Hill's Personal Finance

Pro VA article in WSJ?

Yes its true, the Wall Street Journal did a positive story on variable annuities.

AIG and Your Annuity

What is the current situation?

Since AIG has long promoted itself as the world’s premier provider of fixed annuities, you may be worried if you have an annuity – or life insurance policy - with the worldwide insurance giant. But in reality, you probably don’t have much to worry about. Let’s look beyond the media frenzy and into the reality of AIG and its current situation.

No need to panic. The federal government now owns a 79% stake in AIG, and has lent AIG more than $182 billion.¹ Uncle Sam is now the majority shareholder in the company. That ought to make anyone feel a little better.

Beyond this federal commitment to AIG, you also have state guaranty associations ready to protect annuity owners and life insurance policy owners. So even in a worst-case scenario, the picture is not as bleak as some headlines would have you believe.

What if my annuity is sold? AIG does plan to sell off some of its subsidiaries, such as its annuity business. Insurance laws in most states allow for a seamless transition when one insurer buys the annuities or policies of another. So if AIG sells your annuity contract or your life insurance policy to another insurance company, the terms and conditions of your contract or policy should stay the same.²

If your annuity should remain with AIG, TARP loans should help AIG maintain assets sufficient to meet its contracts and claims. This unique government support for your insurer is a compelling reason to stay the course - and to avoid the hefty surrender charge that may accompany a withdrawal.

How healthy is AIG right now? Well, AIG still faces a challenge. The U.S. government didn’t guarantee its debt the way it did with Fannie Mae and Freddie Mac; it simply offered AIG a two-year loan with an 11.3% interest rate.³ But AIG has started to raise some cash. In April, it announced it will sell its U.S. auto insurance company, 21st Century Insurance, to Farmers Group for $2 billion. That deal will wrap up later this year.¹

On April 24, National Association of Insurance Commissioners president Roger Sevigny informed the New York Times (and consumers) that “AIG’s state-regulated insurance entities are solvent and continue to pay claims.”⁴

State protection. There are state guaranty associations that protect life insurance policy owners and annuity owners. If AIG were to go bankrupt and liquidate its assets, you would still have protection for your assets thanks to these agencies.

If you own a fixed annuity, state guaranty associations generally provide up to $100,000 protection in case of insurer bankruptcy – and some states go as high as providing $300,000 or more in protection.⁵

If you own a life insurance policy, state guaranty associations usually provide up to $100,000 protection in cash surrender or withdrawal value, and at least $300,000 in death benefits.⁵

If you have a variable annuity, the investment subaccounts are your assets – creditors snapping up an insurer’s assets won’t be able to touch them. The part of the contract promising a payout from the insurer is usually covered by state insurance regulations.⁵

Care to talk? If you have questions about your annuity, I welcome them. I invite you to call me (800)-572-6024 or e-mail me to learn more about the state of your investments and your financial options.

Citations.

¹ money.cnn.com/2009/04/16/news/aig.sale.fortune/?postversion=2009041615        [4/16/09]

² ajc.com/business/content/business/stories/2008/09/21/economy_q_and_a.html [9/21/08]

³ emac.blogs.foxbusiness.com/2008/09/17/what-the-feds-rescue-of-aig-really-means/           [9/17/08]

⁴ nytimes.com/2009/04/24/opinion/lweb24insure.html   [4/24/08]

⁵ online.wsj.com/article/SB122194610525160273.html?mod=googlenews_wsj           [9/21/08]

 

The New Living Benefits in Variable Annuities

These popular investments now have even more to offer.

 

 

GMIBs. GMWBs. GMABs. GLWBs. What do these acronyms mean? If you own a variable annuity (or think you might want to own one), they stand for a new class of living benefits that make these investments even more attractive.

 

Guarantees for a new market climate. You might say these new living benefits address the realities of a down market. Variable annuities are tax-deferred investments structured to pay you benefits over a set number of years, and a death benefit to your beneficiaries. They let you invest some of your annuity assets in investment subaccounts that suit your investment styles and goals. Some of these subaccounts have guaranteed return rates.

