March 2009

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CNBC and Annuities

By Ray on March 17, 2009

I know it has been awhile since we have posted, sorry. The market has been a mess, but as you may have read, we knew that for awhile. We called the temporary bottom and were right, but we did not post that it was going to go lower. However, this latest rally is a bear market rally, so don’t get sucked into long-term buying.

Anyhow, we were watching CNBC on Friday when we got all excited when the Power Lunch crew started talking about annuities. FINALLY, some real air time on these products, so we thought. They brought on 2 “experts” one guy against them and the other for annuities, but they were both dolts.

The guy who was against them had no idea what he was talking about. He kept saying 10% commission, spreads, yields and caps, but, for the love of God, they were talking about variable annuities not equity indexed annuities. We agree on indexed annuities they stink and now they will be regulated like Variable annuities, which is cool. Regardless, the guy who was for annuities never corrected this guy!

So there was a yelling match with the anti-annuity guy winning because he yelled the loudest. Oh, how I wish one of us were there, it would have been a blood bath. To make things worse is this guy was an ex-insurance guy who is now, probably, an RIA which is a joke. People, insurance agents sell insurance and usually know nothing about equities, but they do know how to charge a fee and bad mouth insurance companies.

The point is if the pro-annuity guy mentioned some of the selling points like the guaranteed income base during this really low point in the market it would have been a slam dunk. Especially since this market is going to be tough at best or, at the worst, trade back into the 6,000 range. He did none of that which is a shame because variable annuities are a really good buy right now.

Consider this, it took 25 years after the crash of 1929 for the market to reach a new high. This crash was much worse and will probably take equally as long or longer to hit 14,000. The NASDAQ is a great recent example, it has not even come close to reaching its all time high of 1999 – 2000 and that was 10 years ago now. So, investors lost 50%, at least, of their investments and may never make it back again in the near term at least, right?

Wrong, at least if you use a variable annuity product. Most living benefits have a guaranteed income base that says if you do not take out any money we guarantee the base benefit will double in 10 years. Not bad, especially if the market never recovers, but the anti-annuity crowd will strongly disagree with this. They will say that the internal rate of return is only 2% or some other nonsense like that because it is only an income base that is guaranteed to double, not the account value.

That is true, but it is unlikely that the S&P 500 will double in ten years so would you rather have an income base that is worth twice as much in 10 years or would you rather “save” a few bucks by indexing your money and only have 80% of what you already lost? See, these investments are going to give you income, which is the objective of ALL investments you make today. So, yeah I would take a double on my income base over 80% of what I lost any day, not to mention with the step-ups you will probably way outperform the market since you lock in the gains never the losses – which the anti-annuity crowd never mentions.

The point is that variable annuities make sense and to say that a guaranteed income base is a waste of money is self serving. These guys simply want to charge a fee and guarantee nothing versus an insurance company charging a fee that guarantees income for as long as you live. It is about the facts and most people who bash annuities do not have the facts and the folks at CNBC don’t have a clue, especially that On The Money lady who has zero investment experience, but tells us how to invest? OK, that makes sense.

Oh, and Suze, I told you so, but just watch she will roll out with a new book about recovering your investments or some other rudimentary garbage. Although I must confess, she knows how to market stupidity in a grandiose way.

People, get the facts. I know insurance companies are not the greatest things in the world and I am the first to admit the short comings of any product, but man listen to both sides of the story from someone without an agenda.