Dear Investment Public,
Our first discussion is what's called "Annuitization" and how it affects the internal rate of return on investors portfolios that use it and how the investment public misunderstands it. The investor has two choices when liquidating an annuity...annuitization or withdrawal. What does "annuitization" mean anyway? Annuitization is a fancy word for a payment plan over a specified period. Basically, you take an annuity which was earning a specific yield (example: 5%) and freeze it's internal rate of return so it no longer earns 5%, and take the account value (say for example $100,000) and divide it over a specific period (say 5 years...which is 60 months) based on a low internal rate of return (say 1.3%). So, $100,000 @ 1.3% over 60 months = $106,671.21 dollars. The insurance company is making 4.8% (as example) off the general account and paying out 1.3%...thus making 3.5% off the top. You think that congress would have jumped all over the insurance industry if they found-out about this monumental @#$%. But who is the second biggest lobbyist in the nation...you guessed it (the insurance lobbyist)!!!
I've even seen immediate annuities (which you should never buy under any circumstance) be annuitized over a specified period...and the investor does not even get their money back! Example; You invest $100,000 and annuitize it for $1,500 per month for 5 years = $90,000 dollars! This happens a great deal...but you never hear about. If this happened in the money market arena...heads would roll. What happened to that $10,000 you ask? Well, it likely was devoured in what’s called a "national commission over-ride." An agent’s boss (called a marketing company) basically received a special commission or bonus at the end of the year, and the insurance company has to pay these large commissions somehow (and this is one method to accomplish it). But have you heard one word about immediate annuities being a problem on the major news channels? Not one commentary...ever!
If you think that's bad, the insurance companies "agents" market annuitization for life as if it was a great benefit that should be admired. Have you seen a TV commercial where some "big" organization is offering the public income for life...so you can feel comfortable in retirement (with a scene of some couple relaxing worry-free on the beach somewhere)? Let's take a look at the following example:
5 Year Period Certain = $1,777 per month (for 5 years)
10 Year Period Certain = $948 per month (for 10 years)
Life Annuitization = $220 per month (for as long as you live...which could be 1 month or 20 years)
Life Annuitization + 5 Year Period Certain = $200 per month for as long as you live + 5 years of payments to your spouse.
Life Annuitization + 10 Year Period Certain = $150 per month for as long as you live + 10 years of payments to your spouse.
What they don't tell you concerning life annuitization...is you invest say as example $100,000 and let’s say you die tomorrow…your spouse gets nothing!!! Your spouse goes to court and sues for misrepresentation. In addition, unknown to the client (he or she) could have gotten $1,777 in a recovery solution...but no one told them (recovering 100% of the original investment principal) was even possible. And even worse, the client could have done a withdrawal only recovery solution for an even greater aggregate yield, lower over-all taxes, and recovered 100% of the original investment principal & higher monthly payout than a 5 year period certain solution. But, agents are (over-all) un-willing to recommend this type of planning to the public (since they have to actually think), and the insurance companies are un-willing to market this concept (since they did not invent it). Both the agent and the marketing companies for the insurance companies would rather "pitch" the latest "hot" product with the highest commission payout (than do what's right for the public)...for a lower commission pay-out.
Why even be called a financial planner, if solution involves a strategy to create the highest possible commission payout. Have you ever wondered why some planners sell "B" and "C" rated companies? It's because these companies pay the highest commission, since these companies have to put aside less in reserves than an "A" rated company. In addition, these "B & C" rated companies have more so-called "junk bonds" in their general account...so they can pay these outlandish commissions to these so-called financial planners (I MEAN COMMISSION PLANNERS). This is why some annuity products have high surrender periods.
Sincerely,
John Bagwell
The Truth About Financial Products.com
www.thetruthaboutfinancialproducts.com