The Investment Scientist

Archive for the ‘Annuity and Life Insurance’ Category

Old AgeRecently, a client of mine fell, broke his hip and ended up lying on the floor for 20 hours before he was rescued. I went to visit him in the hospital a couple of times. The good news is: he is out of immediate life-threatening danger. The bad news is: he may be wheelchair bound for the rest of his life.

When John first came to me to seek my help with his personal finance, I looked at his overall financial big picture and was pleased overall. He worked at federal and state jobs and enjoyed good pensions. On top of that, he had a decent investment account.

But there was a gaping hole in his retirement security: he was turning 70 then, was divorced, and his children lived far away. That meant if he were to get sick, nobody would be there to take care of him; he would need to hire caregivers. Right then, I insisted that he buy long-term care insurance.

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My friend Dan is in the life insurance business. Recently, he shared with me a case in which he helped a client of his (let’s call him John) get $600k out of his term life insurance with life settlement.

In case you don’t know what life settlement is, it’s the sale of an insurance policy by the owner to a third party for a price higher than the policy surrender value.

How does this work?

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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).

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I was called a “wing nut” by a commenter for pointing out all the malpractices of insurance companies. Indeed, I could go nuts seeing how they mislead their customers into financial peril. They know full well that their customers are not going to read beyond the first few pages of their hundred-page contract, so they put all the goodies on the first page and keep the disclaimers on the back pages.

The following is an actual annuity contract a client of mine purchased a few years ago, much to his regret now.

On the first page of the contract, all the warm and fuzzy keywords are used: “GUARANTEE”, “fixed”, “annualized interest rate of 5.75%”. Pay attention to the following line though: This rate is subject to change each month.

Annuity Contract Front Page

Annuity Contract Front Page

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I recently met an entrepreneur friend of mine. I was pleasantly surprised to learn that he had sold his business and was now looking forward to retirement. He has about $1mm in his 401k plan. As any shameless financial advisor would do, I asked him if he had someone helping him manage his money.

“As a matter of fact, yes!” he answered. “A friend of mine is also a financial advisor, and he helped me create a balanced portfolio.”

He related that “50% of the money will be in safe investment—a (deferred) annuity that has a guaranteed yield of 5%; the other 50% will be in alternative investments for higher performance.”

To say that I was flabbergasted is a serious understatement. With a friend like that, who needs enemies?

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Watch the show and you’ll know what I meant.

Listen to an insurance agent's financial advice

Invest in a Variable Annuity

Recently, a client of mine brought me the variable annuity he bought a few years ago.

Prominently displayed on the first page are the benefits of the annuity:

Death Benefit: Enhanced Guaranteed Minimum Death Benefit

Living Benefit: Lincoln Lifetime Income Advantage

as well as the fact that the money will earn an fixed annualized rate of 5.75%. Under the bold ACCOUNT FEE subtitle, it states: Account fee is $35 per contract year.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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