Talk:Annuity (disambiguation)

Comments

Not comfortable with idea that completely wrong to buy annuities. Where is the evidence for this?. There is academic literature supporting the idea that annuities are fair value, i.e present value of market low-risk bond yields, adjusted by probability of death in any given year, plus "margin", plus additional loading for "selection bias" (the fact that annuitants choose annuities because they have a better estimate of their own mortality).

Would be happy to edit this page but have no idea how.

Add these things, to balance the critisism, perhaps with 'Some argue ..' where needed. - Patrick 16:29 Jan 8, 2003 (UTC)

_Annuity Functions_

Suggest:

"These vary, and depend on the contract .

Unlike a bond, the annuitant does not receive any repayment of principal. Yield is typically higher than a government bond. A standard computation takes projected annuity payments on a year by year basis, adjusts by the probability that the annuitant will be alive in that year, then discounts back using risk-free (link) rates.

Thus the expected value of an annuity, for a person who goes on to live for the exact period expected at the time the annuity calue was calculated, is approximately that of a government bond, less adjustments made for mortality drag (link) and selection bias (link)."

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The problem with buying annuities is that, typically, a huge percentage of the payment goes to commission for the sales agent. After deducting this commission, the annuity holder is worse off than if he had just bought long-term government bonds himself.

• Markets contradict this assertion. Many investments have commissions and charges if bought in a mutual fund. Annuities in fact tend to pay much less commission. Additionally when buying long term bonds, an individual does not have the cross subsidy which is one of the main points of lifetime annuities

Plus the annuity company can invest their very large portfolio of assets in a diversified portfolio that can easily outperform a portfolio of government bonds. They then take their profit, pay the sales agent, and can still pay the annuity holder a competitive rate of interest. Also the holder of a deferred fixed annuity is guaranteed to not lose principal at any given time, only be credited with varying levels of interest. The annuity company removes the risk amlost entirely from the annuity holder whereas the holder of long term government bonds may see significant price (and therefore principle) fluctuations as interest rates change.

Plus, an annuity contract has surrender charges. There may be a high "teaser" introductory rate, but the guaranteed rate is fairly low.

• Most annuities cannot be surrendered.

once annuitized, no annuity can be surrendered that I am aware of. Almost any deferred annuity can be surrendered, sometimes with a surrender charge. - Taxman 21:51, May 13, 2004 (UTC)

Further, insurance companies do go bankrupt from time to time.

• Not always relevant if annuity held in seperate trust

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The edits by 69.158.21.244 left an extremely incorrect statement that "an annuity population can be expected to have distribution of lifespans in accordance with the mortality table used in the premium calculations". That is not correct at all. The annuity company attempts to do that for their annuitized annuties, but are guaranteed to not be exactly correct due to variability. 69.158.21.244 may be correct that the distribution is not a normal distribution, so that is how I left the fix. - Taxman 21:51, May 13, 2004 (UTC)

Surely the lifespans of a population of adults of the same age follow a normal distribution? I would be surprised if this was not the case and the annuity tables used were not ulitimately derived from the assumptions of such an analysis. Dainamo 12:55, 27 Nov 2004 (UTC)

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In my finance class, annuities are simply any asset that pays a fixed sum each year for a specified number of years. Perhaps the article is too specific? I am reading this from Brealey-Myers, the so called bible of finance. Goodralph 07:19, 15 May 2004 (UTC)

My opinion is he wrote that because creating a general, correct definition, is hard, and he copped out. Certainly it would not be an annuity if there were not some sort of legal basis like a contract that determined that the payments would continue over the specified period. For example, a mutual fund account could pay a stream of payments until no money was left, but it would not really be called an annuity. A trust (the third definition) could specify a stream of payments similar to an annuity, but I don't think that it is proper to call a stream of payments under a trust an annuity; it's basically just similar to an annuity. For ex. a life insurance death benefit can be paid in a stream of payments, but even that is called the annuity form of payments, not called an annuity in and of itself. I think to be called an annuity the liquidation of a sum of money over a specified period of time has to be the primary purpose of the contract, and the payments have to be actuarially determined to last the specified period, and be guaranteed to do so. A pension's payments are actuarially determined and act just like a life annuity, but I don't think its really proper to call that an annuity either.

In any case, I'll try to generalize the intro, but still note the most common uses of the term. - Taxman 02:25, May 17, 2004 (UTC)

I don't know whether your definition is right or wrong, but I'm just going off of what I learned in class (Introduction to Finance). Perhaps we use annuities because they are easy to calculate and provide a simplified, but rather stylized, method of valuing assets like stocks, bonds, etc. I'm including growing annuities as well as simple annuities here. Thanks for your response.

You've reminded me of that usage, it is relatively common, but not as common as the primary one the article is written about, and I've included it as an alternate usage. Thanks for pointing it out. I hope I was able to make the usages clear, but the article still needs a lot of work.

