by chatita1951 » Tue Aug 10, 2010 04:10 pm
I am considering investing money in the BPA Select Annuity 12, it sounds so good. But I have always had money in CD's that are FDIC backed.But CD rates are terrible right now. Is there any way that I could possibly lose my initial investment, Financial Advisor says no way but I am not sure and afraid. Help , I need outsider advice on this one.
Posted: Wed Aug 11, 2010 01:45 am Post Subject:
It's not FDIC insured, but actually there is more money in reserve requirements for liabilities at insurance companies than there is backing the FDIC's promise to you.
However, there is a way to lose more than your principal on an annuity, even when fixed. Annuities come with surrender charges for the first several years. Meaning if you take money out beyond something known as a free withdrawal amount, the insurance company will deduct a surrender (early redemtion) fee and keep the money. Additionally many annuities are subject to MVA (market value adjustment) which can be an additional surrender fee if the annuity is still subject to surrender charges if interest rates are going up, but can also be a mechanism to reduce surrender fees if interest rates are going down.
The annuity is a safe product to park your money, but you won't be able to move in and out of one annuity like you could CD's. Additionally, the annuity has tax deferred growth whereas the CD does not. Having your gains taxed year after year in a CD reduces the growth of your money.
Posted: Wed Aug 11, 2010 09:25 am Post Subject:
Hi BNTRS, you seem to have some wonderful investment information for us. From your post, I have a feeling that the annuities offer good investment opportunities for people who have a steady source of income. So, I feel it's better for those who don't have a steady income to invest with CDs. Would you like to throw some light into it?
Posted: Wed Aug 11, 2010 09:36 am Post Subject:
I understand the way our surrender charges increase with rising interest rates. What I don't get is if our MVA is fixed or if it also varies. Perhaps you could explain that to me. It's also not clear how our carriers calculate such market value adjustment.
Posted: Fri Aug 13, 2010 03:18 am Post Subject:
Hi BNTRS, you seem to have some wonderful investment information for us. From your post, I have a feeling that the annuities offer good investment opportunities for people who have a steady source of income. So, I feel it's better for those who don't have a steady income to invest with CDs. Would you like to throw some light into it?
There's simply no way to make a rule of thumb statement like that. Source of income is only one factor in determining the suitability of a financial product for a person. Other factors involved include investable assets, risk tolerance, investment time horizon, and investment objective(s).
In other words, no I wouldn't necessarily agree with the premise that people with steady income should have annuities and those without should have CD's, because annuities and CD's could be suitable for both fact patterns (steady income or no steady income) as it's only one piece of the overall fact pattern that would determine suitability.
Posted: Fri Aug 13, 2010 03:25 am Post Subject:
I understand the way our surrender charges increase with rising interest rates. What I don't get is if our MVA is fixed or if it also varies. Perhaps you could explain that to me. It's also not clear how our carriers calculate such market value adjustment.
The calculation for MVA is fixed, but the actual charge (or bonus I guess you could call it that) of MVA varies. In declining interest rate environments MVA actually adds increased value to the contract and lessens the impact of stated surrender charges. In increasing interest rate environments MVA increases the impact of surrender charges.
The MVA calculation is explained in all annuity contracts that are subject to MVA. Usually they follow an indexed, a bond index. Typically the calculation is something like taking the bond index close X amount of days prior to the surrender and comparing it to the index on the day of the surrender to determine if interest rates are rising or falling. Then that gets plugged into the rest of the equation to determine what impact MVA would have the surrender of the contract.
If calling the insurance company to find out what the impact would be, you'd have to keep in mind that the best they could do is tell you what would happen if you surrendered the contract yesterday since there's no way they'd know where the index will close on that day (unless you can call them after hours) or where it will close any day after today.
Keep in mind that once the contract is out of surrender it is no longer subject to MVA, and the surrender free amounts are not subject to MVA
Add your comment