The Investment Scientist

How to Buy an Annuity You Don’t Need

Posted on: June 24, 2013

annuity 1(1)Last week, I got a panicked phone call from a client of mine, “Michael, my wife bought an annuity a few weeks ago. Now we really regret it. The agent won’t take our call! Can you help us?

I went to their home to examine the annuity contract. It was actually relatively straightforward; for $100k, they will get $456 per month for the next 30 years, beginning three years from now. My client is 71 years old; he will be getting his last payment when he is 104 years old! By then $456 will probably be worth $56 in today’s money. Not what I’d call the deal of a lifetime.

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My client is a retired army dentist, he has a pension from the army on top of social security. They have no need of more fixed income. “So what brought you to buy this annuity?” I ask, most intrigued as to what the answer might be.

“She used to be sooo nice!” the wife opined most pitifully, “she would bring over food her mother made every week! Then one day she whipped out this paper for me to sign, and I couldn’t say no.”

“Where is she now?”

“I introduced her to a wealthy friend of mine. Now she takes her mother’s food to my wealthy friend, but she won’t even take my calls…… Can I get my money back?”

Yeah….. no. I pointed out the fine print: this contract is irrevocable, there is no value when the contract is surrendered. The insurance company doesn’t mind if you surrender the contract, you just won’t get any money back. Lesson: Beware of insurance agents bearing gifts.

(Note: By using the discount value method, the contract is worth about $85k.)

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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