Thinking of MR TIGGS and his financial ponzi schemes tied to complex financial instruments---complex simply means---WE PLAN TO BILK YOU AND NEED TO LAUNDER THE MONEY. CHUZZLEWITT was going to use LIFE INSURANCE to collect upon killing his wife.
We have discussed since the beginning how Greenspan and Bernanke under REAGAN/CLINTON/BUSH/OBAMA worked with Wall Street to create ROBBER BARON FRAUDS with the help of those dastardly 5% black, white, and brown pols and players. They corrupted our entire US financial system by dismantling all government structures of oversight and accountability and consolidating all financial industries under WALL STREET INVESTMENT FIRMS. So, first our stock market was corrupted and now it is our bond market always the safest investment categories------global 1% have now pushed people into INSURANCE-----credit default swaps/insurance AND LIFE INSURANCE.
As Tiggs and Chuzzlewitt let us know-----we are yet again being staged for a scam. It was AMERICAN INSURANCE GROUP---AIG used by US FED and Wall Street to commit last few decades of massive financial frauds-----this time we have other global insurance corporations doing the EXACT SAME THING this time in the bond market.
NEW YORK TIMES NOW BEING A FAKE MEDIA OUTLET HAS AN ARTICLE WRITTEN SUGGESTING JUST THAT.
What Dickens calls the COMMON PEOPLE---the 99% of WE THE PEOPLE are doing just what TIGGS said---we are sending tons of money to corporations we don't know at a time when global corporations are fleecing consumers blind.
'Most policies sold today are some variation on universal life, where the cash value of the policy grows as the underlying investments grow'.
In a Volatile Market, Some Turn to Insurance Instead of Bonds
By PAUL SULLIVAN OCT. 14, 2011
LIFE insurance, it’s fair to say, is a subject that provokes strong opinions. People who like insurance see it as a way to leave money to heirs tax-free or to make sure there is money for a rainy day. Those who don’t like it see a product that generates huge fees for the seller and a diminishing benefit for buyers who probably don’t understand it.
But given the low interest rates on government bonds, some financial advisers have begun encouraging clients to buy permanent life insurance — permanent because it does not lapse, like term insurance, after a set time — as a substitute for bonds in their portfolio.
Their argument is threefold: the rate of return on permanent life insurance is 3 to 5 percent, the money in a policy ultimately passes to beneficiaries free of income tax, and owners can borrow against the policy without incurring any taxes. If they do not repay the loan, it will simply be deducted from the death benefit.
But there are plenty of advisers who point to the layers of fees in any insurance policy — for the management of the underlying investments, for expenses and for the cost of covering the risk of people dying without making all their premium payments. The advisers also say that insurance policies limit the gains that someone gets on the money invested and that the gains go down the longer you live.
But given the continued volatility in the stock market and low yields on United States Treasury bonds for the foreseeable future, there has been an increase in interest in insurance policies for their steady, if low, returns.
Is this a good thing?
It depends whom you ask. “As far as saying your bonds aren’t performing well right now, let’s put them all in the insurance policy, I don’t agree with that,” said Larry Rosenthal, president of Financial Planning Services, a wealth management firm in McLean, Va. “But I understand it from the perspective of accumulation, death benefits and tax deferrals.”
Bob Plybon, chief executive of Plybon & Associates, an insurance agency and wealth adviser in Greensboro, N.C., took the other side. “I think where we are from an economic standpoint it makes tremendous sense to look at it as an asset class,” he said. “Right now, you have the ability to generate yields that are competitive with other investments.”
Surprisingly, some people in the insurance industry are cautious about treating life insurance as an asset class. “I believe insurance should be used as insurance,” said Ron Herrmann, senior vice president of sales and distribution at the Hartford. “Taking money out of the life insurance has ramifications to the life insurance itself.”
So what do you need consider if your adviser suggests you think about putting money into a permanent life insurance as an investment?
WHEN IT WORKS
People who want to use permanent life insurance policies to build wealth do so by paying more than the premium, a practice known as overfunding. This can mean anything from increasing annual payments to making a lump sum payment.
“Overfunding could be a good use because it enables you to get a longer-term return,” Mr. Herrmann said. “If someone was doing this to take money out in one year, it’s probably not a good thing. If you’re looking 15 to 20 years down the road, it works better.”
For people with substantial wealth, above $5 million, the advantage is predictable growth on a part of their portfolio that they hope not to need.
“Over a 20-year holding period, most permanent life insurance policies have an internal rate of return of 3 to 5 percent depending on the company,” said Adam Sherman, chief executive of Firstrust Financial Resources, a wealth manager and insurance broker in Philadelphia. “Given how the world looks, is it bad to have a 5 percent tool in your investment box? It’s not going to hurt you.”