 

All of this appeals to people who want to build retirement savings conservatively. But with the financial markets so volatile of late, GMIBs, GMWBs, GLWBs, and GMABs are really appealing. These are riders in annuity contracts that guarantee certain benefits regardless of how the markets perform.

 

Guaranteed minimum income benefit (GMIB). A GMIB ensures that the annuity payments that come your way are at least a specified minimum amount, even if your investment subaccounts perform poorly (the insurer picks up the slack). How is the minimum payment amount figured out? It is based on the insurance company’s estimation of the future value of the initial annuity investment.¹ 

 

Guaranteed minimum withdrawal benefit (GMWB). If the principal of your variable annuity shrinks due to a downturn in the market, you can use this rider to recoup the amount of your entire initial investment. If you own a variable annuity with a GMWB with a 10% withdrawal rate, you can withdraw 10% of your entire investment each year until the initial investment amount has been recouped. That’s useful if the value of your annuity should decline. If you started your variable annuity with a $200,000 investment and it is now worth $180,000, you can use the 10% GMWB to withdraw 10% of the original principal amount each year ($20,000) until the entire $200,000 is recovered thanks to the guarantee set by the insurance company.²   

 

Guaranteed lifetime withdrawal benefit (GLWB). This means guaranteed income payments for life. Let’s say your variable annuity has an account balance of $100,000 and is structured to pay out $5,000 a year for 20 years. With a GMWB for life, you will continue to receive $5,000 a year from the insurer even if you have recouped the original principal and even if the account value falls due to poor investment returns.³

 

Guaranteed minimum accumulation benefit (GMAB). A GMAB gives you the confidence of knowing that after a set period of years, you will have at least X dollar amount of assets in your variable annuity. Usually, the GMAB is established for the end of a 10-year period, i.e., in ten years, the insurer guarantees that your annuity contract will be valued at a minimum of $100,000, even if the market drives the actual value down.⁴

 

Long term care insurance options. This is certainly a new wrinkle in variable annuities and worth knowing about. Some variable annuities now allow you to pay long-term care benefits from the life insurance death benefit promised in the annuity contract. While this will reduce the amount of the death benefit, it can certainly help during your life. If you don’t choose to spend some of the death benefit on long-term care, then the entire death benefit will be received by your heir. (You can also choose to receive the cash value of the death benefit as an income stream.)⁵

 

Very interesting, isn’t it? If you’d like to know more about the new living benefits in variable annuities, why not talk to a qualified insurance or investment professional today? These new annuity options may give you more financial confidence – and financial choices - for retirement.

 

 

Citations.

¹ investopedia.com/terms/g/gmib.asp     [11/11/08]

² investopedia.com/terms/g/gmwb.asp   [11/11/08]

³ lidp.com/living-benefits-defined.html    [11/11/08]

⁴ finance.yahoo.com/how-to-guide/retirement/18308     [11/11/08]

⁵ investopedia.com/printable.asp?a=/articles/pf/08/variable-insurance.asp           [11

AIG and Your Annuity

What has happened, and what might happen next?

 

Since AIG promotes itself as the world’s premier provider of fixed annuities, you may be worried if you have an annuity – or life insurance policy - with the worldwide insurance giant. But in reality, you probably don’t have much to worry about. Let’s look beyond the media frenzy and into the reality of AIG and its current situation.

No need to panic. The federal government now owns an 80% stake in AIG, as a result of an $85 billion loan.¹ So Uncle Sam is now the majority shareholder in the company. That ought to make anyone feel a little better.

Beyond the federal intervention to prop up AIG, you also have state guaranty associations ready to protect annuity owners and life insurance policy owners. So even in a worst-case scenario, the picture is not as bleak as the headlines would have you believe.

What if my annuity is sold? Last week, AIG did announce plans to sell off some of its subsidiaries, such as its annuity business. Insurance laws in most states allow for a seamless transition when one insurer buys the annuities or policies of another. So if AIG sells your annuity contract or your life insurance policy to another insurance company, the terms and conditions of your contract or policy should stay the same.²

If your annuity should remain with AIG, the $85 billion Federal Reserve loan is designed to help AIG maintain assets sufficient to meet its contracts and claims. This unique government support for your insurer is a compelling reason to stay the course - and to avoid the hefty surrender charge that may accompany a withdrawal.

