Those that have read me for a long time know that I am a proponent of immediate annuities.? Though they pay a fixed stream of income, they are more useful than bonds, because they provide longevity insurance; they can be tailored to prove an income that you can’t outlive, for you and your spouse.
But I got really annoyed when I saw an ad that said the following:
- 7% Income Guaranteed
- No RISK of Principal
And if you click on it, it takes you here, where they talk about 8%+ returns.? Total garbage.
Yes, if you are old enough, when you buy an immediate annuity, the annual payment may be 7% or more than the amount that you gave to the insurance company.? But with the yield on long low-investment grade bonds? hovering above 5%, I can tell you with certainty as a life actuary that the life companies are not providing a 7% return to retirees — it is far, far less, more like 4%, or maybe less.
So why the difference?? Immediate annuities work off of the idea that a lot of people will die, and money from their annuities is reallocated to the living (minus a profit for the insurer, on average).? The insurer earns 4.5% on its investments, and additional money of 3.5-5.0% from deaths of annuitants supports the payments of those living, with 1% to cover commissions, administration, and profits.
So, they advertise that they are paying you 7-8%+, when they are really paying you 4.0-4.5%, and exposing you to the risk of inflation, because that payment will never rise.? Ask them for payout levels on inflation-adjusted immediate annuities, and watch your jaw drop as you see how relatively low the payments are.
This is dishonest advertising, because not only are they not giving you the true level of returns, but they tell you there is no risk of principal.? Guess what, though I like immediate annuities, the only reason there is no risk of principal with them is that you surrender your principal when you buy one.? Your principal is gone, and you have a payment stream that will disappear at death (or death of you and your spouse).
This advertisement was probably put together by an independent agency, but blame still goes to the insurers that allowed themselves to be involved in such a scam:
- Allianz
- Aviva
- Fidelity Investments
- Genworth Financial
- ING
- Metlife
- Midland National
- New York Life
- Pacific Life
- Prudential (US)
Shame on all of you.? This is deceptive advertising that defrauds those who trust the representations of your agent.? State Insurance Commissioners, please take note.
If something seems too good to be true, it usually is, and this is another example of that.
David, you are being a little harsh.
These companies are simply following the “leadership” of Washington DC.
If the government can lie continuously (both political parties are equally guilty), than why can’t the rest of society?
“We the People” allow these lies. “We the People” have the ultimate power, government is only allowed to assume powers that “We the People” assign to them — which means we have the power to make empty promises (otherwise we couldn’t allow our government to do it).
You can’t complain about companies shamelessly following the leadership they get from the crooks in Washington (which “We the People” vote on every 2-4 years).
Every election, “We the Stupid” buy into the notion that our political party’s actions are “legal” even if they are not ethical. We get what we vote for.
Neither “leading” candidate for President in 2016 measures up. Whatever your political affiliation, your candidate is part of the problem
If you don’t like the sorts of false promises in these annuity ads — we need to attack the disease, not the symptoms.
David
While I know that insurance companies are famous for “fine print”, I am struggling to see what your gripe is with this ad, or what is dishonest or even misleading.
You are confusing the rate of return the insurance company gets on the principal and the income stream the annuitant receives. From the annuitant’s perspective, it is only his income stream that counts.
If I hand over $100k and receive a $7k annuity for life, I have an income stream of 7%. The calculation is based on age, so it is entirely possible for someone to receive a 7 or 8% payout. True, they don’t tell you at what age they pay that percentage, maybe this is what you mean? Younger people cannot get such a high payout?
To your argument that the insurance company is likely not generating a 7% return on the capital (if they were, you would hope to have a higher annuity), I have to ask, “So what”? As the annuitant this only matters to me if the investment income is so low relative to the promised payouts that the insurer finds itself in financial danager. Otherwise, good for annuitant that they locked in a solid income stream just before a major dive in interest rates and/or investment returns.
That the insurance company is topping up their investment returns with a return of my principal is a BENEFIT, as this part of my annuity income stream is tax free. Insurance companies go out of their way to point this out, since it is another advantage of insurance products over investments.
Along with the higher immediate income annuities offer compared with say, bonds, I assume the tax advantages are part of the reason you yourself recommend annuities.
Likewise, your argument that there is no principal risk is unfair. Yes, it is true, the insurance company means risk in the capital market sense – uncertainty, whereas Joe Internet-surfer might think this means his principal is protected. But in actual fact, there is nothing dishonest in this – if you annuitize, no no longer have risk of principal loss. This is often a better option than trying to sell down part of your capital (perhaps into unfavorable markets) to provide a top up to the lower initial income stream offered by bonds and dividend stocks.
Should advertisments have the obligation to position their products in the least favorable light possible?
What would be a better argument is that with incredibly low interest rates and indications of rising inflation that locking yourself into a 7% annuity return might be a very bad idea in terms of your ability to maintain purchasing power.
This might have something to do with why insurance companies (who have taken beatings on annuities from the 1980s) are now pushing them. That and the fact that low interest rates leave income investors desperate for yield. But no one ever accused insurance companies of being charities.
There are strict rules for what is meant by yield. Return of capital is never yield.
Thanks for the reply, it got me thinking that maybe I had been wrong all this time.
I can think of several definitions of yield that involve capital return (dividends) or capital gains (yield to maturity, yield to call) but I figured, maybe I’m just ignorant about insurance, so I consulted Wikipedia, about yield on annuity investments and I see this:
“Annuities
The life annuities purchased to fund retirement pay out a higher yield than can be obtained with other instruments, because part of the payment comes from a return of capital. $YearlyDistribution / $CostOfContract.
So my questions are – 1) does wikipedia have it wrong? and 2) if so, can you point me to the rulebook you are using?