Very funny, StJoseph. But I'm not anywhere NEAR through here.
Posted by FFEJRETSO:
"Haven't seen Fossil "have fun" with my post on Variable Annuities.
We're waiiiiiiiiiting..."
OK, FF, I'm glad to see that you're still around because it reminds me of some loose ends that need to be tied down. Let's start by putting some numbers on your example. First, some assumptions:
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[*] The insurance company doesn't mutilate the corpse with surrender charges because he died during the early withdrawal period (j/k)
[*] There isn't a sales load on the ocean of fees the VA alread has
[*] Average fees apply, not the higher 3% you offer. For your VA let's use the average derived in the "Titanic Option" study, 2.15%, and for mine the .09% Vanguard offers for a $100K account.
[*] The buyer is 50 years old, and the 50% loss in the value of his portfolio was a straight line decline over 3 years (4/2000 to 4/2003), meaning that the account declined about 20.6% per year.
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I've tilted these assumptions in your favor, using an older man that's more costly to insure, no sales load and only average fees as if you had something against high ones, and finally the assumption that your actively managed portfolio wouldn't earn a lower return while incuring higher risks than my index fund, which of course wouldn't be true. Fair enough?
Your Variable Annuity:
Year 2001 Fees: $100,000x.0215 = $2,150; Ending Balance After 20.6% Decline: $77,693
Year 2002 Fees: $ 77,693x.0215 = $1,670; Ending Balance After 20.6% Decline: $60,362
Year 2003 Fees: $ 60,362x.0215 = $1,298; Ending Balance After 20.6% Decline: $46,897
Total fees: $5,118
Index Fund + Term Life Alternative:
Year 2001 Fees: $100,000x.0009 = $90 Ending Balance After 20.6% Decline: $79,329
Year 2002 Fees: $ 79,329x.0009 = $71 Ending Balance After 20.6% Decline: $62,931
Year 2003 Fees: $ 62,931x.0009 = $57 Ending Balance After 20.6% Decline: $49,922
Total fees: $218
Fees Available to Buy Term Life Insurance With: $5,118 - $218 = $4,900, or, divided by 36 months = $136 per month
Hmmm...How much term life insurance would $136/mo buy? For a 50 yr old male, www.insure.com says $14.18/mo will buy $50,000 of coverage w/ a 5-yr rate guranatee. That comes out to over $475,000 in coverage.
So bottom line, the guy dies, how much do the heirs get? $100,000 with the VA plan you sold him (and the heirs have to pay taxes on it). Over $525,000 using the index fund/term life alternative (and they get the stepped-up tax basis).
Posted by FFEJRETSO:
"The crying shame is the ignorance many people have about this investment alternative. Investors suffer because of it, their beneficiaries suffer, and the professionals who help people choose from these as potential alternatives suffer, all because of people who talk (and post)before they REALLY know the facts."
You devised your own example not only to prove how great a VA works, but also because you were eager to show that if it works here it will work for just about any other investor in any situation. In your scenario, you chose to use a highly unlikely 50% market decline, a condition which bolstered your case and weakened the case for the alternative. Only twice in the past 100+ years has the market declined by 50%, and both times an investor would need the unlikely misfortune of buying and selling on the VERY WORST days possible to achieve that result. And finally, as with any VA, the value of the guaranteed death benefit is suspect, for two unlikely conditions have to occur: the participant has to to die, and he has to die when his portfolio is down. I'm not saying all this happening together isn't possible, but it's very, very long shot.
Even with all these advantages, in the end the example you gave to prove your case actually disproved it and instead proved mine.
[This message has been edited by Fossil (edited July 17, 2003).]