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Independent Review of the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex

Independent Review of the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex

Today, I’m going to give as unbiased a review as I can of the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex.  A financial product like an annuity may not be useful for everyone, but there are those out there that could benefit from an annuity.

As a financial planner, people that I know usually approach me for financial advice.  Recently, I’ve gotten more and more questions about annuities, so I thought I’d do an annuity review for the blog.  As an independent fee-only financial planner, I don’t sell annuities, but I try to keep an open mind when I review financial products.

I have also filmed a video review for the Jackson National Perspective II Annuity that goes in depth about its features and how it handles some stress tests I put it through.

This review has been updated as of July 2013.

(Before we get started, I’d like to thank Jason Wenk over at his blog JasonWenk.com for the inspiration for this post.)

First, before we continue, I need to post a legal disclosure:

Disclosure

This article is considered a review.  This article is neither a recommendation to buy nor a recommendation to sell an annuity. I am not compensated for this review.  I am doing this review on my own volition.  Jackson National has not endorsed this review in any way.  Before purchasing any investment product you should perform your own due diligence by reviewing the prospectus and other materials for the product.  This review should not be considered personalized advice.  Please, consult a properly licensed professional should have specific question about how this product can fit into your individual financial circumstances.  All names, trademarks, and materials used for this review are property of their respective owners.

Now that’s done, let’s get started.

Quick Background of Variable Annuities

A standard variable annuity (VA) allows investors to invest in subaccounts, which are like mutual funds, within the VA.  Investors take on the risks of the market and usually have some sort of death benefit associated with the annuity for their heirs.

Over the past decade, new riders have come out for variable annuities that offer income guarantees.  Typically, these products are sold as allowing investors to participate in the market, and get any upside from market growth, while avoiding a loss of income from a situation such as the Great Recession.

The story that salespeople tell about these lifetime income riders is that they offer an investor a minimum income for life even if the investments take a dive.

The Financial Crisis of ‘08-‘09 has caused many investors to fear another recession and a lot of salespeople are exploiting that fear.  My worry is that investors aren’t getting all of the facts that they need to properly evaluate these complex financial products.  Even worse, many salespeople may not even know how these products work themselves because they haven’t taken an in-depth look and broken one down piece by piece.

What are the Fees for this Annuity?

So now we’ll go over fees, and after that I’ll show you the break down and stress test of the annuity.

Typically variable annuities pay a 6-7% commission to the agent/broker.  That’s why the insurance company charges you a surrender charge or what this brochure calls a contingent deferred sales charge.  If you don’t stay in the annuity long enough for the company to make a profit, you pay a surrender charge.

A surrender charge is a way for the insurance company to recover the costs of the commission they pay and it decreases over time.

Here is the surrender charge schedule for the Jackson National Perspective II Variable Annuity:

As you can see, the surrender charge decreases each year until it goes to 0% after you hold your annuity for 7 years.  The surrender charge is a separate expense from the annual fees associated with the account.

Beyond the surrender charge, there are also several other types of expenses.

The following is a list of the various expenses of the Jackson National Perspective II Annuity:

  • The base fee for owning the Perspective II Annuity is 1.30%.
  • There are 104 subaccounts.  These will act like mutual funds for investors.  There is a pretty wide range in mutual fund expenses. Ranging from 0.41% to 2.23%.
  • The Perspective II has an average subaccount expense of 0.95%. The model in the review uses the S&P 500 subaccount for a total of 0.59% in expenses.
  • The expense for the LifeGuard Freedom Flex rider with an Annual Step-Up, 7% Bonus, and optional income upgrade is 1.50%.
  • Death benefit rider expenses for the Lifeguard Freedom Flex DB Rider are 0.80% annually, paid on a quarterly basis.  These are not included in the video review.

The typical investor will probably not experience all of these expenses, but it’s good to know that the maximum Jackson National can charge is incredibly high.  If you add up all of the expenses for benefits and riders and the highest mutual funds, you can clear over  6% per year.  In the video I use the expenses for the S&P 500 subaccount, the cost of the income rider, and the annuity expenses.

Features of the Annuity

Like all annuities, investors looking to purchase the Perspective II are typically doing so for the features that an annuity offers that may protect against downside risk.

The Jackson National Perspective II annuity has the following features.  Because it is a variable annuity, it acts as a bucket into which you put your money.  You then invest the money in that bucket into different mutual funds within the annuity.  These mutual funds are called subaccounts and are only invested in by investors with variable annuities.