Or put another way, life insurance gives you guaranteed growth: the death benefit will be worth more than what you put in. Critics would argue that you could earn more money investing that money outside an insurance policy, but even some very wealthy people do not want to take the risk.
Mr. Plybon said he worked with a couple in their 70s who wanted to buy a large insurance policy after watching their net worth drop to $20 million from $30 million in 2008. While they clearly did not need money to live on, they wanted to find a way to get it back, since they had earmarked it for their family foundation. For a premium of about $1 million, he sold them a policy that would pay out $10 million after both spouses died.
Why not just invest that money in other, faster-growing assets? “They didn’t want to take a chance,” Mr. Plybon said. “They wanted to get less aggressive, not more aggressive.”
The other main advantage of insurance as an asset class is its preferential tax treatment. It is well known that the death benefit passes to heirs free of income tax. But policy holders can also borrow up to the amount they put into the policy tax-free and after that take out a loan against the policy, which can be repaid or deducted from the death benefit.
WHEN IT DOESN’T
Treating an insurance policy as an asset class can be a bad idea if you expect the policy to be more than it is.
“Just like any other asset someone would invest in, you have to pay attention to it,” said Glen Coral, director of advanced planning at CBIZ, a consulting firm. “You have to make sure the reason you purchased it in the first place still makes sense, and you have to make sure it’s performing as you anticipated it might when you first purchased it.”
Borrowing against the policy, for example, means you have to pay interest, and as the interest compounds over the years, it could greatly reduce the value of the policy.
Permanent life insurance is also loaded with fees up front, so anyone who wants to cash in a policy before 10 or 15 years is going to lose money. So those frustrated by the current low yields in the bond market need to weigh whether their frustration will last a decade.
They also have to decide whether the security of insurance is worth what they will lose in returns. Mr. Coral estimated that over 25 years a low-cost bond portfolio would have returns 1 to 1.5 percent higher than a permanent life insurance policy.
Most policies sold today are some variation on universal life, where the cash value of the policy grows as the underlying investments grow. So there is the chance for higher returns. But there is also a chance for far lower returns. Many policies guarantee at least a 3 percent return, but others, like variable universal life that allow for greater appreciation, may not.
“Insurance companies want you to think of it as an investment vehicle, but it’s a protection vehicle,” said Robert D. Russell, president of Russell & Company, a retirement adviser in Dayton, Ohio. “Fifteen years at 5 to 6 percent? Show me that in writing.”
Of course, at some point someone will get a return on the money you put in, whether it is 3 percent or 15 percent. “Mortality is recession-proof,” Mr. Sherman said. “When we go, it’s not going to be because the Dow was up or down.”
We wanted to share a long and difficult article to understand because it speaks to TALKING POINTS we hear from our FAKE MEDIA and 5% pols and players. AIG global insurance corporation was TOP CRIMINAL CORPORATION bailed out so the 1% did not lose investments and told to go OVERSEAS TO OPERATE----it was not bankrupted---it was not driven out of business for criminal ethos----it was staged overseas for the coming global Wall Street fraud ---this time laundering US Treasury and state municipal bond fraud.
Below we see a quote basically telling us we are dealing with COMPLEX FINANCIAL INSTRUMENTS in these insurance plans.
'There is no easy “one-fits-all” solution for insurance companies seeking to manage their assets amid negative rates. Each country has a different regulatory capital model, domestic capital market size, and a different gap between domestic yields and international yields. Cost of capital and hedging under various market conditions and further amendments to regulation, all pose an important consideration. Monitoring and learning from the trends of peers in other markets will help insurers formulate appropriate investment strategies in their own markets'.
What insurance industry soared during OBAMA? Global health insurance corporations of course----who is using hundreds of billions of dollars to leverage trillions of dollars in these several years of bond fraud? OUR GLOBAL HEALTH INSURANCE CORPORATIONS.
Please Goggle article to see great graphs---we chose this article because #1 it shows how WORLD BANK is ONE WORLD in having all nations' 1% sending their 99% of citizens' assets to be fleeced. It also talks about NEGATIVE INTEREST RATES=====so, our US Congressional pols CLINTON/BUSH/OBAMA during Obama continuing with Trump DELIBERATELY staged a NO-ESCAPE financial collapse and this focus is on taking the insurance assets we have tied to bond market.
Uncharted Territory: How Life Insurance Companies Can Navigate the Era of Negative Interest Rates
Yongho Lee, CFA
Vice President, Insurance Asset Management, PineBridge Investments, Hong Kong
6 July 2016
A prolonged period of low interest rates has beset insurance companies for more than a decade. Now, the adoption of negative interest rates by a number of central banks in Europe as well as Japan is steering the industry into uncharted territory.
Traditionally, local government bonds are one of the major asset classes life insurers use for asset-liability management. But the new era of negative rates means that traditional approaches will struggle to help insurers meet their return requirements. This, plus the relatively small size of the local corporate bond markets, leaves insurance companies with limited options.
