAN A COST AND DISTRIBUTION BURDENED INSURANCE PRODUCT. IT MAY SEEM UNLIKELY, BUT THAT IS THE POWER OF COMPOUND GROWTH.

your points have some validity, however, to the person who has lost their husband or wife, averages mean little. Also, the breakeven point isn't after one year or two, it's somewhere if the market goes down, or stays the same minus your loss from the $40k vs. the loss plus expenses of the $100k. It's actually quite a few years out there, if it even happens at all.

DO THE MATH, JUST DO THE MATH. YOU WILL FIND THAT YOU ARE WRONG. AN 8 PERCENT GROSS YIELD PORTFOLIO SUFFERING A 3 PERCENT INSURANCE CHARGE AND A 5 PERCENT WITHDRAWAL RATE WILL NOT GROW. ADD VARIANCE SINK FROM VOLATILITY AND IT WILL SHRINK.

ON THE OTHER HAND, A $40,000 LOW COST BALANCED FUND WITH VERY LOW EXPENSES WILL DOUBLE IN 9 YEARS AND QUADRUPLE IN 18 YEARS. SOMEWHERE IN BETWEEN IT WILL SURPASS THE INSURANCE PRODUCT IN CASH VALUE. PROBABLY AT ABOUT ONE HALF OF ORIGINAL LIFE EXPECTANCY FOR THE 55 YEAR OLD BUYER.

SO IF YOU ARE GOING TO PLAY THE ODDS, YOU'LL TAKE THE LOW COST BUY-AN-ANNUITY-AND-INVEST-THE- DIFFERENCE PATH.

You see, you are not familiar with this particular product at all. First off, I see you used 8% to try and show no growth factor on the variable annuity, however, what you didn't factor in is in your scenario, the persons' income would also be increasing by 5% per year.

Also, 8% will not double in a low cost mutual fund in 9 years. It would double in a NO cost mutual fund, which as far as I know, does not exist anywhere. No one is working for free. If you assume a 1% expense, then your money would double in 10 years.

THE $40K WON'T GROW NO MATTER WHAT, BUT IT WON'T BE DRAWN DOWN BY DISTRIBUTIONS AND IT IS MORE LIKELY TO SHOW GROWTH THAN THE 8 PERCENT PORTFOLIO BURDENED WITH 8 PERCENT IN DISTRIBUTIONS.

Shouldn't you also mention that the $40k could go DOWN in value? Since we're going for accuracy here.

PEACE OF MIND IS A FUZZY CONCEPT THAT ALLOWS RETIREES TO BE SCREWED BY THE INSURANCE INDUSTRY.

MY QUESTION IS HOW MANY PEOPLE WOULD GIVE UP 40 PERCENT OF THEIR INVESTMENT VALUE FOR PEACE OF MIND IF THEY SAW THE COST THAT WAY? NOT MANY, I BET.

THE SALES FORCE, HOWEVER, IS NOT TRAINED TO PRESENT COMPETING ALTERNATIVES BECAUSE THEY WON'T GET PAID FOR SELLING A COMPETING ALTERNATIVE

First off, in leaving money to a loved one, peace of mind is huge! Few want to die thinking they've left their spouse penniless.

Your 40% number is purely made up and nowhere have you shown in any way accuracy here. You just pulled a number out of a hat, at least recognize this fact. In truth, you could have 40% less based on your scenario....or more.

And you stating what the "sales force" is trained to think is an outrageous claim. Are you stating you are the only one capable of viewing investment options clearly? You've just insulted thousands of people with one sweeping comment.

FOR THE RECORD, I'VE GOTTEN HYPOTHETICALS FROM A NUMBER OF VENDORS. WITHOUT THEM, AND WITHOUT AN UNDERSTANDING OF THE PRODUCTS, I WOULD NOT BE ABLE TO WRITE COLUMNS.