Because variable annuities have contract values that go up and down with the market, they normally offer some type of death benefit before you annuitize the annuity, which means to begin the withdrawal phase of the annuity.  This benefit basically offers you the greater of the value of the annuity or the amount you originally invested.

Finally you have a withdrawal schedule that enables you to take withdrawals before you annuitize your contract.  This is how much you can take out of the annuity each year without being penalized. Typically it is 10% of the annuity’s value each year.

 

So, how does the LifeGuard Freedom Flex income rider work?

This is a very complex annuity rider with a lot of moving parts so pay close attention.

This version of the Perspective II annuity has two components, the income base and the contract value.  The income base is the amount that the income guarantee of the contract is based on.  The contract value is the value of your subaccounts.

For the first 10 years of your contract the income base will be credited by the percentage that you’ve chosen.  The fee associated with your annuity will vary based upon the percentage you’d like your annuity to “step up” each year. Here are the expenses for the various income rider options:

For the purpose of this review, I chose the LifeGuard Freedom Flex with 7% Bonus and Annual Step-Ups optional income upgrade, which has 1.50% in additional fees.  The joint survivor variation is no longer available.

Each year (quarterly options are no longer available) Jackson National will compare the guaranteed income base of the annuity to your annuity contract value (the value of your subaccounts) and “lock in” the higher of the two values.  If the contract value is lower than the value of your income base, the 7% increase will step in and increase your income base by 7%.  This does not affect the value of your subaccounts.

So, during the sales pitch, the LifeGuard Freedom Flex rider is sold as a guarantee that you get the higher of either market growth or 7%.  The fees greatly reduce the returns of the portfolio, so I don’t think this is a fair representation of how it works.  It’s unlikely that your portfolio will generate returns in excess of 7% after fees, as you’ll see in the video.  This may cause you to be limited to the gains from the 7% bump each year for the first 10 years, which again, do not apply to the cash value of your account. They only apply to the income base, upon which the income withdrawals will be calculated when you begin taking withdrawals.

There is also a 200% Guaranteed Withdrawal Balance Adjustment that will increase your income base to 200% of the original premium value after 12 years.  If you were to invest $100,000 in this annuity and then wait 12 years to begin withdrawals, your income base would increase to $200,000.  If you were 77 when you began taking withdrawals, this would be an $11,000 per year stream of income.

While this sounds fantastic, it’s interesting to see how it might play out in reality.

Video Review of the Jackson National Perspective II Annuity

Here I walk you through what the data tells us about the Perspective II. In the video I use an excel model of this annuity to break down the returns a 65 year old investor could expect to have.  If you are interested in the Perspective II Variable Annuity, it’s a must-watch.

 

 

Some Final Thoughts on the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex

This annuity offers compelling benefits and a lifetime stream of income.  However, if you are looking for an financial product that offers both growth and income, this will not fit your needs.  The high fees on this annuity, which were 3.39% with the features in the video, cause the Perspective II annuity to be a poor vehicle for growth.  The majority of the allure of this annuity is in the Lifeguard Freedom Flex rider.  It will take quite some time to get a return on your investment with this annuity and those searching for guaranteed income products may wish to look elsewhere.

Now I don’t think these advisors and salespeople are bad people for not explaining these annuities like I did for you in the video. I just think they aren’t fully informed about how these annuities work.  You see, I have several friends in the insurance business that said they were very interested in seeing my thoughts on various annuities and encouraged me to write this review.  With complicated financial products it’s tough to go through all of the data and model it all out. Unfortunately, that’s really the only way to understand how they work.

Have Any Questions?

If you have any questions, please contact me.  Annuities, with all of their guarantees and lifetime income riders, are just flat out complicated financial products.  They can be really confusing, especially when a salesperson is putting pressure on you to buy an annuity as soon as possible.  Before you put a large amount of your savings into an annuity, consider your options.  As you saw in the annuity review, annuities are a long term investment with surrender charges, so I think it’s important that you know the facts about an annuity before you buy it.

You should have an independent financial planner give you an objective opinion about whether an annuity is right for you and explore better ways to protect your savings while generating reasonable returns.   As a fee-only financial planner, I’m only paid by my clients and I don’t receive any commissions from insurance or brokerage companies.   This means I’ll objectively review your finances and tell you whether or not an annuity makes sense in your situation.

I plan to do further reviews in the future so to get an email notification when I post a blog update, enter your email address below to subscribe.

If you think I’ve been in error anywhere please let me know.

If you know of anyone else that can benefit from this annuity review, please share it with them via email or Facebook via the social sharing buttons at the bottom of the post.

