No. of Recommendations: 1
Does anyone have an opinion on using life insurance annuities as a vehicle for saving - for vacations, emergencies, college tuition, just about anything?

I have a friend who is a financial planner, who is really pushing this type of investment, and its not something I'm comfortable with.

He claims there is no risk, you can always make 4% per year with the ups and downs of the stock market. Is that really true?

There is always a risk. In this case, it's the risk in the company that issued the annuity. While there is insurance at the state level, it generally only provides coverage up to $100k - $300k, depending on the state, and only for your principal. If one of the big insurers had to access the insurance, I suspect many of the states where a lot of annuities had been sold would not have sufficient funds to pay out their insurance, and the insurance would be paid only if the rest of the insurance industry was willing to step in. It's happened before - look up the failure of Executive Life.

Additionally, the only way that the insurance company 'guarantees' a miniumum 4% 'return' is a combination of setting a cap on the return that they will give you and returning a portion of your principal as part of the minimum payout.

Since you won't actually get a copy of the contract until after you pay your money, just marketing information, it may be hard to discern that part of the 4% guarantee is part of the return, but if you are given a table that shows the principal balance if you make the 4% withdrawals each year, you can usually see that the principal balance goes down each year. If you do sign up for the annuity, the contract should contain this table. However, once you get the contract, you only have a set timeframe (30 days) to cancel without triggering surrender charges.

Additionally, if you are planning on using the money for 'vacationa, emergencies, college tuition, just about anything' be sure to look closely at the surrender terms. If you need the money for any of these needs before the surrender charge period expires, you better hope that the amount that you need is less than the amount that is allowed to be withdrawn without triggering the surrender charges.

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