While insurers are facing a considerable challenge, they are not empty handed. The continual fall in yields has given them an incentive to take offshore credit risk for yield enhancement as well as diversification. But it’s important to realize that there is no one perfect solution; each insurer needs to determine the best asset allocation strategy to address the “negative world order.”
Increased investments to foreign bondsThe asset-liability management (ALM) framework of insurance companies begins generally with duration matching (including cash flow matching) and currency matching. Generally, currency matching is achieved by directing investments into assets that are denominated in the same currency as the liabilities.
The path to negative
Historical 10-Year Government Bond Yields
However, ALM matching becomes problematic when it comes to duration because most Asian countries have an insufficient supply of long-term bonds beyond Treasuries. Given that life insurance liabilities are generally longdated, it is inevitable that insurance companies will face reinvestment risks posed by shorter duration bonds, and will require capital to offset that risk. The continual decrease in yields has given incentives for insurers to take offshore credit risk not only for the purpose of yield enhancement but also for diversification, which again raises the question of whether to match currency and duration.
While the low yield environment has become a global theme and changed the investment environment, the asset allocation of insurers varies largely depending on the liability structure, regulatory capital framework, and local capital market conditions.
Great variety in asset allocation
Asset Allocation of Life Insurers
The asset allocation of insurers in Japan, Taiwan, and Korea has also changed as interest rates have declined. The period when allocations to foreign assets (mostly bonds) started to increase coincides with the period when the yields of 10-year foreign bonds represented by US Treasuries (adjusted for currency hedge cost) becomes higher than 10-year local government bond yields. Generally speaking, Asian insurance companies run short-term rolling currency hedges that make it possible for them to achieve higher currency-hedged foreign bond yields than local yields.
On average, Taiwanese insurers now hold approximately half their portfolio in foreign assets
Historical Asset Allocation of Taiwan Life Companies and Yields
The extent to which these three major Asian markets are exposed to foreign assets depends on the local capital market conditions. Taiwan, for example, has total insurance assets of around US$500 billion, while the local bond market is less than US$300 billion. This has led to persistent low yields, low volatility, and low trading volumes in the Taiwan bond market. A relatively small bond market, coupled with the fact that Taiwanese insurers are required to hold capital against negative investment spread while no capital is charged for the duration mismatch, has triggered an aggressive expansion into higher yielding foreign bonds.
Major Taiwanese insurers using foreign credit to deal with negative investment spread
Japanese insurers are also allocating more to foreign bonds
Historical Asset Allocation of Japan Life Companies and Yields
USD denominated zero coupon callable bonds have been one of the major foreign bond investments for Taiwanese insurers. Reuters reported in May 2015 that the issuance of these bonds with maturity of 30 year yielding above 4% has reached around $5 billion since February1. Likewise, Formosa bonds in USD/RMB are in growing demand, and Moody’s estimates that 60–70% of foreign currency exposure from invested foreign bonds is hedged at industry level.
The interest rate environment in Japan is unique and is the result of persistent stagnant economic growth for over a decade after the collapse of its asset price bubble in the 1990s. The Japanese insurance industry has gradually increased its exposure to foreign bonds, which has helped to overcome the prolonged negative investment spread.
Korea’s bond market is about double the size of its insurance assets. Until recently, the onshore market offered higher yields, which is why Korea was relatively late to increase its investment allocation into foreign bonds.
Unlike Taiwan, Korean insurers are required to hold capital not only for a negative investment spread but also for duration mis-match. The Financial Supervisory Service in Korea reported that the life insurance industry is facing a negative spread of 40 bps (4.4% portfolio return vs. 4.8% reserve rate) as at end of June 2015. Korean insurers also have been investing in callable bonds for yield enhancement but these were generally sourced from the local market. Within a foreign bond portfolio, Korean insurers have long favored making foreign investments using US-dollar-denominated bonds issued by Korean entities, leveraging in-house credit analysis capabilities. Today, however, insurers are expanding their investments into bonds issued by foreign entities as the yields in the US and Korea are currently trading at similar levels.
Korea has been slower to march into foreign bondsHistorical Asset Allocation of Korea Life Companies and Yields
A gradual US rate hike cycle in coming years widening the spread with interest rates in Asia and the Euro zone could potentially increase the cost of currency hedging, which can further shift demand from US Treasuries to US Corporates and Emerging Market Sovereigns.
To match or not to match?
When interest rates fall below zero, traditional risk models fail because most of these assume rates cannot be negative. Negative rates are uncharted territory in terms of risk and asset management because they make ALM unprofitable or create negative spreads. So insurance asset managers are now facing the question: To match or not to match?
The main factor that drives whether an insurance company matches liabilities is the cost of doing so, which can be measured by the financial cost of hedging and the cost of regulatory capital.