Update: 

As of October 15, 2012 Jackson National no longer offers the joint life expectancy payout option for its Lifeguard Freedom 6 Net and Lifeguard Freedom Flex income riders.

As of July 18, 2013. This annuity review article has been updated and a new video has been filmed and uploaded to YouTube to reflect changes Jackson National has made to this annuity.

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34 thoughts on “Independent Review of the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex

  1. Richard DIckson

    Mr. Scherer, thank you for this information. I will turn 65 on January 2, 2013 and had planned on purchasing this exact annuity at that time. At age, 65 I will be able to withdraw 5%. I was planning on purchasing this product for two reasons. One, to guarantee a lifetime stream of income. Two, to ensure that I leave a large part of the purchase price to leave to my heirs. But after watching the video, I am now having second thoughts. Not that I wasn’t already having second thoughts for about a year.

    I have read as much as I can about investment products to help fund my retirement but I am still at a loss as how to wisely invest my money to accomplish my two goals.

    Any comments would be greatly appreciated.

  2. I am thinking about purchasing this annuity soon with a quarterly step-up. I am 65 and plan on annuitizing this annuity as soon as I purchase it. Can you modify your spreadsheet to reflect this scenario? The payout is 5%. Thanks for your insight, It has been very helpful. I have an appointment the week after Thanksgiving with my adviser. So if you could do this by November 26, it would really help. Or maybe you could e-mail the spreadsheet in your video and I can modify it to meet my needs. Thanks. This is a very difficult VA to understand.

  3. invested 321000.00 in a jackson national perspective 11 two yrs. ago the more i read the more i want out any suggestions

  4. Thanks for the breakdown! That was informative,

    What if the investor is 50 years old, invests $100K, and starts taking the payout at 65?

    Thanks!

      • Dieter,
        Excellent points on your presentation. Would it be the same if I invest $100,000 at age 45? Please advise.
        Thanks

        • Thanks! I’ve actually done a major rework on my model, which allows me to utilize simulated returns (rather than average returns) from the past 87 years. So I plan to update the post with a new video soon to reflect the changes. It’s capable of doing 50 year returns, so I’ll incorporate this question into the video (or a second video.) The starting period greatly affects the returns, so I can’t give you an exact answer. If you’d like a walk through shoot me an email via the contact me page and we’ll set something up.

  5. I want to roll over my 401K and get a monthly income from it.
    Would the Lifeguard Freedom Flex be good for me or the Freedom 6 Net???? I am 74 and only have $100,000. to invest but need an income from it of at least $500. per month.

  6. Same question here. (49 instead of 50, but same $ and withdrawals starting at age 65.)

    Thanks for a very informative, and interesting, analysis!

  7. My wife & I are considering moving some fixed annuities (TSA’s – part of her educational retirement program) to this Jackson Variable Annuity program. The fixed annuities now guarantee a minimum 3% annual growth and have no current surrender charges. Does it make any sense to transfer from our fixed to the Jackson variable annuity program?

    • I can’t really give you any specific advice until I can read through a contract because it’s really a matter of seeing if the numbers work. It’s simply amazing what you can learn if you delve deep into a contract (both your current TSA as well as any new annuity.) So, the first thing you should do (or an advisor should do, preferably a fee-only one) is conduct a cost/benefit analysis of the two investments. Determine if it fits your risk tolerance, your time horizon (these types of variable annuities are typically held for ten years before you take an income), and the alternatives. If you’d like some more specific help, shoot me an email via the Contact Me page.

  8. Thanks for the info. Could you provide break down for investor is 38 years old, invests $70K, and starts taking the payout at 65?

    • My new model can do 50 year returns, so we could run the numbers for a 38 year old but it would be limited to an ending age of 88. If I start using anything greater than 50 year periods, there are fewer start dates I can use therefore we start having trouble with the sample size.

  9. Interresting analysis. I think the thing that is the most compelling about annuities is the “pitch” that your investment is guaranteed not to lose. It can go up if the market is good BUT it wont lose $ if the market goes down. Very important to people that are entering retirement age now or soon and don’t have time to make up for loses if the market tanks again. The fees are what they don’t tell you about. Your discussion was very thorough. Do annuities ever make sense at any age?

    • Rand,

      Thanks for the comment, you bring up some great points, I’ll try to address each of them in turn.

      As you mentioned, it’s the pitch about this type of annuity that is the problem, but I’d say it’s not necessarily the annuity itself. Unfortunately, most retirees are not told that the guarantee is a hypothetical account that is used to determine their income, whereas their walk-away-money (the surrender value) will fluctuate with the markets and withdrawals.

