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Dan Otter

How Valuable Is The M&e?

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Guest Sierra
Joel, if you're insisting that there is such a thing as an M&E fee for a fixed annuity, it should be no trouble to quote one from a prospectus. Please do so. Two financial advisors (TR & Chad) have written here insisting there is no such , and a Genworth actuary has been quoted. The simplest way to settle this is to quote from a prospectus. If you can't find an M&E fee in a prospectus for a fixed annuity, then there is simply no such thing.

 

I don't want to hear any more about "common sense," because (and this is not said to offend) your version of "common sense" has not corresponded to mainstream definitions of common sense in the past.

FT:

 

You can look for the ME fee in a prospectus for a fixed annuity until the cows come home. You will never find one because fixed annuities are sold by individual or group annuity contracts not by prospectus.

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Guest Sierra

Chad, FT: The ME fee must be disclosed in a variable annuity prospectus because the VA is a security but the Fixed Annuity is not a security but an insurance product that is not sold by prospectus.

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Guest Sierra
"You are misinterpreting his statement. Not having the ME "applied against the contract" means that the ME fee is factored/incorporated into the mathematical computation when the insurer is deciding what the fixed interest rate will be. This is different than the ME fee's application to the VA where it is "applied against the contract." "

 

Sierra,

I will agree with you on this. It is a cost in the product. They just don't specifically call it M&E.

FT, Chad: Now that TR has spoken do you guys care to change your opinion?

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I never expressed an opinion on the subject. I asked for proof of the existence of an M&E in a fixed annuity.

 

So are you saying it's legal for an insurance company to sell a fixed annuity with an M&E fee without disclosing said fee in the contract that must be signed? I remain skeptical.

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Guest Sierra
I never expressed an opinion on the subject. I asked for proof of the existence of an M&E in a fixed annuity.

 

So are you saying it's legal for an insurance company to sell a fixed annuity with an M&E fee without disclosing said fee in the contract that must be signed? I remain skeptical.

The following statement of yours sure sounds like an opinion: "The simplest way to settle this is to quote from a prospectus. If you can't find an M&E fee in a prospectus for a fixed annuity, then there is simply no such thing."

 

Now to your latest post. That is exactly what I am saying. A bank is not required to disclose all of the fees/expenses it incorporates into its declared interest rates either. It is the exact same thing with an insurer that guarantees a fixed rate of return on an annuity. This is why the guys/gals that sell fixed annuities compare them to bank CDs.

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Are you saying there are no laws that govern full disclosure of mortality and expense fees?

 

Because if there ARE such laws, and those fees exist but are not being disclosed by insurance companies selling fixed annuities, you've got one hell of a class-action lawsuit on your hands. I urge you to contact Eliot Spitzer immediately.

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Guest Sierra

FT: If anyone made a formal complaint to a Regulator the regulator would respond along the following lines: The ME fee is factored into the fixed annuity rate to the same degree as other expenses incurred by the insurer; i.e. wages, rent, etc. All of these costs are simply passed on to the annuity policyholder and is reflective in the declared interest rate. Like TR has said: "It is a cost in the product". The reason why they (these implicit fees) do not have to be disclosed (as explicit fees do) to the fixed annuity contract owner is because the contract is one of a debtor/creditor relationship. There is no investment risk! The contract owner (creditor) is simply lending out his/her money to the insurer (debtor) for a stated interest rate just like a bank depositor lends his/her money out to a bank, ie CD. The main reason why the fixed annuity income rates are higher for TIAA than for profit making insurers is that the TIAA ME fee is a fraction of the industry average.

 

I hope this has helped you understand the ME fee's impact on the fixed annuity product.

 

Peace and hope,

Joel

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Hey Joel,

 

I still believe there is no "M&E" in a fixed annuity. Of course there are costs in running a fixed annuity just like there are costs associated with a savings acct. or CD. I'll submit that these costs may be passed on the contract owner in the form of lower interest rates. I do know that the insurance companies are making the vast majority of their money by re-investing the funds in fixed products.

 

There is risk in putting money into a fixed product. If the insurance company goes under, contract owners may not get their money back. That's why it is important to buy annuities (and life ins.) from highly rated ins. co.'s.

 

Correct me if I'm wrong on this... If people have been putting money into a TIAA 403b (supplemental retirement acct) fixed annuity for the last 2 years or so they would be earning 3.25 or 3.5% interest. If they did the same in a Lincoln National Life 403b fixed annuity they would be earning the same rate. They both also have a min. guarenteed rate of 3%.

 

 

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Guest Joel Lee Frank

Chad: If you "still believe there is no ME in a fixed annuity" would you please answer the following: What is the name of the fee the fixed annuity holder pays in order for his accumulating premiums/contributions to be guaranteed future annuity income rates? For example: $.08 per year per dollar of accumulation starting at age 60.

