Liberal GAAP Accounting Rules Impacts Variable Annuities

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Liberal GAAP Accounting Rules Impacts Variable Annuities

Liberal GAAP Accounting Rules Impacts Variable Annuities

From a Reader:

I read your blog quite frequently and really enjoy the work you put into it.  It helps me to think about other opinions/concepts and always look at things in a different light.   I’m a financial advisor in St. Louis for a small boutique firm and truly feel your blog helps me be a better financial advisor.
 
Anyway, in trying to better myself and feel even more comfortable about recommendations I make for clients, I wanted to get your opinion on annuities.  In short, I used to avoid these things like the plague early in my career.  Now?  I find myself using them quite a bit for a portion of clients money and I find that in the planning process, they are a great tool in which to be able to tell clients exactly how much income they can expect in 5 or 10 years when they retire.  These riders and benefits are actually very useful in my opinion and have come a long way over the years.  I guess where I struggled in the past was during the 2008 crisis when my nice, neat 60/40 allocation for clients still lost them money…..sure, I was charging 1% and that’s cheap compared to the cost of an annuity but I can’t help but think how far ahead of the game clients would be if they had a portion in a product that guaranteed their income.  Of course, their account values might be down but their guaranteed income would still be intact.
 
So, with all that in mind and because of your background in the insurance business, I figured you might be the perfect person to fire away a few questions.
 
1) What’s your general opinion of guaranteed income riders?  Do you think they are worth it?  I know everything is relative to clients needs but from a pure practical standpoint, do you find that the benefit is still a good one?
2) What’s your opinion on contracts like with Jackson National or Metlife that offer a 5% guaranteed withdrawal AND a minimum death benefit combo of at least your initial contribution?  You have to leave $1 dollar left in the contract for the death benefit to pay but it seems to me to be an attractive option….guaranteed 5% w/d’s with assurance you can pass at least the initial premium on to your spouse or heirs
3) Lastly, what’s your take on this recent article?  Maybe for clients not wishing to pass money to heirs, this might be a good strategy?  Seems smart actually when they lay it out this way…..
http://www.advisorone.com/2013/02/22/milevskys-va-shocker-turn-on-your-living-benefit-n
 
I’m sure you are extremely busy.  I appreciate any feedback.  Sorry to ramble, just wanted to get my thoughts across.

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When a Variable Annuity is popular, it is because the secondary benefit is underpriced. Many life insurance companies sell such policies; that is one reason why I don’t invest in them. The other reason is that GAAP accounting for life insurers is too liberal, particularly with guarantees on variable products.

There are many attractive benefits that have been offered in the past with variable annuities. If an insurance company offers to buy you out of an annuity with such benefits, refuse them, unless you know better than they do that you will die soon.

There are some attractive benefits out there, and insurers that have underpriced the benefits. Where you find attractive benefits, have clients invest in them.

Finally, if the living benefit is attractive, exercise the option.  Think in your own interests.  What will give you the best payoff?  At a time like this, where equity values are high, converting asset value into income could be a great idea.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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