I DON'T THINK YOU HAVE ANY IDEA OF WHAT WRITING A NEWSPAPER COLUMN IS ALL ABOUT. WHILE MANY READERS KNOW LITTLE, QUITE A FEW OF THEM ARE VERY SMART. SOME KNOW A LOT AND ARE VERY SMART. I'VE WRITTEN MY COLUMN FOR 33 YEARS. IT HAS BEEN SYNDICATED FOR 30 YEARS. WHEN YOU REACH MORE THAN 2 MILLION READERS, SOME ARE GOING TO FIND EVERY SINGLE ERROR. THEY WILL HAPPILY BEAT YOU TO DEATH WITH ONE.  IF YOU MAKE TOO MANY, YOU WILL NO LONGER BE SYNDICATED OR PUBLISHED.

PEOPLE WHO SELL INSURANCE CAN GO FROM ONE INNOCENT TO ANOTHER. IF A PERSON KNOWS TOO MUCH OR ASKS TOO MANY QUESTIONS, HE JUST BECOMES A NON-CUSTOMER AND THE SALESMAN MOVES ON. HE CAN ALWAYS FIND ANOTHER PROSPECT BY OFFERING A FREE SEMINAR DINNER

I see apparently you feel insulted and in need of striking below the belt. No, I have no idea what it takes to write an article, but I understand the concept of READING an article and believe it or not, am capable of dissecting one that is lacking in factual information. You claim you have hypotheticals from "a number of vendors". I would have no idea what that number is? One? I see from your included link you spoke with Prudential. I have no idea if you've spoken with others, and it seemed when speaking with Prudential, you went in with a very jaded opinion in advance. However, in the above letter, there are three companies specifically listed. Did you speak with any of those three? You seem to enjoy grouping all insurance companies as one. This would be akin to you doing an article on automobiles and calling up Jeep to discuss their lowest rated Wrangler in safety records, then declaring conclusively that "CARS ARE NOT SAFE TO DRIVE!"

I DON'T RECALL INTERVIEWING HIM SPECIFICALLY ABOUT THE ADVANTAGES OF LIVING BENEFITS. I DO RECALL THAT HE WROTE A PAPER IN WHICH HE FOUND THAT LIVING BENEFITS MIGHT BE UNDER-PRICED. THIS FINDING WAS THE OPPOSITE OF HIS CONCLUSION ABOUT THE OVERPRICING OF DEATH BENEFITS.

IT IS POSSIBLE FOR LIVING BENEFITS TO BE UNDER-PRICED FOR THE INSURANCE COMPANY BUT STILL BE A BAD DEAL FOR THE CONSUMER. WHAT HAS TO BE CONSIDERED IS THE IMPACT LIVING BENEFITS CAN HAVE ON THE RESERVE REQUIREMENTS OF THE INSURANCE COMPANY. THEY CAN BE DRACONIAN. INDEED, THE RECENT MARKET DECLINE AND RELATED INSURANCE COMPANY RESERVE REQUIREMENTS IS THE MAIN REASON INSURANCE COMPANIES HAVE BEEN DIALING BACK ON THEIR LIVING BENEFIT OFFERS

Geez, now I have to research your own articles for you.

assetbuilder.com/.../variable-annuity-watch-2007.aspx

Here's my reality, I read your articles weekly. When you write good and useful articles, I enjoy them. When you write articles that are loaded with misconceptions and poorly researched journalism, I point it out.

I'm sorry you find this offensive.

If you actually read the column that mentions Milevsky you'll find that he is NOT interviewed. I simply reference his papers and the potential of living benefits.

An assertion is not to be confused with a fact and it does not become a fact by repetition.  

Scott

Fine. My apology for assuming you've met or interviewed him. However, after reading your article, I made it a point to go and hear Mr. Milevsky speak in person and then had lunch with him afterward.

He does happen to be a variable annuity convert. He admitted he was opposed them, but now sees benefit to variable annuities with living benefits.

Apparently, you respected his opinion enough to use him as a reference for your article. I can't blame you, he is a very intelligent man.