You may want to look at Capital Asset Pricing Model and Capital asset pricing model. Goodralph 21:30, 17 May 2004 (UTC)

Did you point that out just for general info? I didn't see any usage of the term annuity in them. But yes, those articles should be merged into the lower case article title, as that is the convention as I know it. It's unfortunate that different capitalization can lead to separate articles. - Taxman 03:32, May 18, 2004 (UTC)

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From User talk:Enchanter:

Hi, you've made some good edits, but also removed some valid (as far as I know so far) information, and majorly re-arrainged the introduction to include some incorrect (also as far as I understand) information and ignore one of the most common uses of annuities. You may even be right that "The most common use of annuities is to provide a pension for people in retirement". It may in fact be correct in England, while I'm quite sure it is not in the US. In either case, true or not, removing what the article had said without backing up your statement is a bit irresponsible it seems. More correct would be to note that in Europe/England x use is more common, and in the US, x use is more common, if that is the case. Also wouldn't an edit that changed the meaning of the entire intro that much warrant an addition to the talk page first? - Taxman 15:53, May 18, 2004 (UTC)

Hi there. What I was aiming to do was to emphasise the key feature of an annuity, which is that it is a series of regular payments. I understand that in certain countries, including the US, you don't have to take the proceeds out in the form of regular payments (an annuity). However, that misses the point that the reason that the contracts are called annuities is that they provide regular payments - the fact that you can take money out in other ways, for tax reasons or otherwise, is not central to the idea of it being an annuity.

So as far as the definition of an annuity is concerned, I think it is the fact that it is a series of fixed payments that should be emphasised. The use of an annuity to describe a series of fixed payments is universal, and applies in the US and elsewhere. The specific characteristics of annuity contracts in the US, the UK, and other countries, could also be mentioned, but I think they deserve much lower placing in the article.

Enchanter 16:31, May 18, 2004 (UTC)

The aim was good, the result was not. Removing correct information is never good. Appropiate placement of primary characteristics of a topic is of course, fine. Annuities may be named after a stream of payments, but if their largest use is not for that, and the stream of payments concept is the only thing the article introduction references, then the article does not represent the topic well. I could not get numbers for annuity sales in other countries, but in the US, of $170 Billion (British Milliard) through three quarters of 2002 total annuity sales, over 95% are the deferred form. [1] (LIMRA 2002) and supported by [2] (LIMRA 2004)

A proportion that large in the world's second largest economy does warrant promininent placement in the article that not all annuities need to be or ever are annuitized. I'll grant that maybe it does not need placement as the primary point, especially if deferred annuities do not exist in any other country. The reason annuities are called what they are should not be the only criteria for the introductory content if the primary use is different.

As a side note, I have never once heard of a pension in the US being referred to as an annuity, even though the concept is similar.

Taxman 17:51, May 19, 2004 (UTC)

I've put in a comment that annuity contracts don't have to be annuitized in the section on the US tax code, based on our discussion; please check if I've got it correct.

The word annuity is used commonly in discussing pension plans, in the US and elsewhere; for example, it's common to hear discussion of plans giving benefits in "annuity or lump sum form".

Enchanter 21:05, May 19, 2004 (UTC)

Disambiguate

This page needs to be disambiguated. There should be several links on the page, one to annuity under finance theory, one to annuity financial product under US law or conventions, and one to annuity financial product under European law (or maybe even more specific.) There is a bunch of competing information, some which applies to the annuity products in the US and some of which falls under laws of Europe. There is also the annuity function in finance theory. Any person not familiar with all of these issues is going to be confused immediately. It's also way too long for a single page, an issue that should be remedied by splitting up the information. I'd be happy to edit the results for finance theory and US law, but someone else will have to put together the English or European version.

Aaron Hall, 12:00 noon, Central Time 1/13/2006

Yes, that's a good point. That's part of why this article is so terrible, because it's hard to accurately discuss things that overlap yet differ so much. The question would be the proper titling of the disambiguated articles. Annuity (finance theory), is a good start, but do we want a name as long as Annuity (United States product)? I created a new section here and moved the comment to the bottom because that is convention now. - Taxman ^Talk 18:42, 13 January 2006 (UTC)

How about Annuity (US financial products)? Let's do that. I also like Annuity (finance theory). Pensions would be a good place for the mortality tables and the rambling gaga stuff. Aaron Hall 4:00 central, 1/13/06

annuity fees

There is a price that you have to pay for any investment. If you place your money in a bank, you get a stated interest rate return - there are no fees. But the bank does have huge internal expenses that you are paying, in affect, from having them use your money. That said, fees for investments tend to make people think that they getting ripped off. This may or may not be true. You really have to make a comparison based on a project return. Some deferred annuities, like an equity index annuity, will limit a loss. There are huge fees associated with this since the annuity firm will be taking on some calculated risk and expenses to manage the investments. Is it worth it? Maybe. I have a deferred annuity and even though I pay a 1% M&E fee, I still am still doing well with it and glad that I don't have to pay taxes gains every year. If I could have placed it in an a lower fee account, like an IRA, I would have ... so this annuity was a good option for me regardless of the fee. There are other options to defer taxable gains - like holding onto ETFs.