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Dan Otter

How Valuable Is The M&e?

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It has been estimated that Mortality & Expense (M&E) fees average approximately 1.25%. How valuable is the insurance protection of the M&E? Supporters say that it provides valuable protection to heirs in case of premature death during a down market. Detractors say participants would be much better served purchasing low-cost term life insurance and investing in low-cost investments.

 

Secondary question: It has been reported that much of the M&E expense goes for commissions. Would sellers of products with an M&E component benefit from more transparency? Meaning: why not break up the M&E into a separate "M" fee for the death benefit component, and a separate "E" fee for the commission and expense cost?

 

Dan Otter

 

 

Mortality and Expense Charges (From Motley Fool)

The first fee typically imposed by an annuity will be what's known in the industry as a "mortality and expense" (M&E) charge. This fee pays for the insurance guarantee, commissions, selling, and administrative expenses of the contract. In general, these fees in a variable annuity will be charged as a percentage of the average value of the investment and will probably be quoted in terms of "basis points." A basis point is 1/100th of 1%. Thus, an M&E charge of 115 basis points means a fee of 1.15% will be assessed against the value of the investment. According to the National Association of Variable Annuities (NAVA), the industry average M&E in 1997 was 1.15%. In a fixed annuity, these charges are usually incorporated in the insurance company's determination of the periodic interest rate or the annuity payment amount during the distribution phase.

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Hi

The only way the M&E would be worth it is if an indivdual were to lump sum a large amount of money into an annuity. And even then, it wouldn't be worth it if one could get term life insurance for less. M&E is just very expensive insurance along the same lines as extended warranties, mortgage insurance, and car rental insurance. The M&E has to be pure profit for the insurance companies. I would like to know what they take in, and what they have to pay out in this area.

 

Insurance is probably an area where people overinsure in areas where they don't need the insurance and underinsue in areas where they probably need it. This comes out almost every year here in California where people find out they don't have enough coverage for their homes when disaster hits. Best Wishes.

 

Joe

 

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Hi Dan,

Scotty said it best in an article he wrote about M&E. He said that in order for this "benefit" to work, first the investor has to die and second, the principle of your account has to fall below the starting amount. Ok, doesn't sound so bad after all, but the devil is in the details. Take for example, say that I started with an account of $40,000 and the market brings it down to $36,000. At that impeccably timed moment, I die. The benefit will pay the difference of $4000. Ok fine, I had not been in the plan very long and my family gets the 40,000. However, I see two massive problems with this scenario: 1. it hardly ever happens and 2. If the principal grows above the $40,000, there is no benefit.

Retirement planning is a long term endeavor which brings up the last and costly problem: What if I had this plan for 20 years and many teachers who have 403bs, unfortunately, are in VAs for that long and they drop dead. Do they get a benefit? No, because one would hope that the account has grown in those 20 years. So for that poor sop who had been in the plan, there would be no benefit whatsoever BUT in the meantime, he or she has been paying 1.25% for this worthless piece of your know what for 20 years! And if the account has lost money, what kind of "investment" is this person in!

It is the most useless insurance coverage every promoted and sold by the insurance industry.

The Point is: avoid all connections between insurance and 403bs. I have lots of insurance but none of it is connected in any way with my deferred 403b or after tax investments. Keep them separate.

Best wishes,

Steve

 

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Secondary question: It has been reported that much of the M&E expense goes for commissions. Would sellers of products with an M&E component benefit from more transparency? Meaning: why not break up the M&E into a separate "M" fee for the death benefit component, and a separate "E" fee for the commission and expense cost?

 

 

 

Dan: in a typical 1.25% M&E fee (the figure you cited), what percentage of that is said to be the insurance component, and what percentage the expense (commission)?

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Hi FrenchTeacher,

 

Good question. I have never seen it broken up which I believe is part of the frustration with this charge. I would be curious to hear what representatives of these products and perhaps financial advisors have to say.

 

Dan

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Guest TR1982

Yea,

Why don't we have a conversation about this? I'll post my own opinion in an honest way and then everybody here who hates annuities and financial advisors piles on with personal attacks and insults. That's a sure fire way to get another opinion. Come on boys and girls, do what you do best.

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Guest TR1982

JM,

I didn't say I was going to defend anything. What I said was that I don't want to post anything that disagrees with what people like you think since your response will be one that in involves personal attacks and insults. Am I wrong to not want to be personally attacked and insulted for simply stating my opinion?

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Guest Sierra

Another "guarantee" one gets by paying the ME fee is a future rate of annuity income if and when one lifetime annuitizes. But the distribution option one elects doesn't have to be made until age 70.5. Additionally, how many out there plan on annuitizing at age 70.5? CS (common sense) tells us that the 1.25 percent ME fee would be better used to grow the account during the accumulation phase and if one is so inclined as to annuitize decades later that is the time to make the decision. It is utter stupidity to pay for something every two weeks when one knows very well he/she will not benefit from paying the fee because he/she will never lifetime annuitize. In my view the selling of an annuity for pre-tax investing is a violation of the suitability rule adopted by the NASD/SEC. Insurers and their reps that sell them are highly unethical. These remarks do not include T/C which sports a ME fee of 0.03 and does not offer a guaranteed return of premium death benefit.

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Guest TR1982

"In my view the selling of an annuity for pre-tax investing is a violation of the suitability rule adopted by the NASD/SEC. Insurers and their reps that sell them are highly unethical."

 

Here it comes. Better get out of the way!

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TR1982,

 

The goal of the post was not to simply bash the M&E but instead open it up to honest debate. I have heard claims that many heirs of those who died during the market downturn benefited greatly from the M&E. I have also heard others express frustration at the lack of transparency with this fee. I think most rational individuals realize that a commission or fee for solid advice is more than fair. I also believe that most individuals just want to know how much of the M&E goes to insurance and how much is an expense or commission.

 

Dan Otter

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Guest TR1982

This would be an excellent point of discussion.

 

However, when the other people on the thread start off by describing you as highly unethical, where is that conversation going? Come on, Dan.

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Why is it that the FT is the only individual that posts on these boards in full support of his decision to use his union's endorsed VA for pre tax investing?

 

For the same reason, I suppose, that I appear to be the only person from the state of New York who posts for any reason at all on these boards. I'd be curious to know where most of the posters come from; my impression is California, but I'm not sure.

 

Some possible explanations:

 

1. People in California are experiencing an unusually high degree of dissatisfaction with the 403(b) setup out there. Given what I've read about it, I can understand that.

 

2. People in New York are experiencing an unusually high degree of satisfaction with their 403(b) setup. Since everyone has no-load and full-service options available to them in NY, I can understand that too.

 

3. ING's $3 million fee is equally divided among all of us in a successful effort to buy our silence. This is undoubtedly the real reason. :-)

 

 

 

 

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TR1982,

 

I was really looking forward to hearing both sides of this issue. I think you are well positioned to speak to one side of the issue and I encourage you to do this.

 

Dan Otter

 

 

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Guest TR1982

I will if you will politely ask others on this thread to refrain from making personal attacks as to my ethics, honesty, or integrity simply because they don't like my industry. They are entitled to not like my industry. They are entitled to not like me. They are not entitled to suggest that I, personally, am unethical or dishonest simply because I work in an industry they do not like. I do not accuse you of being unethical or dishonest simply because you are an educator. I expect that same courtesy here.

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