When rates are low and long-term guaranteed liabilities are high, the cost of matching is high. If the cost of capital for failing to match is high, then an insurer may be willing to accept the lower return and negative investment spreads. This will, in turn, have an impact on its future business profile. In this scenario, for example, the insurer may offer products that are not heavily affected by squeezed margins. When rates fall to ultra-low or even negative territory, the financial cost of hedging becomes more pronounced and less emphasis is placed on duration matching.
Asset risk is also a critical factor that plays out under this scenario – for example, if an insurer decides to shift from government bonds into real estate or below-investment-grade credit. It is prudent or indeed, may be mandated, that they hold capital for the additional risk that is taken.
For every insurer and every country there are different asset-liability matching trade-offs. Among the major insurance markets, Japan provides an interesting example warranting further investigation.
Japan’s 10-year yield has been persistently below 1% since 2012, which led insurers to reduce allocations to government bonds. Now yields are negative up to the 15 year tenor which means that 83% of the Government bonds outstanding are in negative territory. Government bonds invested by insurance companies are generally long duration and more than 70% of Japan’s government bonds are longer than 10 years
2.2 Source: Annual Reports from major Japanese Life companies including Nippon Life, Dai-ichi Life, Meiji Yasuda Life, Sumitomo Life, Taiyo Life, and Daido Life.
Major insurers in Japan have steadily reduced their allocation to government bonds and replaced these with foreign assets – predominately foreign bonds.
Most of Japan’s yield curve is negative
The ultra-low interest rate environment has made Japanese government bonds unattractive for domestic insurers to undertake duration matching, making the risk inherent in foreign credit more palatable. The local credit market, which can potentially provide a better yield alternative to government bonds, is only around one-third of the size of insurance assets because direct bank financing is still a major source of funding for Japanese corporations.
Additionally, the US credit market shows better yields compared with Japan’s local credits.
The US offers better yields
We expect to see a further allocation into more alternative and offshore assets by insurance companies due to negative rates. The degree to which insurance companies will embrace this new investment paradigm will depend on their appetite for the relevant risk.
Regulatory framework limitations
In addition to capital, there are also regulatory limitations that dictate how much companies can invest offshore and into riskier investments. For example, insurers in China, Korea, and Thailand are not permitted to invest directly into foreign high yield bonds.
Japan previously had a regulatory limit of 30%, 20%, 30% on total assets for domestic stocks, real estate, and foreign assets, respectively. This limit was abolished following a revision to the Ordinance for Enforcement of the Insurance Business Act as of 18 April 2012.
The Financial Supervisory Service in Korea announced last year that it would lift the current regulatory limit, which consists of a 30% allocation to foreign assets, 6% for derivatives, and a 7% single issuer limit, by 2017.
Taiwan’s Financial Supervisory Commission passed a bill in 2014 to exclude foreign currency bonds issued onshore from the 45% limit on foreign investments. In 2013, the regulator started to allow insurance companies to invest in foreign real estate and continuously increased the regulatory cap inclusive of BB+ rated bonds, given certain conditions are met.
We believe that reforms across the globe are going to continue to be a one-way street, lifting direct measures by liberalizing regulatory limits but imposing indirect measures by increasing the risk charges and governance under different regulatory capital models. This is required in order to accommodate the ultra-low or negative rate environment while at the same time promoting sound risk management practices toward meeting the requirements of economic value-based solvency regimes. Solvency II in Europe, C-ROSS in China, discussions about RBC II in Singapore, and Japan’s field tests of economic value-based solvency regime in 2010 and 2015 are all illustrations of this.
With each step toward liberalization, we are likely to see increasing numbers of insurers diversifying into more international and alternative investments.
Optimizing portfolios: A case study from the Japan life insurance industry
The Capital Market Line is a decision-support tool developed by PineBridge’s Multi-Asset team, which quantifies several key fundamental judgements for each asset class to generate an intermediate forward looking view (for 5 year period) of expected return, volatility, and correlation amongst the asset classes.
The fixed income outlook reflects anticipated developed-market sovereign yields driven by current aggressive monetary policy (negative rates and quantitative easing) and the expected gradual normalization of rates with less concern over disinflation. The equity outlook reflects increased leverage in emerging markets, Europe’s cyclical recovery, and Japan’s shareholderfriendly corporate governance reforms. The US dollar is expected to remain strong with a widening of interest rate differentials ahead.
While Japanese and US government bonds are the two major asset classes for Japanese life insurers, they have an unattractive return profile over the next five years as shown in the chart above. However, using a smart allocation with a diversified foreign asset portfolio can demonstrably produce better portfolio positioning on a risk-adjusted return basis, measured by the return on the asset risk charge under the Japanese regulatory solvency framework.
