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Dan Otter

How Valuable Is The M&e?

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Hi,

FT: "I agree that we should not treat the unlikely as impossible...but neither should we treat the unlikely as likely."

 

I don't think in today's world you can take anything for granted anything. We have witnessed in the past few years things that were not expected from airplanes flying into buildings, the collapse of high tech and the stock market in 2000, the Enron bankruptcy, the Orange County bankruptcy, and the loss of retirement and health benefits for many workers in different industries. I am sure that I could think of more things that have caused economic hardship for large numbers of people.

 

There is real risk in many different areas. That is why it is necessary to diversify. So I think that the collapse of a large insurance company is very much a possibility.

 

I live in a condo. Each year the insurance agent for the master policy of our building comes to a meeting and talks to us about our insurance. He is a State Farm agent. He told us about when the big hurricane a few years ago came close to Miami. He said that if the hurricane had actually hit Miami itself, State Farm would had gone under. They wouldn't have been able to handle the loss. So I agree with Larry Swedroe, you can't treat the unlikely as impossible. Best Wishes.

 

Joe

 

Joe, I'd add the failure of a huge hedge fund (Long-Term Capital Management) to your list of unexpected disasters, as well as the failure of several airlines (though they admittedly came with far greater warning than anything else we've listed here).

 

I don't disagree that you shouldn't take such possibilities, as far-fetched as they may seem, into account. But what's the solution? Insuring your property with several different companies? Sierra noted one example of a company that went under in the early 90's, but he claims that was AAA-rated before its demise. If that's the case, I don't know how to guard against that possibility.

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Guest Sierra
His direct response: "Who IS this guy? Everyone knows fixed annuities don't have M&E fees!"

FT: Now see if you can keep your mouth shut and let your ING rep speak for himself.

===============================================

To FT's rep: I assume FT has quoted you accurately. Having said that, may I say that "everyone" does not include the individuals that prepared the ING Prospectuses. If you believe that the ING Prospectuses contains language that supports your quote please supply us with the page and verse.

 

Peace and Hope,

Joel L. Frank

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Hey Sierra, I'll shut my mouth when you shut yours. I'm sure my rep's silence will speak for itself; I've already told you he reads this boards, albeit infrequently, but has no intention of contributing. Having said that, he's a big boy, and can surely do whatever he wants.

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Hi,

FT, One handles the risk by diversifying. This side conversation was started by "Joes" stating that there was no risk with fixied annuities. We agree that is not correct. It cannot be know in advance where and when that risk is going to show up. But I am sure there are many people out there who have the bulk of their 403b funds with one insurance company. Let's hope that the risk doesn't show up for those people, but I wouldn't most of my funds with one insurance company even if it has a good rating. Best Wishes.

 

Joe

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Joe, good point. I've been thinking of this sort of risk strictly in terms of fixed annuities, where the "guarantees" issued are based exclusively on the company's ability to pay. Perhaps it also extends to the variable marketplace too, though.

 

And your story from Miami is chilling...the notion that any of the insurance companies are one hurricane away from folding is a bit more than most people would care to hear, I'd wager.

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Hi FT,

You would think that the insurance companies would recognize the risk that they are taking on when they insure for certain things, but they don't appear any wiser than the rest of us.

 

A good example is here is California. Before the last really big earthquake, insurance companies had to offer earthquake insurance if they sold homeowner's insurance in California. Well, I guess that they didn't see the risk. So after the big earthquake in 1991(?), insurance companies stopped selling polices in California. The state had to step in, and now I buy my earthquake insurance from the State of California.

 

Also, homeowners don't see certain risks when they buy homes. All they can see is the wonderful view from their million dollar homes. The Laguna Beach homes that were involved in that landslide are not covered by their homeowner's insurance. Here is where the insurance companies recognized the risk. I guess the buyers of those homes should be asking themselves why the insurance companies won't insure for landslides before they buy the homes. Best Wishes.

 

Joe

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In terms of insurance costs, both Fixed and Variable annuities have insurance costs. This is the result of both contracts being insurance contracts; therefore, having a death benefit. Also, the death benefit cannot be free, there must be cost for this benefit. In the Variable, this cost is included in the M&E and is charged as fee paid by the contract participant. That fee is usually expressed as a percentage of the Variable account.

 

In the Fixed account, the insurance cost is imbeded in the cost structure of the product, it is not a separate fee paid by the participant.Note that Variable contracts will identify the M&E as a charge against the variable (separate) account. The Fixed has insurance costs. But, like Chef Boy-r-dee; "It's in there!", just not easily seen.

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Guest Sierra

Re: The fixed annuity ME fee.

 

Herb: Is it accurate for us to assume that you are in full agreement with me and the French Teacher's CFP who says: "Who IS this guy? Everyone knows fixed annuities don't have M&E fees!" is fundamentally wrong?

 

Joel

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Not to belabor my small point, but it is not accurate to say any insurance product does not an insurance cost. There are only 2 products life insurance companies offer: life insurance contracts and annuity contracts. The IRC permits an element of tax deferral (usually in the death benefit, and also in the cash value build up on the contracts). This tax deferral is granted because the contracts are NOT considered to be PRIMARILY investments. There must be a death benefit within the contract, it must be paid for, and, (ta-ta) there is tax deferral. But, this favorable tax treatment is periodically attacked, but the industry has, to a significant degree, been able to fight off the attacks.

 

Aloha,

 

H

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