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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?
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smolkod: "Does anyone have an opinion on using life insurance annuities as a vehicle for saving - for vacations, emergencies, college tuition, just about anything?"

Not familiar with life insurance annuities, but generally think life insurance as a savings vehicle is preety far down the list and that anything other than an immediate annuity is also pretty far down the list, with certain exceptions.

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."

"Friend"? If you are not comfortable do not buy until wither you are comfortable and umderstand what is going on and why it is good in your istutation.

Regards, JAFO
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Does anyone have an opinion on using life insurance annuities as a vehicle for saving - for vacations, emergencies, college tuition, just about anything?

If you need insurance, buy insurance. Don't confuse insurance with investing. Savings should be put into stocks, bonds, bank accounts, mutual funds, etc.

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.

Go with your gut. If you're not comfortable there is probably a reason. It is being pushed because there is a potential good commission involved for the salesman which you are calling a financial planner.

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?


No one can guarantee a fixed percentage and if it is being claimed your upside in really good years is being compromised.

Bob
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Hi smolkod,

Does anyone have an opinion on using life insurance annuities as a vehicle for saving - for vacations, emergencies, college tuition, just about anything?

Annuities are generally (always?) offered by life insurance companies, and of course cash-value life insurance is offered by life insurance companies, but its not common to refer to either product by the combined term "life insurance annuities."

Is your friend actually recommending annuities, or cash value life insurance... do you know?

He claims there is no risk,

Risk is like energy, it cannot be destroyed, only focused, repositioned, or dispersed... but it is always present in one manner or another.

you can always make 4% per year with the ups and downs of the stock market. Is that really true?

Maybe. There are longterm fixed annuities offering crediting rates at or near the 4%s....

There are also fixed rate cash accounts in cash value life contracts offering a guarantee of 4-6% (depending on the product.)

There are no market loss risks... but this is because the insurance companies hold sufficient statutory reserves to contractually guarantee that they are protecting you from the market risks (same as banks with CDs and guaranteed investment contracts.) The risks to you, therefore, are not tied to the market, but to the strength of the insurance companies directly, and to the state insurance association (which holds reserves as a backstop for the local companies) indirectly.

Cash value insurance contracts that offer strictly fixed or indexed crediting rates are required to be backed by no less than 90 cents on every depository dollar (as opposed to banks, which are only required to carry reserves of about 10 cents on the depository dollar.) The highest rated insurers carry 105 cents to 125 cents liquid reserves for every depository dollar... so the safety against market loss is near absolute, and the safety against company (and backstop association) failure is generally strong.

Of course, TANSTAAFL, and the way that the insurance companies generate enough internal returns to both pay out higher rates than you'd get on a DIY basis, *PLUS* cover the costs of keeping sufficient reserves to guarantee you against market downsides, requires long-term illiquid positions on their internal trading account. Since they bleed when their long-term trades are prematurely unwound to liquidate for early withdrawals, they pass the costs on to the account holder in what are known as "early surrender fees" if the customer pulls more cash, more quickly, than a predetermined amount that the insurance company can safely liquidate without costs.

Surrender fees are usually declining over a period of time... from 3-15 years, depending on your product selection (with the longer commitments naturally offering the higher rates of returns.)

Fixed insurance products are also usually front-loaded on their business/admin/sales costs, but end up generally cheaper (or a lot cheaper) than equivalent alternatives that charge as-you-go *IF* you stay the course and stay to the product plan and design. There is a trade-off in rate of return versus time commitment of liquidity. If the plan doesn't fit your liquidity needs, and you unwind it too early, it can end up very expensive.

Is that helpful?
Dave Donhoff
Leverage Planner
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The only person who will make any money off of this is your so-called friend. You don't need friends like him.
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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 risk. There may be less than other options but there is always risk.

No disrepect intended but as someone that somethings recommends annuities to clients, I get the impression that your friend is more concerned about their commission than about your friendship.

There are all sorts of potential downsides to this that they do not appear to have disclosed.
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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.

AJ
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Hi AJ,

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.

This isn't true, unless I am misunderstanding your statement (not really in any way I can try to make it true to come close to agreeing.) Fixed rate annuities & cash value life can both credit a straight 4% without requiring you to distribute principal (let alone requiring it as part of the 4% calculation.)

Since you won't actually get a copy of the contract until after you pay your money, just marketing information,

Most insurance companies can provide a sample contract identical to what your chosen product contract will be, known as a "specimen contract," on request in advance of your approval, and certainly before issuance.

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 we are referring to annuities, then for tax purposes each withdrawal or distribution must be accounted for as a pro-rated blend of interest credit and original principal. If a contract is paying a 4% guarantee, then the overall balance (including whatever portion you are distributing) will reflect the full 4% rate of growth. A 4% crediting rate cannot be calculated as including principal in order to reflect a (for example) 4% "distribution rate" rather than an actual 4% growth rate.