      If someone is completely aware of the costs involved, how the annuity functions, and the returns they can reasonably expect from the product and is OK with that, then it may fit them. I think it really comes down to the personality of the investor, how risk tolerant they are, and whether the annuity will get them to their goals/maintain their purchasing power. So a cost/benefit analysis should really be run to see if a particular annuity will do so and whether another annuity may be available that could do it cheaper.

      So, at the end of the day, variable annuities with income riders may have their place in certain situations, but certainly not all of the situations in which they are sold. Most people buy annuities based on the mouth-watering 6-8% returns with no downside risk, so for those individuals, it probably isn’t a good fit.

      Stripped-down variable annuities are another beast altogether. A variable annuity with no guarantees and rock bottom fees (<$300/yr) can act solely as a tax-deferred wrapper. These don’t offer anything in terms of guaranteed income, but they can actually be very useful for high income earners that have maxed out other tax-deferred options. If constructed correctly they can act like another IRA.

      Best,

      Dieter

  10. Very enlightening! Thank you, I am being “advised” by a financial salesperson to invest in a Jackson annuity, but have not seen a contract. I cannot afford to invest the little I do have unwisely. My question is, if one is 10 years from retirement and accessing the money, why would an annutity not be a good idea with a plan to close the account, once there are no surrender charges and walking away with the “guaranteed” 7% growth? Am I correct in thinking that at retirement age, there are no tax deferred options to roll the money into, and that capital gains taxes would make this idea prohibitive?

    • Hi Debbie, thanks for posting your questions.

      There are two types of account values in this annuity. There is the surrender value, which is the amount of money that you could walk away with after the surrender charges and then there is the income benefit base. The income benefit base is the amount that is guaranteed to grow at the greater of the guaranteed rate (in this case 7%) or the value of the subaccounts. The income benefit base cannot be withdrawn and is only used to calculate the guaranteed lifetime income from the Lifeguard Freedom Flex income rider.

      Let’s do an example.

      If after 1 year your subaccounts grow from $100,000 to $105,000, (5% growth) your surrender value would be $105,000. Because 5% growth is less than the guaranteed rate of 7% growth, the value of your income benefit base would grow at the guaranteed rate of 7%. So the benefit base would grow from $100,000 to $107,000. The $107,000 benefit base is the amount used to calculate how much you could take each year when you turn the income rider on. The $105,000 is the amount you could walk away with. The guaranteed 7% is not applied to the surrender value and is only used to calculate the amount you could take as income.

      Your second question really depends on the current tax status of your money. You will be subject to capital gains if you have held stocks or bonds for over 1 year and your money is in a taxable account. If your money is in an IRA, then there would be no tax benefits for placing the money in an IRA into an annuity as they are both tax deferred (pre-tax contributions and distributions taxed at normal income rates.)

      After age 70.5, you would have to start taking required minimum distributions on any money in a traditional IRA or an annuity. However, any money/assets in a Roth IRA (after tax contributions and tax-free distributions), would not be subject to required minimum distributions because you have already paid taxes on the funds in a Roth IRA.

      I hope this clarifies the issue a bit. Let me know if I need to go into some more detail.

  11. Thank you for such a refreshing explanation. This question is almost too embarrassing to ask, but the case is that a financial adviser persuaded my 72 year old mother to take out a home equity loan of $300,000 and to purchase this Perspective Annuity with it. I will meet with this adviser to hear his side, but I just want to confirm that it appears to be as outrageous an example of financial mismanagement as I think it is. I am also wondering if it rises to the level of a violation of his fiduciary responsibility.

    • James,

      You’re welcome, thanks for reaching out.

      No question should ever be embarrassing, it’s all a learning process.

      To answer your question, it doesn’t sound like anything we would ever recommend. I’m not a licensed attorney so I cannot offer you counsel about the legality of such advice.

      There are two regulatory bodies, the SEC and FINRA. The SEC regulates registered investment advisors, who are classified as fiduciaries when dispensing advice, whereas FINRA regulates financial representatives (annuity salespeople, broker dealer representatives, etc.), who are held to the lessor suitability standard of advice.

      As this is a matter relating to the sale of a financial product, I would suggest you contact FINRA, the organization that regulates financial representatives and ask FINRA for advice on the situation.

      Additionally, if she wishes to return the annuity and if she purchased this annuity within the last 10 days, there is typically a “free look” period that may allow her to exit the annuity without any surrender charges.