We analyzed a range of portfolios to determine what such an allocation could look like using our Capital Market Line forecasts. The following chart shows a representative portfolio of the life insurance industry in Japan as a base portfolio. The blue portfolios are those showing higher risk-adjusted returns relative to the base portfolio. Foreign bonds are all assumed to be currency-hedged, while foreign equities and alternatives are assumed to be unhedged. The yellow portfolios are equivalent portfolios with the exception that foreign bonds are not currency-hedged.
These study results assume that insurers have sound foreign credit analysis and currency risk management functions.
Overall, the ultra-low interest rate environment and relatively thin local credit market in Japan would encourage investment decisions to diversify asset risks and take foreign credit risks, supported by the well-capitalized positions of the life insurance industry. Interest rate risk can be increased a little by reducing the portion invested in government bonds, which have previously been used as the main asset class for duration matching. The BOJ’s quantitative easing program which aimed to devalue the Japanese yen provides an incentive to take a tactical view on currency movements and assume some currency risk. However, it is important to note that currency volatility can be increased by unsynchronized monetary policy worldwide.
We first want to remind US citizens to where all those hundreds of billions of dollars sent to bail out AIG went. We have discussed in detail the spin-off of AIG into global investment firms often tied to global hedge fund IVY LEAGUE universities---this is from where these universities financialized these now global corporate campuses.
China was the big player in laundering massive subprime mortgage loan fraud and all that AIG CREDIT DEFAULT SWAPS INSURANCE. When we hear that China owns much US debt----this is it. We see here where China's 1% are making out like bandits in sharing the global Wall Street looting of 99% of US WE THE PEOPLE. AIG SPIN-OFF GOES TO CHINA 1%.....now they are hawking the current US Treasury bond fraud again making out like bandits. 99% of US citizens going under the bus middle-class going, going, going.
'PineBridge Is Owned by the Son of Asia’s Richest Man
PineBridge was owned by American International Group Inc. (NYSE: AIG) until 2010, when it was sold to Pacific Century Group (PCG) to help repay AIG’s rescue by U.S. taxpayers. PCG is an Asian-based private investment group controlled by Hong Kong billionaire Richard Li, the son of Asia’s richest man, Li Ka-Shing, who has a net worth of $33 billion. Li and his family were criticized by the Chinese government for their European investments and for selling $2 billion worth of Chinese assets in 2015'.
So, we KNOW a rebranded AIG will be the same WOLF and can look at what that WOLF is saying to understand from where all the coming massive financial frauds will come and the goals of this coming economic collapse.
PineBridge Investments Drives Effort to Rebrand AIG
AIG’s investment arm has a new name — PineBridge Investments. But can it persuade investors to forget its former parent?
- Julie Segal
DICKENS' TIGG was using this same scheme to bilk the COMMON PEOPLE the 99%-------let's take time to understand public policy terms around financial products all our wealth and assets having not been lost now remain.
As we shouted these several years of OBAMA US Treasury bond fraud-----the safest of investments have always been the MUNICIPAL BOND MARKET AND US TREASURIES. So, pensions, retirements, US city coffers, life insurance, and ANNUITIES have all last century been tied to the bond market for safe steady interest over long term. Like Social Security and Medicare our aging BABY BOOMER SENIORS are getting ready for the largest shift of NEEDING THOSE ANNUITY PAYMENTS. We are dying ---ergo life insurance----we are retiring ergo Social Security ---and this is why global 1% are attacking the bond market sending it to JUNK BOND STATUS----they are RUNNING AWAY WITH THE LOOT JUST AS TIGGS.
The article above speaks to ANNUITIES, BONDS, AND NEGATIVE INTEREST------this is on what our discussion this week will focus. The key public policy as always is WHO ARE THE LOSERS WHEN THE ECONOMY CRASHES----we discussed TRANCHES created tiered winners and losers------when our pols invest our pensions and government coffers in what they KNOW create 1% winners and 99% losers---that is fraud and criminal malfeasance. This time these same 5% global 1% pols and players KNOW the bond market will now be tiered to winners and losers and again it is the 99% of WE THE PEOPLE----the taxpayers ---who are staged to be great big losers not to mention our savings investments.
Fixed Annuities vs Bonds
A fixed annuity is a contract between an insurance company and one or more individuals, in which individuals make premium payments over the course of an accumulation period. The insurance company invests the premiums, then uses the investment proceeds to make distribution payments to the annuity holder. These distribution payments typically span 10-20 years but may also last for the life of the holder. For a close look at other features of fixed annuities, see Fixed Annuity Features.
A bond is a debt security often purchased by older individuals seeking income from its interest payments and the security of principal associated with creditor status. Bonds carry maturities ranging from one year to 30 years. A fixed interest payment (called a coupon payment) is determined at issuance. The effective yield of the bond depends on its price, which is free to fluctuate in accordance with market conditions. Bonds are issued by large companies, state and local governments and the federal government. (Technically, Treasury-bond maturities range from 10 to 30 years; securities with maturities of between two and nine years are called notes.)