How healthy is AIG right now? Well, AIG still faces a challenge. The

U.S.

government didn’t guarantee its debt the way it did with Fannie Mae and Freddie Mac; it simply offered AIG a two-year loan with an 11.3% interest rate.³ But state regulators and insurance industry analysts across the nation don’t anticipate a bankruptcy.

Last week, National Association of Insurance Commissioners president (and

Kansas

state insurance commissioner) Sandy Praeger said: "We have a very strong message for consumers: if you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims."⁴

State protection. There are state guaranty associations that protect life insurance policy owners and annuity owners. If AIG were to go bankrupt and liquidate its assets, you would still have protection for your assets thanks to these agencies.

If you own a fixed annuity, state guaranty associations generally provide up to $100,000 protection in case of insurer bankruptcy – and some states go as high as providing $300,000 or more in protection.⁵

If you own a life insurance policy, state guaranty associations usually provide up to $100,000 protection in cash surrender or withdrawal value, and at least $300,000 in death benefits.⁵

If you have a variable annuity, the investment subaccounts are your assets – creditors snapping up an insurer’s assets won’t be able to touch them. The part of the contract promising a payout from the insurer is usually covered by state insurance regulations.⁵

Care to talk? It is a momentous time financially, and I know you are certainly thinking about your money. I welcome your questions and thoughts, and I invite you to call me or e-mail me to learn even more about the state of your investments and your financial options.

 

A CD, OR A CD-TYPE ANNUITY?

How they compare – and why annuities are so attractive.

 

If you’re a conservative investor, you may be wondering what fixed-rate alternatives you have to certificates of deposit. Have you ever looked at fixed annuities? Specifically, fixed “CD type” annuities? Right now, they look a lot better than CDs do.

Yes, CDs are FDIC-insured. But fixed annuities come with a guarantee as well, and often a better rate of return - plus the opportunity for tax-deferred growth and compounding.

The drawbacks of CDs. The interest rate on CDs today is often disappointingly low – often well below 5%. Besides the pitiful return, you have another disadvantage: the interest your CD earns is fully taxable.¹ (And FDIC or no FDIC, do you really want your money in a bank right now with the hassles bank customers are going through?)

But you have an alternative.

The appeal of the “CD type” fixed annuity. Just like a CD, a “CD type” fixed annuity is designed to grow your money over a specified term until maturity – usually five or ten years. Right now, some of these annuities are earning well over 5% interest.² (The interest rate is locked in for the whole term of the annuity, unlike some fixed annuities where the interest rate is only guaranteed for one year.)

 

Unlike a CD, a “CD type” fixed annuity gives you tax-deferred growth. The earnings aren’t taxed until withdrawal.³

 

With five- and ten-year terms, these annuities are particularly appealing to people in their fifties who are seeking a conservative retirement savings vehicle.

 

Learn more. If you think of yourself as a risk-averse investor, you might want to examine the range of options in fixed “CD style” annuities. Before you make a decision, make sure you talk to a qualified insurance agent or financial advisor who can explain the terms and conditions of these annuity contracts.

 

 

Citations.

¹ streetauthority.com/terms/c/cd.asp      [8/08]

² annuityadvantage.com/annuitydata.htm            [8/22/08]

³ investopedia.com/terms/d/deferredannuity.asp             [8/08]

 

 

 

 

 

Ben Bernanke's Holdings

Ever wonder what  the Chairman of the Federal Reserve invests in. The website Financial Market Center has a bountiful supply of information on the Federal Reserve and its officers. On each of the officer's pages it has their annual financial disclosure. Check out Fed Chair Ben Bernanke's. Isn't funny that the majority of his assets are in annuities. Maybe they are not as bad as Suzy Orman says they are.

Download BB07.pdf

Fixed Annuities vs. CDs

Do you have a CD down at your local bank? Do you consider yourself a conservative investor? If so, you may want to take a look at a tax-deferred fixed annuity – a popular investment choice for many retirees and pre-retirees.

