Posted on: July 16, 2012
I have a new client who suffers from the same problem: her retirement accounts are choked full of Allianz’ variable annuity products very similar to this Lincoln product I reviewed a year ago. They are not as deviant as the Lincoln product in term of hiding fees, but they are nowhere close to being a keeper.
Recently, I was approached by a prospective client named John, who has all of his retirement in one annuity.
I have always been intrigued by how annuities and life insurance are sold. Listening to John explain his decision-making process and reading through the annuity contract is like turning on the light bulb in my head.
It turns out that the unique selling point of this product is the “200% Step-Up of the Guarantee Amount (GA).” The way John puts in, if he just keeps the annuity for 10 years, he will get back 200% of what he put in. What is there not to like about that! After all, he gets guaranteed upside with absolutely no downside risk.
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4 Responses to ""
July 16, 2012 at 7:42 pm
Ron,
The reality is John had no ideal what he bought, he heard the word “guarantee” and bought the product without reading the contract. He had no idea about the costs, he had no idea how the guaranteed amount is restricted in payout etc. He just though he gave a million and guaranteed to get two millions back.
Insurance companies aren’t that dump.
July 16, 2012 at 7:44 pm
You are not telling the whole story. And why are you using a 6% discount rate? 1% or less would be appropriate today.
July 18, 2012 at 5:14 am
Joe,
At the time of writing, 30 year treasury bond that has the full faith and credit of the US was yielding 4%. I think asking an insurance company to pay 6% over essentially a 30 year borrowing is not excessive.
The Investment Scientist 
July 16, 2012 at 7:36 pm
Depends on John’s aversion to risk. The guarantee must mean a lot to him because even in a sidways market a good investment guru could return him that amount without putting all the capital at risk, and John would still own all the money. With an annuity he is trading capital for fixed income and betting he will outlive the break even point. The risk for John is only the day he signs the contract, after that he gets the defined benefit.
I may be foolish, certainly I am younger the John. I would rather own my capital and find safe niches to put it to work. Safety, depends on each investor’s fear of risk.