Many characteristics of the fixed annuity are similar to those of a bond. This makes it useful to compare and contrast fixed annuities and bonds from the viewpoint of an investor. To get the best picture of which investment is best for your savings goals, compare rates on bonds and annuities through a licensed financial advisor. You can contact an advisor, free of charge, by requesting an annuity rates report below.
Risk of Default
The risk characteristics of fixed annuities and bonds are quite similar. Corporate bonds carry the risk of default, which can be minimized by choosing only from companies whose bonds are rated at least investment-grade by the bond rating agencies. Fixed-income investors with sufficient resources can also diversify their corporate bonds holdings to reduce the impact of default by a single company. One way of attaining diversification is to invest in a bond fund, which utilizes the mutual fund technique of selling shares in a pool of invested funds created by professional managers who select a portfolio of bonds. This simplifies the process and decreases default risk - at the cost of worsening interest-rate risk.
The default risk of municipal bonds is smaller, since city and state bankruptcies are much rarer than corporate ones. The default risk on federal Treasury securities is lowest of all; these are viewed by financial theorists as the quintessential riskless assets.
Default risk is smaller for insurance companies than for businesses generally, since their product is always in demand and the investments that backstop the company are professionally managed and diversified. Major ratings agencies rate the financial strength of insurance companies, which allows annuity buyers to avoid companies whose finances are shaky. Finally, the existence of state insurance guaranty funds covering life and health policies further decreases the default risk borne by fixed-annuity buyers. Technically, that level of risk is less than for corporate bonds and slightly more than for Treasury securities. Overall, the default risk borne by careful fixed-income investors is quite small – much smaller than that run by purchasers of individual stocks, for example.
Security of Principal
Security of principal is another similarity shared by bonds and fixed annuities. Barring default, a bond investor can assure a specific return by holding the bond until maturity. Thus, market risk becomes a problem only if the investor must sell prior to maturity. Market interest rates may rise, implying that the bond’s price must fall to preserve the interest yield of the fixed coupon amount. This fall in price will impose a capital loss on the seller.
Fixed annuities preserve the investor’s principal by including minimum guarantees for interest and income credited to the accumulation account, thus insulating the investor against market risk. Once again, an investor who needed to cash in the annuity prematurely would face a penalty; namely, the surrender charges imposed on early withdrawals by the insurance company. (Annuity holders younger than age 59 ½ also face a 10% tax penalty levied by the IRS.) Whereas market fluctuations in interest rates are unpredictable, these charges are known in advance, since the schedule of surrender charges is stated in the annuity contract.
Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.
Cost of Liquidity
Both bonds and fixed annuities impose a cost for liquidity. The penalty for bondholders is potentially larger in magnitude but lower in probability, which tends to balance out the comparative degree of risk. (Again, the comparison would be modified for annuity-holders younger than age 59 ½, who would face an additional 10% tax penalty levied on withdrawals by the IRS.)
Inflation risk is a serious concern for both bond investors and fixed-annuity holders. The purchasing power of fixed coupon payments and principal can be eroded by increases in the general level of prices over the term of the investment. In recent years, the federal government has sought to allay this concern by issuing Treasury Inflation-Protected Securities (TIPS) and I-bonds (savings bonds). Each of these instruments makes adjustments based on fluctuations in the Consumer Price Index. TIPS adjust the principal value of the security on a daily basis, which increases the investor’s coupon payments and principal value in accordance with average increases in prices. I-bonds increase the credited interest rate based on changes in the CPI. This protection against unanticipated inflation carries a price tag, since investors will bid up the price of inflation-protected securities, thus decreasing their effective yield compared to non-protected securities.
Recently, insurance companies have begun issuing fixed annuities whose investment accumulations are indexed against inflation. This may be a competitive reaction to the popularity of TIPS and I-bonds. Typically, indexation takes place once per year and is tied to a well-known index such as the CPI.
Interest-rate risk refers to the chance that money tied up in illiquid investments may be locked into low-yielding instruments when interest rates rise. This is a problem with bonds of intermediate maturities (say, 5-10 years) as well as with long-term bonds with 10, 20 or 30-year maturities. One strategy for overcoming it is to “ladder” bond purchases by staggering maturities by one year, then rolling each year’s maturing funds into a bond of constant maturity. This allows new funds to be available for reinvestment every year, reducing the exposure to interest-rate increases.
Garden-variety fixed annuities may have an initial guaranteed rate that lasts only for a year or two, after which the insurance company is free to specify a lower rate. Ironically, CD annuities arose precisely because they lock in a guaranteed credited interest rate for the investment term of the annuity. Perhaps the surest way to deal with the problem of using annuities is to purchase an annuity whose investment returns are tied to a bond index rather than an equity index. This is the type of problem that indexation was intended to solve.
