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|Subject: Re: investments for the non-financially literate||Date: 4/20/2013 4:27 PM|
|Author: intercst||Number: 72096 of 76901|
I'll probably get lambasted for this, but it sounds to me like you're describing an annuity. Specifically, a Single Premium Immediate Annuity (SPIA). They're not my favorite choice, but they have their place, and this might be it.
The big problem with an SPIA is that 20%-30% of the purchase price is lost to the insurance company's various fees, expenses and costs. While they are heavily promoted by financial advisors, I wouldn't touch one with a proverbial 10 foot pole.
The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
You can estimate the costs embedded in a single premium immediate annuity by comparing the premium quote you get from the insurance agent to the expected present discounted value (EPDV) of an immediate life annuity. The EPDV is sometimes called an "actuarially-fair annuity" or "money's worth annuity". Economists define the ratio between the EPDV and the premium quote as the Money's Worth Ratio (MWR).(Note 1.)
For individuals of average mortality, Money's Worth Ratios as low as 0.70 are not uncommon, depending on the annuitant's age. That would indicate that 30% of the purchase price of the SPIA is siphoned off in the insurer's various costs and expenses. For retirees who are aquainted with low-cost index funds where one can assemble a diversified portfolio of stocks and fixed income securities for an annual cost of 15 basis points (0.15%) in fees, the embedded costs of an SPIA seem large enough to choke a crocodile. Even if you applied a 15 basis point annual fee over the entire 50 to 60-year life of the annuity pool, it would still amount to less than 2% of the purchase price.
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