  12. I am 69 years old and have a Allianz annuity past the seven year period that my financial advisor is suggesting to do a 1035 exchange into Jackson Perspective II. I am wanting to take the cash out of Allianz and pay my current taxes. I am not planning on taking this as income but a lump sum. I feel I should do this now before I have to take IRA automatic distributions. By the way my accountant says that I can pay the taxes now without having to push me into the next income bracket.

    • There really are a few issues at play here.

      If the Allianz annuity was purchased within an IRA, you cannot 1035 exchange it into a non-qualified annuity. The 1035 exchange is designed to allow a non-qualified annuity to be exchanged into another non-qualified annuity without triggering a taxable event. To avoid required minimum distributions, you would need to withdraw the funds from the IRA to trigger a taxable event and pay taxes on the earnings (which you mentioned would not increase your marginal tax bracket, which is good news.) You really need to analyze the advantages and disadvantages of this.

      Advisors sometimes roll over an annuity simply to generate a new commission, so there should be a very compelling reason to roll your annuity into a new one. Whether you must take RMDs or not should not be considered in isolation, you really need to look at your tax planning strategy as a whole. As for tax management strategies, you have a few options to reduce your taxes during retirement and avoid RMDs, I can walk you through some on the phone if you’d like.

      Additionally, annuities with income riders that were issued prior to the financial crisis in 2008 typically have more favorable income terms than do currently issued annuities. Without analyzing your annuity, I can’t say for certain, but your current annuity may offer better terms than the Jackson Perspective II. Also, any income guarantees that had accrued within the Allianz annuity would be forfeited by selling it. For the Jackson National Perspective II, to take full advantage of the guarantees of the annuity you would need to wait 10 years before withdrawing income from it (or 12 if you’d like to take advantage of the guarantee that doubles your premiums after 12 years.) If you are just focused on taking a lump sum distribution from the annuity, an annuity is probably not the best option to accumulate money. The high fees hamper investment growth and the income rider will not offer any downside protection. So, annuities should really only be used for income as a sort of portfolio insurance.

      If you want some more individualized advice, shoot me an email via the “Contact Me” menu option at the top of the page.

  13. I have had since 2006 a Hartford Liftime Income Builder annuity. Now Hartford wants me to make some changes on this annuity by Oct. 4th that I am not happy with,,neither is my Finalcial advisor. My advisor has suggested Jackson Mutual. What do you think?

    • Hi Mar,

      It’s impossible for me to say exactly what you should do because I don’t know the specifics of your situation, but here’s what I can say.

      The Hartford is forcing individuals to change their allocations or else they will lose their benefits. The Hartford is doing this because prior to the financial crisis the terms of their guaranteed income riders were too generous. They now have huge income liabilities that they must cover. They are forcing investors into more conservative portfolios so that the protected income balance grows at a smaller rate and therefore when investors annuitize they will have a lower income base on which they must calculate the guaranteed withdrawal provision. Changing annuities will reset the amount of time you must wait before you can annuitize and reap all of the benefits of the return guarantees. Additionally you will lose any protected income balance you currently have in your Hartford account because these are separate from the annuity’s cash value. So at the end of the day it really depends upon the state of your contract and how it compares to other annuities. If you’d like some more personalized help, shoot me an email via the contact me page or give my office a call.

      Best,

      Dieter

  14. Thanks for a great article.

    On the Lifeguard Freedom 6 DB series there appears to be a 200% step-up to the GWB, provided you have not made any withdrawals up to your age 70. Does that not make your payout 10% of your age 70 GWB, which would seem pretty decent?

    • Hi Dave,

      You’re welcome!

      I don’t have the Lifeguard Freedom 6 DB prospectus in front of me at the moment, but for both the Lifeguard Freedom Flex and the Lifeguard Freedom 6 Net the It’s the later of the 12th anniversary of the contract or the 70th birthday of the investor. You also need to look at it in terms of compound interest (interest on principal and earnings) not simple interest. Using compound interest the internal rate of return for the 200% step up after 12 years is 5.95%.

      So, for example with the Lifeguard Freedom Flex if you pick the 6% or 7% bonus values, the 200% step up will never be used because the guaranteed rate of return for the income base is 0.05% higher for the 6% bonus and 1.05% higher for the 7% bonus.

      Best,

      Dieter

  15. Concerned Citizen

    Sir,

    Thank you for your in depth look into the JNL VA, as you obviously hope to better inform your readers. I do have a few concerns though, and hope you can straighten me out.

