When Do You Need Annuities and Life Insurance?
Posted on: June 15, 2012
Annuities and Life Insurance
I recently met with a physician couple who became clients of mine.
Their investment portfolio is chock-full of annuities and life insurance; even their qualified retirement plans are not exempt.
They told me that they went to financial seminars and were convinced that these products were good wealth accumulation vehicles. In fact, they are anything but.
These insurance products have nothing with do with wealth accumulation (except for insurance agents).
Life insurance is protection against the financial consequence of dying prematurely. Take me, for example; I am the primary bread earner of my household. Should I die prematurely, my wife would lack the financial resources to raise our two kids. So I need to buy a 20-year term life insurance policy.
Do I need permanent life insurance? No, I don’t, unless I have a disabled child. Otherwise, after 20 years, my kids will be grown up, they can live on their own, and I can die peacefully.
An annuity is the opposite of life insurance; it protects against the financial consequence of living too long. Let’s say you are 75 and down to your last $100k. You are in good health and refuse to die. There is a dire consequence to your stubbornness: you might outlive your money.
To protect against that outcome, you may enter into a contract with an insurance company under which you give them the $100k and they promise to pay you $800 every month until you die. The annuity essentially removes the risk of outliving your resources.
Such are the unadulterated purposes of life insurance and annuities.
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6 Responses to "When Do You Need Annuities and Life Insurance?"
June 16, 2012 at 1:20 pm
Hoh boy, you’ve raised the wrath of insurance salesmen (or “senior financial planners” or whatever is the slick marketing term du jour). I wonder what comments they are going to leave here. Nothing bothers them more than honesty and a risk to their commissions, but I repeat myself. I agree with you 100%, by the way. Those 6-point-font 96-page annuity contracts weren’t written for the benefit of the _buyers_ after all. (“Oh, don’t worry if you don’t understand the contract. Someone’s going to make a lot of money. Truuust me, and sign here.”)
June 16, 2012 at 1:34 pm
Jerry,
I actually read through the 100 pages annuity contract. The good doctor is paying up to 4.51% in combined charges for this wealth accumulation product. I think I am going to write about that.
Michael
June 16, 2012 at 10:07 pm
Excellent post Michael, brief and easy to understand (unlike most insurance documents I have read). Like any financial instrument, an insurance policy or an annuity may be the right tool or might not. It all depends upon the unique situation of the client involved.
The Investment Scientist 
June 15, 2012 at 4:02 pm
very informative and brief