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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19414  
Subject: Re: Why do we not like annuities? Date: 7/24/2005 6:57 PM
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Author: CTkaren | Date: 7/24/05 6:10 PM | Number: 9949
I'm not retired yet as I need to keep earning to pay health insurance (will be 65 in three years). Went to a talk on "insurance "packages and the fellow was touting 'Asset protection annuity with LT Health care included".

If you never use the long term care, beneficiaries get twice the principal in a death benefit. A $50,000 lump sum buy-in pays approx. $350,000 in LT health care.The annuity grows and the death benefit and LT care amt increase.

My brother says the small print will mean you will never get what you expect. I could only afford something like this if I sold my home and moved to a less expensive area and property.

I kind of like my home and may not ever sell---but are these annuities all bad?? I think this one was with Lincoln Financial. I don't have alot, but would love to leave something to my three sons.


It never ceases to amaze me how convoluted annuities have become!!

The reason that the insurance industry makes annuities so complex is so they can make them sound like a great deal will actually they usually are not. If they made them simple, you would see instantly that they are usually too expensive. In actual fact, annuities are the single most profitable financial instrument for an insurance company and the sales people who peddle them.

The bottom line with annuities is that you are buying some form of financial insurance, and it isn't cheap. It is described in painful detail in the contract you sign. The insurance can come in the form of guaranteed payments over a period of time, a guaranteed rate of return, a guaranteed return of principal along with payments, a minimum return as compared to some index like the S&P 500, or combinations of these things. Now, they are combining them with life insurance, health insurance, and long term care, yet one more level of confusion.

Now, annuities are not always bad. If you fully understand what you are buying, and you know exactly how much it is really costing, and you agree that the price is OK, then there is nothing wrong with that annuity.

For instance, an immediate annuity is easy to understand and may be right for some people, especially people who are highly risk averse. When you buy an immediate annuity, you give the insurance company a lump sum of money, and they annuitize it back to you minus their fee (guarantee you payments over a specific period of time - often for the rest of your life). You can create a pseudo-pension this way. See http://www.immediateannuities.com to see what amount of income you can get for a certain amount of money.

Then, there are Index Annuities. These start to get more complex. They usually guarantee a minimum return each year or a percentage of the growth of the S&P 500 up to some cap. For instance they may guarantee a 3% return or 80% of the growth of the S&P 500 index up to a maximum of 9%. The thing they gloss over is that when the refer to the S&P 500 growth, they do not include dividends. This reduces the S&P 500 Index growth by nearly 2% per year. Then, at some point in the future, you probably have an option to annuitize the total value for payments over the rest of your life.

The annuity to be really careful of is the Variable Annuity. The insurance company sets up what look like mutual funds and you invest your money into these 'mutual funds' any way you want to. The selling point is that gains are protected from income taxes, just like with a 401(k) or an IRA. What they don't dwell on is that these mutual funds normally have expense ratios over 2%. They also don't dwell on the fact that after you purchase a variable annuity, you cannot sell out of it without huge penalties for the first 7 to 10 years. You are locked in. You may be able to exchange out of one company and into another company's anuity, but it will still be expensive.

Now, they are combining variable annuities with health and long term care insurance. This is getting so complex that it is nearly impossible for an individual to properly evalute it. Oh, and they may throw in whole life on top of the annuity just for good measure.

So, if you are considering an annuity, take a copy of the contract to an independant CPA or fee-only CFP to review it before you sign it. They will be able to spot the hidden costs and tell you what you are really buying. Then, after you fully understand it, you will be able to make an informed decision as to whether or not it is right for you.

And if you are thinking about an annuity, but haven't talked with an insurance salesman yet, be prepared for a hard sell, much like what you'd get if you go to one of those 'free' weekends at a timeshare facility.

Russ
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