Effective Interest Yields
Effective interest yields on bonds and annuities are comparable although not identical. Insurance companies invest in high-grade corporate bonds and blue-chip stocks in order to pay out interest to fixed-annuity accumulation accounts, so we would expect to find the latter yields to be somewhat lower than the former. On the other hand, competition between insurance companies prevents this yield spread from becoming too wide. Treasury securities and municipal bonds have even lower levels of default risk than do annuities, so we would expect the latter’s yields to slightly exceed the formers'. This range of asset yields nearly covers the spectrum of fixed-income interest rates. High-yield bonds (so-called “junk” bonds) have significantly greater default risk; consequently, their yields are much closer to those of equities.
The biggest difference between fixed annuities and bonds is the security afforded by annuities. The option to annuitize – that is, to distribute the capital sum created by investment in regular payments over the remaining lifetime of the annuity holder – is unique to annuities. The problem of how to allocate consumption over a lifetime is inherent, and annuitization eliminates the possibility of running out of money before running out of life. It does this largely at the cost of surrendering control over the capital sum that finances the annuity payments.
The only fixed-income security analogous to the annuity is a consol – a bond with no maturity date that provides coupon payments in perpetuity to its holder. Consols are familiar to students of financial theory for their useful analytical properties, but unfamiliar to most people because they seldom exist in real life. As a practical matter, an annuity is the only way to assure a stream of income whose duration exactly matches the life span of the recipient.
Fixed annuities, like annuities in general, have a well-deserved reputation for incurring high expenses. This is due primarily to the insurance-related, minimum-guarantee features that protect annuity-holder principal. In contrast, bond investments can usually be made inexpensively. Corporate bonds can be acquired with the help of a discount broker, as can municipal bonds. Treasury securities can be purchased directly at little or no transaction cost. Even bond funds carry lower expenses than annuities.
Other significant differences between fixed annuities and bonds exist. Annuity investment gains accumulate tax-deferred, which is another significant investment benefit. Corporate bond interest is taxable in the year of receipt unless the bond is held within a qualified plan such as an IRA – a strategy recommended by some financial authorities. Municipal-bond interest is exempt from federal income taxes but taxable at the state and local level. High-income individuals often hold municipal bonds for this reason. Treasury bond interest is state-and-local tax-exempt but subject to federal income taxes. The value of a state or local tax exemption varies not only with the income status of the recipient but also according to the height of state and local taxation, which itself varies widely by location.
Annuity gains are taxable as ordinary income when distributed or inherited. This does not represent the same relative disadvantage for fixed annuities relative to bonds as it does for, say, variable annuities compared to mutual funds. Bond interest is also taxable as ordinary income and capital gains only become a factor if the bond is sold prior to maturity.
As insurance products, annuity assets are shielded from creditors – such as liability-judgment awardees – in many states. Again, this is a benefit not conferred upon bondholders.
Annuities can pass directly to a beneficiary upon the holder’s death, without being tied up in probate. Securities such as bonds ordinarily require re-titling under probate supervision unless their registration includes a transfer-on-death (TOD) stipulation.
As investment vehicles, fixed annuities and bonds are quite similar. For risk/return analysis and asset-allocation purposes, they can both be viewed as fixed-income instruments. The chief differences between them are created by the specialized features of annuities – both good and bad.
Here is from where the staging of losses to 99% of citizen investors often represented by global municipal bond market funds, state and city treasurers and comptrollers------AGAIN, THIS IS A BENEFIT NOT CONFERRED UPON BONDHOLDERS. To where are all our annuities, retirements et al being housed? IN THE BOND MARKET not shielded from creditors-----global 1% corporations and investment firms.
As insurance products, annuity assets are shielded from creditors – such as liability-judgment awardees – in many states. Again, this is a benefit not conferred upon bondholders.
Below we see an investment firm hawking not only annuities but identifying TEXAS AND FLORIDA for GOODNESS SAKE as states having laws protecting annuities from creditors when we all know these two states are GROUND ZERO FOR FINANCIAL FRAUDS AGAINST THE 99% OF CITIZENS.
What states that like to pretend to pass state laws protecting citizens when in fact they are only protecting global corporations and global 1% from losses do----is exactly what this Ft Lauderdale plan does------massive borrowing tying pensions to THE BOND MARKET.......where they will NOT be safe from CREDITORS.
Fort Lauderdale plans massive borrowing to cover pension costs
July 23, 2012|By Larry Barszewski, Sun Sentinel
FORT LAUDERDALE — The city has found a new way to shore up its pension funds and reduce budget expenses: Borrow hundreds of millions of dollars to bet in the stock market.
