Annuity IQ

This week was a historic week by anyone’s means of measurement. We witnessed a catastrophe that was beyond all belief, Bear Sterns went out of business. To say we were stunned is an understatement.

While it is no secret that Annuity IQ knew the housing market was going to implode (it was written about on this very blog over a year ago) the shear scope of the situation is beyond belief. The sub-prime debacle is being blamed for this implosion, but it is not just sub-prime, it is AAA rated borrowers who are now falling behind to the banks.

The Fed, in their infinite wisdom, greatly underestimated this entire situation and they still are. The buyout of Bear Sterns by JP Morgan saved the markets as the 5th largest broker in the world declaring bankruptcy would have caused unbelievable carnage in the equity markets. The problem is Bear was not the only one in trouble, rumors are abundant that Lehman Brothers and even Merrill are still in trouble.

What can stop this liquidity problem? Nothing, in short. The Fed has pumped over a Trillion dollars into the banking system over recent months and it has done little to ease the pain. Years of mismanagement from the banks and the executives led to their very destruction. This industry has hated regulations and restrictions literally begging the government to stop regulating them, but now they are begging for tax payer dollars to bail them out.

While this is the only time we would ever advocate a bailout for the free markets, it is clear that not all of the guilty parties should be left off the hook. Bonuses need to be repaid to depositors and shareholders, CEO’s need to be fired and investigated and, yes, some banks need to fail altogether after all this is a capitalistic market system we have, survival of the fittest. It is also impossible to bailout the entire financial system as it is too large for the Fed to save on its own.

How does this relate to variable annuities? Well, read on.

Running a pro-annuity website leads to a lot of hate mail from the people who hate variable annuities. We receive many emails saying we are just a propaganda machine and we feed ignorance about a product that is “worthless”. All the pundits say that the guarantees offered by Variable annuities are not worth the cost.

I beg you to say that to the share holder of Bear Sterns who bought the stock a year ago at $170/share, or someone who bought the stock last week at $30/share. These pundits swear by index funds and tactical asset allocation with complete market exposure. While we also advocate market exposure and asset allocation, we also believe that the inherent risk of investing in equities needs to be mitigated by insuring some of your money.

This is where living benefits come into play. While 5% or 6% income a year may not sound like a lot you must consider that those numbers are guaranteed to be based on at least your initial deposit. If you experience positive investment returns then your withdrawals may go up as well. This is called downside protection with upside potential.

No index fund or tactical asset allocation program could have saved you from the carnage of the last 6 months. Nor would it save you from the collapse of the financial system, outside of an annuity. What those investments could do inside of a variable annuity is buy you piece of mind to know you will not loose everything.

So, all you people who write to use saying variable annuities are worthless, all we need to do is to ask you to turn on your TV and look at the returns in the equity markets to make our case. While this market may turn around, those who you guided into investments with no protection and told them to take withdrawals from those funds will never recover.

Those who bought a variable annuity on the other hand are safe in knowing they are guaranteed income forever.