Monday, August 27, 2007

Why annuities????

Today (and for the next few posts) I thought I'd write about the reasons to buy an annuity.

So let's start this off with a post about safety. The nice thing about buying fixed-deferred annuities is the have no 'stock market' risk. Not only will get a return on your money, you are guaranteed to get a return of your money.

Even with a fixed-index annuity which pays you an interest rate the moves with the changes in the stock market, you are guaranteed not to lose money in the market.

Even with years to go before retirement, gen xers would be smart to put a portion of their money in vehicles that don't lose money.

Of course you always have the risk of insurance company defaulting but you use insurance companies to insure your home, your cars, even your life.

Friday, August 17, 2007

Fixed-index annuities, more thoughts

I am not advocating for the elimination of the stock market in your retirement portfolio. Like I said, I own mutual funds and stocks. Of course you have to make the decision for yourself.

I am suggesting everyone, whether young or old, should take a look at indexed annuities. They don't replace stock market investing but I do think they compliment it very well.

FIA's are also not a short-term savings vehicle. They are designed to be held for a number of years. Some have surrender charges as long as 15 years or more.

Thursday, August 16, 2007

An example of an FIA crediting method

Yesterday I started writing about one of my favorite retirement savings vehicles, the fixed-index annuity.

So how does an insurance company credit an FIA contract with interest?

One popular design is the annual point-to-point reset design. Let me explain how this works.

This annuity takes one measurement of the index on day one, and another measurement exactly one year later (though some take an average of everyday over the last month). The difference in the index value is calculated and a percentage of change is determined. As an example:

Assume on December 31 2007 the index in the contract has a value of 1000. Assume on December 31, 2008 the value of the index is 1100. The difference is 10 percentage points. Theoretically the insurance company would credit all those contract holder's that purchased their annuity on December 31 with a ten percent increase. But, if you remember from yesterday the annuity never gets the full growth of the index, only a portion.

Right now some of my favorite point-to-point contracts are utilizing what they call a participation rate to limit the gain of the contract.

Let's look at the example again and let's assume a 50% participation rate. The policy would credit a 5% gain (50% of 10%).

And on December 31, 2008 the new index value is 1100 and the next year's gain or loss will be measured against the 1100 value.

If you had purchased an annuity with $10,000 the value would now be $10,500. Of course if you were able to buy the index itself with your $10,000 it would now be worth $11,000.


Now let's take a look at what happens in a down year.

Assume on July 31, 2007 the index value is 1000 and on July 31, 2008 the value is 750. What interest rate does the annuity contract credit? 0%. While those that purchased the index directly had a 25% loss, the index annuity didn't lose anything. And as an added bonus, the new starting point is 750. So any gain or loss for the year 2008 will be measured against the 750 index value.

If the next year (July 31, 2008 to July 31, 2009) the index goes from 750 to 800 the index annuity with a 50% participation rate would credit about a 3.5% gain. If you had bought the index directly in on July 31, 2007 you'd still be down 20%.

With a $10,000 purchase, the index annuity value would be $10,350 while money that bought the index directly would be value at $8000.

And that is the reason I like index annuities so much. If I knew what the stock market was going to do each year, I wouldn't buy an indexed annuity, ever. If I knew the stock market was only going to go up, I'd buy as much of the index as I could afford, I might even be tempted to borrow some money to invest.

But that's not how the market works. Sometimes it goes up, and sometimes it goes down. Personally I do own some stocks and some mutual funds. But I also own a few indexed annuities. I like to have some money that I won't ever lose.

I hope the clears up a little confusion on fixed-indexed annuities. Of course there are bunch of different ways FIA's credit interest, this is just one of the options.

Wednesday, August 15, 2007

A great retirement planning tool!

Today I thought I'd mix it up and write about one of my favorite retirement savings products:



Fixed-Indexed Annuities (formerly called equity-indexed annuities)



Imagine sitting down at a blackjack table in Las Vegas with these rules:



You can never lose money when you lose a hand. You get to keep your bet. If you lose ten hands in a row, you still get to keep your original bet.



But it comes at price. The price is when you win, you only win a portion of the amount of the bet.



Would you like to play blackjack with those rules?





That's essentially the nuts and bolts of a fixed-indexed annuity.



What is a standard fixed (deferred) annuity?

A deferred-annuity is an insurance product that earns interest much like a certificate of deposit with one great exception; annuities earn interest tax-deferred. You don't actually pay taxes on your interest earnings until you withdraw the money.



Would you rather earn 5% interest in a taxable CD or in a tax-deferred annuity? That's not hard to figure out.

Now annuities are not short-term savings vehicles. They are to be held for retirement planning. Just to make sure you are using them for retirement the tax law states that if you take any money out of an annuity prior to age 59 1/2 you will incur a 10% tax penalty on the amount withdrawn.

But if you are saving money for retirement in a regular CD it would be a wise decision to look at annuities sold by insurance companies.


Right now regular annuity rates and CD rates are very similar. And I would bet in the next couple of years, annuity rates will actually be higher than CD rates. Add in the tax deferral and it seems like a no-brainer to me.

So what is a fixed-index annuity?

Instead of declaring an interest rate at the start of the term like a bank declares a CD's interest rate, some annuities base their interest rate on the movement of the stock market. These are called fixed-indexed annuities (FIA's for short). Based on a formula declared within the annuity contract itself, FIA's use the movement of one (or more) of the major stock market indices to determine an interest rate.

Primarily the FIA's use the S&P 500 as the index although many now use the Dow Jones and some even use Lehman Brother bond index.


The formulas vary from contract to contract. I don't have time to go into all of them or even some of them, that's for another post.

The truly amazing aspect of the FIA though is the fact you never lose interest. Now of course there are risks such as insurer default but you use insurance companies to insure your home and possessions, so it is no more of a risk than you have with your homeowners insurance.

Even if the stock market goes down, these FIA's guarantee you will earn some positive interest.

Now you will never earn as much interest as you would if you were invested directly in the S&P 500 for example but you can't lose money either if the index tanks.

I'm in my early 30's and a portion of my retirement program is in FIA's. In fact last year I earned over 6% in one contract and another contract earned 7%. Not too bad.

I love FIA's and I truly think everyone should take a good hard look at them.

If you would like more information, I can send you out a buyers guide to fixed annuities. Just drop me an e-mail at brad.j.baldwin@gmail.com.

Thursday, August 2, 2007

Summer heat...

It has been hot here. Seems like every week we see temperatures in the 100's. I will be posting again in the next few days. If there's a type of insurance you'd like a little information on, please drop me a line.