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Author: BruceCM 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 75701  
Subject: Re: ??? about annuities - Warning: long Date: 2/21/2011 5:57 PM
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There is nothing wrong with a fixed life annuity from a reputable insurer with a long history of providing such things and a sound credit rating from places like A.M.Best or S&P credit rating services.

A couple of other points you may wish to pass along:

The person who has proposed this option is NOT an advisor, anymore than the guy at the car dealership is his Transportation Consultant. He's a sales rep. Nothing particularly wrong with being a sales rep and earning your income from the commissions on what you talk others into buying...but its NOT an advisory relationship.

The sales rep will be happy to tell him the "Good Stuff" about this particular life annuity with a 'Period Certain' (this is the technical name for what you are referring to as the 'guarantee'). But what the sales rep is NOT going to offer is any of the "Bad Stuff"....so here's some of it...

1. Zero flexibility once the annuity starts
2. Nothing left if he dies prior to his life expectancy. The 15 year 'period certain' will provide a continued income stream to his designated beneficiary for the remainder of the 15 years, but sometimes this remaining payment stream may be reduced under certain conditions. He should try to find specific language in the annuity contract that guarantees that under no circumstances would the remaining annuity payments be reduced, including due to the cause of death, market conditions, etc, and make sure the beneficiary knows this. BTW, why does he think he needs income continuation should he die early. This may be an expensive 'add on' to a simple life annuity that he really doesn't need, but the sales rep may be recommending because it fattens his commission.
3. No adjustment for cost of living. Inflation adjusted life annuities are available, but they are usually capped at a max adjustment per year and an overall life cap. And they can be VERY expensive.
4. If the insurer goes bust (is taken over by the state insurance regulators), his fixed payment amount may be reduced.

BruceM
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