The risky venture raises red flags among financial analysts nationally. Similar pension borrowing recently forced the cities of Stockton and San Bernardino in California to declare bankruptcy.
Fort Lauderdale plans to borrow $297.5 million using pension obligation bonds and dump the money into the hands of the city's pension fund trustees to invest. Officials expect investment returns will exceed the debt's interest payments.
How annuities can shield you from creditors
Published: Oct 8, 2013 6:15 a.m. ET
StanHaithcock Florida Sentinel
Stan "The Annuity Man" Haithcock is an annuity specialist and nationally recognized annuity critic. Haithcock is the author of six published books on annuities, including the highly acclaimed “The Annuity Stanifesto.” With over 25 years of experience in the financial-services industry, he has propelled his “will do, not might do” contractual-guarantees-only mantra to reframe the annuity category for the transfer-of-risk strategies they were designed to be. Haithcock is the co-founder of the first direct-to-consumer annuity platform, annuities.direct. Haithcock is licensed in all 50 states and is based in Ponte Vedra Beach, Florida. You can learn more at stantheannuityman.com.
Is Florida the annuity utopian dream?
In some states, annuities can provide more value than just the contractual guarantees
I live in a place called Annuity Realityville. That place only looks at the contractual guarantees of an annuity policy and lives by the credo that "you own an annuity for what it will do, not what it might do."
Unfortunately, the majority of annuities are purchased today are sold in Annuity Dreamtown where the sales pitch is that you can have your cake and eat it too.
Most agents think that annuity utopia exists with a room full of aging baby boomers. I always joke that annuity utopia for agents is an actual place in the middle of Florida called The Villages. You’ve probably seen the TV commercials with the catchy harmonizing jingle that you can't get out of your head, "Florida's friendliest hometown." I'm convinced that this is where most annuity agents yearn to go on vacation, and if there was ever an annuity Mecca ... this is it.
The Villages is actually a very nice community, and totally designed for the retiring baby boomer. Golf carts outnumber cars, and you can eat three free meals a day at agent sponsored annuity seminars. The only downside to living there is that you will probably be pitched an annuity every single day in some form or fashion. This might be a prime example of annuity utopia for the agent, but this isn't the pearly annuity utopia golden gates that I’m referring to.
Where is annuity utopia?
There are a few states that have laws in place where annuities can provide protection from creditors and frivolous lawsuits. Two prime examples of those states are Texas and Florida. Both have specific statutes in place that can protect your annuity and life insurance assets from the litigious world that we live in. If you are interested in reading the actual laws, here are the links to the statutes in Florida and Texas.
Annuity agents in Florida love to use O.J. Simpson as the poster child for annuity protection using these creditor protection laws. As the story goes, our favorite Southern Cal running back has a large amount of his money in annuities. Before he made some bad decisions in Vegas, he was residing in south Florida and the pitch you will hear is that those annuities he owned were fully protected under the Florida statutes. I've never spent much time on the O.J. saga to dig into his specific details, but I personally know many physicians and successful entrepreneurs in Florida that have taken advantage of this asset protected legal statute by placing their assets in annuities and life insurance.
Physicians also use these creditor protection statutes in conjunction with specific annuity strategies to potentially lessen their required malpractice insurance. In Florida, if you pay your house off in full, that asset is protected under Florida law. By the way, that's the reason you see a lot of high level people have their primary residence in Florida as well as the fact there is no state income tax ... and the beaches are pretty nice. After the house is fully paid off, you can then put all of your non-IRA assets (i.e. non-qualified) into annuities or life insurance products so that everything is fully protected from predators. That's how the asset protection game is played in Florida.
Be proactive, not reactive
If you are living in one of these "annuity utopian" states, and are concerned about protecting your assets, I encourage you to meet with your attorney and CPA to see if this type of strategy would make sense for your specific situation. It's important to point out that annuity agents cannot make this legal call, and can only help with the implementation of the plan.
The reason this consultative step is essential is because you have to be proactive when using annuities for asset protection purposes. In other words, you can have the lawsuit filed against you and then immediately put everything in annuities. As they will tell you in Florida and Texas, that dog won't hunt! You have to be able to prove that this creditor protection strategy was part of your overall plan, and not some knee jerk reaction to something that just happened in your life.
Should you buy an annuity because you live in one of these states that provide this type of creditor protection? It obviously depends on your specific circumstances, but the answer is probably no and not for that reason only. However, it should be considered as part of your overall plan and in conjunction with how your estate is set up. My advice is to contact a local lawyer or CPA to see if this creditor protection strategy is available in your specific state, and if it is something you should consider.
Regardless of how much money you have accumulated, you probably worked very hard for it and want to make sure that you protect it at all costs. Depending on the state you live in, annuities might be able to provide a solid asset protection plan that is backed up by actual law. Maybe you too will be able to find your own personal "annuity utopia."