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An Often Maligned Insurance-Investment Vehicle
[By Staff Reporters]
Most doctors are familiar with fixed annuities (particularly during periods of high interest rates like two decades ago), which come in two basic varieties—the traditional single or multiple-year initial rate guarantee product or the market value adjusted (MVA) interest rate product.
Once the guaranteed rate ends however, the physician-investor is at the mercy of the insurance company’s renewal rate.
MVAs have offered higher interest rates but function much like bonds if surrendered before the end of the guarantee period. If interest rates have declined, the cash surrender value increases and vice versa. This can be mitigated by “laddering” as one would do with bonds.
Literature Review
In his article “Annuities on the Horizon” (Financial Strategies, Fall 1996, pp. 44–46, Investors Financial Group Inc.), author Clifford Jack acquainted financial advisors and others with a recoup of vintage annuities.
For instance, while variable annuities were historically limited to the most basic of investment portfolios, many now offer portfolios that include international equity, mid-cap equity, high yield bonds, REITS, ETFs, and global bonds with many different fund management companies. Others include multiple guaranteed accounts offering competitive interest rates, which provide the flexibility to make a tax-free transfer into these types of accounts or to dollar cost average into the equity accounts.
Indexed Annuities
The equity indexed annuity product allows participation in the upside of the S&P 500 Index by crediting an interest rate that is tied directly to the performance of the index. Most guarantee a percentage participation rate that varies depending on the current interest rate environment. If the contract is held until the end of the guarantee period, investors can be assured of a return of original premium, plus a minimum guaranteed interest rate of 3%.
An equity indexed-annuity is likely to outperform fixed annuities when interest rates are low and variable annuities when the market is trending downward. They permit participation in stock market-like rates of return with downside protection. And, for retirement age physician investors, look at immediate versions of equity index annuity products, which link income payments to an index and thereby offer an inflation hedge.
Assessment
Faced with a rocky market and unknown interest rate scenarios, annuities may be a consideration to the portfolios of suitable physicians; if costs are appreciated, other qualified retirement plans fully funded and time-line long. Comments on this often contentious topic, are appreciated. Are these annuities an insurance product, investment product, or both; and why not use a “purer-play for same?”
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Conclusion
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Filed under: Estate Planning, Insurance Matters, Investing, Retirement and Benefits | Tagged: annuities |
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Studies and Surveys,
Did you know that a survey by Lincoln Financial Group of 1,000 people aged over 45 showed that 79% are seriously concerned about the amount of Inheritance Tax (IHT) their estates will bear when they die and the resulting effect on what their children will inherit? The, now several years-old, study is often cited by those in the industry.
At least, this is the company line for the financial services sector whose goal is to sell products; like annuities and insurance policies.
But, after the recent market meltdown, new Obama Administration, and “sun-downing” of the current estate tax laws; is the validity of this survey still accurate?
Paul
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Nothing “Fresh” Here
In our “legal-but-shouldn’t-be” world, you’ll often get annuities salesmen trying to focus your attention on guaranteed returns, instead of high back-end fees and surrender charges.
I should know; I sold em’ for years. So, beware!
Tom
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Annuities Are Not Safe Investments
Annuities are not without risks. People who buy annuities expose themselves to three serious risks:
1. Credit risk of the issuing companies;
2. Liquidity risk, because they can’t use the money when they need it most; and
3. Asymmetric information risk, because the annuity contracts are written by the insurance companies in a way that requires an actuary and an attorney working together to understand.
Source: Michael Zhuang – Principal of MZ Capital
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Can I provide annuity payments to my heirs after I die?
You may be able to provide income payments to your heirs for the rest of their lives through the use of a stretch annuity.
A stretch annuity (also known as a legacy annuity) makes lifetime payments to the beneficiary you name in your deferred annuity contract if you die before the annuity start date (e.g., before you begin receiving regular annuity payments).
Sean
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Qualified Annuities
The term “qualified” refers to those annuities which permit tax-deductible contributions under one of the Internal Revenue Code (IRC) sections, i.e., § 408 Individual Retirement Accounts (IRA), § 403(b) Tax Sheltered Annuities, § 401(k) Voluntary Profit Savings Plans. Qualified annuities can also result from a rollover from such a plan.
Non-qualified annuities, then, do not permit deductible contributions
There is much debate as to whether an annuity, which is tax-deferred by nature, should also be used as a funding vehicle within a tax-qualified plan, i.e., a tax-shelter within a tax-shelter.
Since the investment options within the annuity are also generally available to the plan participant without the additional management expenses of the annuity policy, it is felt this could be a breach of fiduciary responsibility, and both the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) have gone on record as criticizing these sales.
Paul
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