A fixed rate of return … and so much more. A fixed annuity is another traditional way to earn high accumulation rates. Like a CD, an annuity offers you a guarantee of principal and interest. At the moment, CDs commonly earn 3.5-5% interest.¹ Fixed annuities offer you comparable or better rates of return plus other advantages.

The big advantage is tax deferral. You get tax-deferred growth with a fixed annuity: you earn interest on your money, interest on your interest, and interest on the money that you would have paid to the tax man. You only pay taxes on the money in a fixed annuity when you withdraw that money. Contrast that with a CD, where the interest you earn is taxed every year.

The assets in a tax-deferred fixed annuity accumulate at a set rate of growth over a specified or adjustable period. Some fixed annuities even have a first-year “bonus rate”. Accumulations can be paid to you periodically, or you can let them compound. The investment risk is assumed by the insurance company, which by law has to have the dollar-for-dollar liquidity to fulfill scheduled payouts.

A check in the mail for the rest of your life. Really? Yes, that is often the case. Fixed annuities commonly offer you the option of guaranteed lifelong income, in the form of monthly or annual payments. Many fixed annuities also offer a guaranteed death benefit. Fixed annuity proceeds are even exempt from probate.

Ask yourself: would you rather have a bank CD that brings you a slight, taxable increase in your money after a period of time, or a tax-deferred investment that brings you a guaranteed check for life? Weigh this choice, and you see why so many people choose an annuity.

Now you see why fixed annuities can be very attractive. When you compare the advantages of a tax-deferred fixed annuity to the advantages of a CD, the fixed annuity looks very good indeed. (You can even transfer a CD to an annuity.) Please call me if you would like to know more about a tax-deferred fixed annuity – a conservative investment that could be a great choice for you financially.

Stephan Pollan:"Die Broke"

Financial planning guru Stephan Pollan looks at the world differently than his peers. His mantra, " Quit today, pay cash, don't retire, and die broke" is unconventional wisdom. Bankrate has a great interview with him. I might not completely agree with all of his opinions, but I like the logic where it comes from.

403(b)s and 90-24 Transfers

On July 26, 2007, the IRS released the final 403(b) regulations, which included provisions that severely restrict the transfer or exchange of 403(b) assets after September 24, 2007.Today, 403(b) assets are transferred or exchanged under Revenue Ruling 90-24, which allows a tax-free exchange of one 403(b) contract, which may be funded with either mutual funds or a variable annuity, for another 403(b) contract that has no relationship to the sponsoring employer’s plan. This was the first change to Section 403(b) in over 40 years.

Requests for 403(b) exchanges received after September 24, 2007 may not be valid tax-free exchanges unless, as of January 1, 2009, the receiving company has signed an “information sharing agreement” with the participant’s employer.

Under the final 403(b) regulations, tax-free transfers or exchanges of 403(b) contracts under 90-24 must be completed on or before September 24, 2007. New informal guidance from the IRS has indicated that a 90-24 exchange be “completed” when there is a legally binding agreement between the transferring and the receiving companies to complete the exchange.

Future of 90-24 Transfers

Proposed regulations would restrict transactions to 403(b) products that are

approved by your employer.

The IRS’s proposed rules would require the employer to provide centralized coordination of its 403(b) program. These rules would require that 403(b) plans operate similarly to other existing retirement plans. These retirement plans will typically limit the number of investment options or vendors available to its plan participants.

What this means to you, is that you may not be able to transfer your 403(b) assets to the

vendor of your choice after 12/31/2007. The 403(b) products approved by your employer

may be limited to a certain number of investment options. If you have considered transferring your 403(b) account to another provider, now is the time to explore your options

.

Your next steps…

■ Determine whether or not your 403(b) allows for 90-24 (in-service) transfers.

■ Schedule a meeting with your trusted financial professional to help determine your options.

Ben Stein Talks Retirement

Ben Stein, noted actor/comedian, is also a very knowledgable financial writer for Barron's, The Wall Street Journal, and The New York Times. He has put together three short videos on retirement planning that are worth a look.

Ben Stein Retirement Video part 1

Ben Stein Retirement Video part 2

Ben Stein Retirement Video part 3

His advice is general, but worthy of consideration.