    1). Why did you choose the S&P in your spreadsheet? Is that ethical, and are you certain no FINRA rules were broken in your representation of actual “nominal” returns within this Variable Annuity. You obviously have access to the sales and disclosure materials. I must ask why you chose not to save a lot of time, and just have the company run a hypo for your project, USING REAL PORTFOLIOS or investments within the actual sub-accounts offered? I kept waiting for you to address in both your blog and vlog, but you glossed right over it.

    2). You are aware there are managed portfolios within JNL, which are managed via Ibbotson? Not everyone investing in these vehicles plan to be 100% equities are they? I hope not, especially retirees, who would most likely look at this type investment. In fact, I am curious if that is what you are insinuating you do, since YOU decided to do this service to humanity. I think any professional who manages money for a living, knows about suitability, risk tolerance, or the “know your customer” rule. I am gonna give you the benefit of doubt, and and save you the time of explaining how the sub accounts don’t have a long enough track record to fit in your projections, but to say your analysis is misleading is putting it VERY lightly. Sub-accounts, especially those actively managed, would change your ENTIRE data thesis, blowing away your entire assertion.

    3). What were you doing in 2008 and 2009? How many family’s were relying on you to help them avoid losing all their money? What were your returns? When did you move to cash with their money, or go in heavy defense mode? More importantly, WHEN DID YOU GET THEM BACK IN? Did you miss the last half of gains in 2009?

    4). What about all these folks who asked about investing at a younger age? Why haven’t you responded with another hypothetical closer to their request? I am getting a little worried you might be biased towards these investments, but will assume you aren’t lying about your reasons of spending INCREDIBLE AMOUNTS OF TIME, modeling them.

    5). What about qualified assets that can’t be accessed prior to 591/2 without the 10% early withdrawal period? Use the example of a 55 year old early retirement scenario, and assume they have 500k in their 401k. They roll it into an IRA, and have additional liquidity to bridge them until then, using after tax money. Are you asserting that its best for them NOT TO PROTECT ANY OF THIS ASSET until they can take income from it? Is it terrible for

    6). In your scenario, is the person or people in the accumulation phase, or the income distribution phase of life? I am assuming the former, due to your most aggressive possible investment choice.

    7). Are you able to see all the false negatives in your argument yet?

    I am gonna stop here,bc I think the point is made, and end with this. You are irresponsible at the least, and a wolf in sheepskin at worst. Nothing makes me angrier than when people base what would otherwise sound most intelligent and plausible, off of totally set up misleading factors. That is so wrong for so many reasons.

    Anyone who goes so far as to, infer an entire segment of the investment population not look for all options to protect themselves in markets full of algorithmic giants we see today, raises my BS meter. I hope you prove me wrong.

    • Hi There!

      Thanks for the reply I always enjoy critical analysis of my work.
      1.) I chose the S&P 500 because it has the longest dataset available, with good data going back to 1926. I wanted to stress test the annuity against various time periods and economic conditions. (Rising interest rates, falling interest rates, the Great Depression, etc.) These types of annuities have not been around very long, so using the actual sub account data would at most allow me to test this back into the late 90’s. That’s just a thin slice of time, so it wouldn’t be representative of most economic conditions.
      Most of the hypothical returns insurance companies give are limited to a specific time period. When analyzing a time series of returns for an investment, the cumulative returns are highly start and and end dependent. So it can be easy to cherry pick the data. I wanted to show rolling returns across a wide range of economic conditions, so that’s what I did with the stress tests. I also have a predilection for skepticism and questioning everything. If I want to know the answer to why something works, I’ll try to devise an analysis of my own to verify it. This goes along well with my duty to my clients, that I fully understand any products before recommending them.

      In your second point you mention not everyone will be 100% in the S&P 500, which is true. However, these annuities work best as a transfer of risk from the investor to the annuity company. Unlike other companies JNL does not require an investor to purchase conservative securities in the portfolio. Therefore, to optimize the transfer of risk from the investor to JNL an investor should invest heavily in higher risk/return securities, such as stocks. This should help increase the protected income base at a higher rate than a more conservative portfolio. Therefore, I used the S&P 500 rather than a 60/40 portfolio because during my tests the 100% S&P 500 portfolio offered the best case scenario in terms of real after inflation returns. In today’s low yield environment, the high fees on a conservative portfolio would further inhibit growth of the accumulation account after fees, which would decrease the possibility of increasing the protected income balance. I was trying to be unbiased here by showing the best case scenario from my testing. See my answer to 6 for more info on this.