 

Peace and Hope,

Joel

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The main reason why the fixed annuity income rates are higher for TIAA than for profit making insurers is that the TIAA ME fee is a fraction of the industry average.

 

 

TIAA charges an M&E fee on their fixed annuity? Could you please show me where it says they do that on their website?

 

Because the funny thing is, they DO mention an M&E fee on their variable annuities on their website. And they talk about other kinds of charges, like surrender charges, on their FIXED annuities on their website. But an M&E on a fixed annuity? Not a word.

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Joel,

 

If there is a fee in a fixed annuity, I don't know what it is called. I do know it is not a "mortality" fee because there is no mortality coverage as I've already explained. I would call any fee associated with a fixed annuity a "low interest rate" fee. I guess it doesn't really matter what the terminology is, the fact of the matter is fixed annuities are not good products for most people (unless you are a stockholder of an insurance co.).

 

By the way, my first 5 years of teaching I was "scamed" into contributing to a 403b fixed annuity plan (Great American Life Ins. Co.).

It has a low rate, but even worse it has a surrender period of 14 years! Needless to say, I think it is very important that we share with our fellow teachers and non-profit employees to become educated about 403b's, including but not limited to the costs involved.

 

If you think M&E fees are bad, look into indexed annuities, two-tier annuities, and "rolling" surrender periods. In my opinion, these should all be highly regulated (if not illegal).

 

To conclude my input on this topic, I'll say again that paying M&E on a variable product may be appropriate for some people in the right situation (see my earlier example).

 

Nice "talking" to you.

 

 

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If there is a fee in a fixed annuity, I don't know what it is called. I do know it is not a "mortality" fee because there is no mortality coverage as I've already explained. I would call any fee associated with a fixed annuity a "low interest rate" fee. I guess it doesn't really matter what the terminology is, the fact of the matter is fixed annuities are not good products for most people (unless you are a stockholder of an insurance co.).

 

 

I have no trouble believing that there are fees, of course. With the exception of TIAA-CREF, these companies are all for-profit entities, so of course they will maximize profits however they can, as long as the market will bear whatever cost structure they try to pass on to their customers.

 

But "Common Sense" (ahem) dictates that if there is a fee, there is a legal requirement to disclose it to the customer. Credit card companies can't simply charge $30 late fees if you miss a payment, they are legally obligated to inform you that they will do so.

 

The M&E fee is no different. If the SEC doesn't govern notification of an M&E fee for a fixed annuity (the way they do for VA's) because there is no "investment risk," then there is some other legal mechanism by which the company must inform the customer. A fixed annuity requires the signing of a contract, yes? So perhaps contract law applies here?

 

 

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Guest Sierra

QUOTE (chadposner @ Jun 6 2005, 01:59 AM)

If there is a fee in a fixed annuity, I don't know what it is called. I do know it is not a "mortality" fee because there is no mortality coverage as I've already explained.

____________________________________________________

 

Chad: You are mistaken, there is definitely mortality coverage. The insurer assumes mortality risk (living longer than your life expectancy) during the distribution phase when the policyholder is receiving a guaranteed lifetime income. The cost of assuming this risk is passed on to the policyholder in the form of a lower interest rate during the accumulation period as well as a lower annuity income rate during the distribution period. Like TR has said: "It is a cost in the product".

 

 

"The M&E fee is no different. If the SEC doesn't govern notification of an M&E fee for a fixed annuity (the way they do for VA's) because there is no "investment risk," then there is some other legal mechanism by which the company must inform the customer. A fixed annuity requires the signing of a contract, yes? So perhaps contract law applies here?"

 

FT: The ME fee for a fixed annuity is one of the "implicit" fees. Implicit fees are not required to be disclosed. Another example: You go to a restaurant for a fine dinner---do you find the cost of providing you with water listed on the check? Of course not. It is "incorporated" in the final amount. It is an "implicit" cost. "Like TR has said: "It is a cost in the product"

 

I trust I have helped both you guys understand the ME fee and how in impacts the fixed annuity product. Should you have any concerns or additional questions just post 'em up

 

Peace and hope,

Joel

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Guest TR1982

Sierra,

I do have one question:

 

If annuity payout rates are not guaranteed in the contract then doesn't the insurer collect the mortality risk premium through the payout rate? That is what you referred to in the previous question.

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Guest Sierra
Sierra,

I do have one question:

 

If annuity payout rates are not guaranteed in the contract then doesn't the insurer collect the mortality risk premium through the payout rate? That is what you referred to in the previous question.

TR: Please call me Joel though I love the Sierra Nevadas.

 

When one buys a fixed annuity the ME fee is reflective in the declared interest rate during the accumulation phase and in the annuity income rate during the distribution phase. The contract assumes that the policyholder will be lifetime annuitizing so the risk that the insurer assumes is being charged to the individual during both phases----accumulation and distribution.

 

Peace and hope,

Joel

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