      2.) Your assertions are not backed by empirical data. There has been much research done on active mutual funds in terms of their net performance after fees. Many active mutual funds have been shown to underperform the index. Here’s a good article on the topic http://www.dfaus.com/2009/05/active-vs-passive-management.html I also did a post about hot mutual funds here.The annuity is already a risk management tool with high fees so it doesn’t make sense to add in additional high fees from active funds for further risk management.

      Risk tolerance and knowing your client are important within a complete financial plan, however, looking at one microcosm of it (the annuity) and extrapolating that to be the entirety of the investor’s portfolio is fallacious thinking. These should be used as a piece of a portfolio for risk management purposes, not for growth. Risk tolerance and knowing your client are important, but they should be used with the empirical analysis of data when we have the option and ability to do so.
      I typically don’t like to go this route, but you mention suitability as well, which for fee-only planners like me, can be a topic of contention. So, for those who aren’t well versed with the legalese of our profession, suitability basically means you can sell a product to someone if could work for their circumstances, even if it’s not in their best interest. When someone sells an annuity they are bound by the suitability standard. However, most people confuse suitability with fiduciary.
      Fiduciary is the higher standard, which means that the advisor must act in the best interest of the client. Fee-only advisors (all of the time) and fee-based advisors giving advice(i.e. when they aren’t selling commission based products) are bound by the fiduciary standard.
      This is not to say that all annuity salespeople don’t work with their client’s best interest in mind, I’m sure there are plenty of honest annuity salespeople out there. It’s just important to understand the distinction and the legal protections of each.

      3.) Well that’s an easy question, if you peruse my About Dieter page you can see I was at Virginia Tech studying financial planning. So, I was not advising clients during the financial crisis. My mentor, the principal of our firm weathered the storm with his clients (he really just saw it as a time when all stocks were on sale for bargain basement prices), but I can’t really see how all of this pertains directly to this annuity review. It really just seems you trying to sling mud at me for my age, which is odd because knowledge of how an annuity functions doesn’t come with age like gray hair, it comes from studying the contracts. Anyway, knowing my limitations and when to seek help and learn from others’ errors is a strength of mine.

      4.) Younger investors do not have the lifetime guarantee active until they are at retirement age.
      From page 81 in the prospectus (PDF page 101 in my electronic version):
      “The For Life Guarantee becomes effective on the Contract Anniversary on or immediately following the Owner (or with joint Owners, the oldest Owner) attaining the age of 59 1/2.”
      I had considered making a video for those under retirement age, but other projects have come up. Most people looking at these annuities are around retirement age.
      I’m happy to run through the numbers if anyone wants to get deeper into them.

      5.) If the investor already has after-tax funds in a brokerage account and they plan on using those funds to bridge the gap between early retirement and retirement age, it makes little sense to invest that money in an annuity. Especially an annuity that has the specific purpose of protecting a lifetime income stream after holding the annuity for 10-12 years. If they are extremely risk averse they could just stick their after-tax funds in a portfolio consisting of cash, short term income securities, and laddered bonds. There would then be no need to use an annuity’s 10% withdrawal provision. Alternatively, the could utilize the Internal Revenue Code Section 72(t) exclusion for substantially equal periodic payments to avoid the 10% penalty levied on IRA withdrawals prior to age 59.5.

      Additionally, the variable annuity does not protect the surrender value in the same manner that it protects the protected income balance (guaranteed benefit balance). Any short term investments within the annuity would be subject to the same market volatility as an investment made outside of the annuity.

      6.) Annuities should not be utilized by following a glide path or some other rule of thumb for investing an investor’s portfolio near retirement. You should maximize the utility of the annuity to the investor. An annuity with an income rider is not an accumulation tools. It is an income tool which is used to provide an investor with portfolio insurance. Therefore we should maximize the utility of the portfolio insurance, which is the protected income balance (also called guaranteed withdrawal balance or guaranteed benefit balance all of these largely refer to the same balance) of the annuity, which is separate from the money you can walk away with, the surrender value of the annuity. In the case of this annuity, my analysis determines that you are more likely to maximize the utility of the annuity, i.e. the guaranteed stream of income; you should place a larger allocation in stocks.

      7.) It is the disingenuous salesmanship and the misinformation that comes with selling annuities that I take issue with, not annuities themselves. Annuities have a place in some investment strategies. It’s all about how you structure them and the client’s expectations about how the annuity actually functions.
      Because of JNL’s lack of restrictions on the investments within the account, this annuity is actually better than a lot of others out there. But people need to have a realistic view of how these work.

      Many people believe the 6 to 8% guaranteed returns refers to the cash value of the account, having been lead to believe they can walk away with those step ups after 10 years. In reality, the guaranteed returns refer to the income base, which does not have a cash value, but is used to calculate the guaranteed withdrawal amount. That’s not the right fit for a lot of people, but it is for some, so educating an investor about how these actually function is very important.

      Best,

      Dieter

  16. Dieter,
    I finally got around to watching the Video and it helped a little to demistify this Lifeguard Freedom 6 DB. The total fees on this are 1.6% for the M&A and 1.55% for GMWB withdrawal and GMWB DB, with I guess a step up to the GMWB withdrawal fees at year 5. So 3.15% total fees.

    1) What is a little confusing to me is exactly how the death benefit rider works. Does the death benefit start decreasing once you start an income stream? I think I understand what happens if you annuitize, you have choices like any annuity on survivorship, but it seems there a lump sum option for say the children of the spouse if the DB option is kept intact, if so how much?

    2) In your Video you talk about 20 yr & 30 year terms, is this after the 10 accumulation phase, if so how are the results affected by a 15 year accumulation phase.

    3) Seems like you model is based on not annuitizing the contract, is this always the best option? Does a 15 year accumulation change it at all?

    Dave

    • Hi Dave,

      Thanks for watching!

      1.) Yes, the death benefit starts decreasing once you start the income stream, it’s reduced by the withdrawals. For the optional death benefit riders, the Lifeguard Freedom Flex DB for example, it’s generally the higher of the net premiums you invested in the contract (premiums – withdrawals and premium taxes), the contract value, or the GMDB Benefit Base (pretty much the same as the income base, but may have had a smaller guaranteed bonus, depending on the option you choose.)

      2.)The 20 or 30 year terms are referring to 20 or 30 years after you purchase the contract. (15 Year Accumulation Phase – See Below)

      3.) The model annuitizes the contract after 10 years or if the 12 year guarantee is higher, after 12 years. This is due to the fact that the guaranteed bonuses stop after 10 years and the retiree is 65 in my example. Based on my tests a 15 year accumulation phase tends to decrease returns from the GMWB rider over 20 and 30 year periods because you wait longer to annuitize and therefore it takes longer to breakeven. However the 20 and 30 year total returns (if you plan to cash the annuity out at some point, which somewhat defeats the purpose of the rider) are slightly higher, in the neighborhood of 0.5% higher.

      Best,

      Dieter

  17. What would happen if you withdrew the same dollar amount from the SnP as you do from the annuity? Can you run one for me that shows apples to apples? Or, if easier Is it possible to reduce the amount you take from Annuity to match the SnP?

  18. I have 2 issues with this video as someone who is in the industry:

    1. The conclusion of the video plays on peoples fear that they will have no money to pass on. Someone who is in the market for an annuity like this one should be using it for income. When compared to the “Portfolio” income, there is no comparison. If you were to calculate taking out the same amount out of the portfolio as you did the annuity, the annuity would be better off. You are comparing the worst of an annuity to the best of a “Portfolio” Using some things that shouldn’t matter for someone who should be in the market for an annuity (they are probably still oversold)

    2. There is also playing on the fear of there being no money left, which goes away with the different income amounts. Usually you can pay an additional fee to add a death benefit or just take out a life insurance policy if one really wants to pass money on.

    3. The “Portfolio” ROI is invested directly in the S&P. One cannot invest directly in the S&P, so there are fees attached. If one was to take this approach, there would usually be about a 1.7% fee, making the Portfolio return lag.

    4. People in the market for this annuity would not be getting market like returns, further skewing the results.

  19. I haven’t watched the videos yet. Does your review and analysis apply equally to the Lifeguard Freedom 6 and Flex products? Our credit union enrolled my wife in the Freedom 6 09/09 plan. I’m not convinced this is a good idea as a sole investment. But since I see “Flex” mentioned in the article, I want to be certain I’m reading about the correct product.

  20. Thanks for the article. For those above or for anyone investing for their retirement, use Vanguard for annuity investing, if you must own an annuity.
    Today you may buy a “pay out fund” at Vanguard which accomplishes most of what an annuity does without the complex rules. This is a balanced fund and it’s systematically liquidated at 4%.
    Not mentioned is that years ago, tax treatment of annuities was better compared to mutual funds. Today a mutual fund that is tax efficient may be a better alternative.
    Since the total fees of my Vanguard Total Stock Market Admiral shares is 0.05% (not a typo), I see no advantage to paying 3.3% or more to Jackson for some “guarantees.” I’ll take the money instead.
    What is the real only advantage of a variable annuity? The contents of it and your IRA are immune from civil judgement.

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