If we are referring to cash value life, there is no requirement for distributions to be accounted on a growth/principal blend if accessed on policy loans.

Cheers,
Dave Donhoff
Leverage Planner
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This isn't true, unless I am misunderstanding your statement (not really in any way I can try to make it true to come close to agreeing.) Fixed rate annuities & cash value life can both credit a straight 4% without requiring you to distribute principal (let alone requiring it as part of the 4% calculation.)

Then your experience is different than the annuity contract that I had experience with. I guess it may be the 'can' vs. 'do'.

If we are referring to annuities, then for tax purposes each withdrawal or distribution must be accounted for as a pro-rated blend of interest credit and original principal. If a contract is paying a 4% guarantee, then the overall balance (including whatever portion you are distributing) will reflect the full 4% rate of growth. A 4% crediting rate cannot be calculated as including principal in order to reflect a (for example) 4% "distribution rate" rather than an actual 4% growth rate.

The salesperson that sold the annuity that I saw told the buyer that the annual return was a minimum of 6%, and that the same 6% could be distributed yearly without surrender charges. And even when I questioned the salesperson several times, the salesperson continued to insist that the 'return rate' was equal to what you are calling the 'distribution rate', because that's what you allowed to withdraw, so it was 'returned' to you, even though the principal balance was decreasing. So it may be that they were actually guaranteeing a 4% return, and allowing a 6% distribution. However, the marketing material did nothing to differentiate between 'return rate' and 'distribution rate', and when I looked at the numbers, the minimum guaranteed interest credit each year was less than what was allowed to be distributed.

YMMV - it may be that this was just a salesperson spouting the line he had been taught. But annuities are complex enough that I suspect that many people selling them don't completely understand them, so having a salesperson that does this is probably not uncommon. In the OP's case, since his friend was insisting that there was 'no risk', I would suggest that the OP's friend was spouting the line he had been taught.

AJ
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Yes, very helpful Dave. I will print this out and refer to it the next time we have a discussion on invstments. I don't know the exact product he is pushing. I'll post more on that later. He is helping me with college financial planning, and I know that annuities are his preferred investment choice over the market.
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All good information. Thanks.
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He's promoting the use of annuities through a book called "Bank on Yourself" by Pamela Yellen. I'm not through the entire book yet, but so far it's a lot of reading without giving any real information on how the annuities actually work. The book is full of testimonials about how great this investment strategy, and how wallstreet doesn't want anyone to know about it, and how you can take money out, and pay it back to yourself and the balance never goes down. All nice things to hear, but it doesn't explain how it works.
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He's promoting the use of annuities through a book called "Bank on Yourself" by Pamela Yellen. I'm not through the entire book yet, but so far it's a lot of reading without giving any real information on how the annuities actually work. The book is full of testimonials about how great this investment strategy, and how wallstreet doesn't want anyone to know about it, and how you can take money out, and pay it back to yourself and the balance never goes down. All nice things to hear, but it doesn't explain how it works.

And according to several reviews of the book that google found for me, you never will get any actual explanation on how it works in the book.

Here's a pretty neutral review that I found - gives some upsides and some downsides to the strategy: http://moneyover55.about.com/od/bookreviews/a/Book-Review-Ba...

Does the concept work? Actually, it does. However, you have to keep in mind, there is a cost. Within the life insurance policy you are paying for life insurance. For most families, this feature is a good one. For people who don't need life insurance, you would have to compare the internal costs of the insurance to a strategy of saving and using your own money out of a bank account. Since the book provides no technical illustrations, it is difficult to run this type of analysis.

There are other reviews out there, some with lots of comments, both pro and con. I would encourage you to read them, in addition to the discussions here.

Please keep in mind as you read comments on this board.....Since Dave sells these types of policies, he's biased towards them. Since I've had some bad experiences with life insurance and annuity salespeople, I'm biased against them.

AJ
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The book is full of testimonials about how great this investment strategy, and how wallstreet doesn't want anyone to know about it, and how you can take money out, and pay it back to yourself and the balance never goes down. All nice things to hear, but it doesn't explain how it works.

And that's your clue. It's garbage, bedazzling you with dollars whizzing around every which way, so you don't notice the grifter who is lifting your wallet. If you have the patience to sift through all the details, making sure that every dollar is accounted for and none are counted twice, you'll see that there's nothing there besides a bunch of BS.

It has a lot of similarities to the "Money Merge" scam.
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Hi AJ,

YMMV - it may be that this was just a salesperson spouting the line he had been taught.

Yeah... sounds like complete smoke to me...

But annuities are complex enough that I suspect that many people selling them don't completely understand them, so having a salesperson that does this is probably not uncommon.

I'm sure you are right on that.

In the OP's case, since his friend was insisting that there was 'no risk', I would suggest that the OP's friend was spouting the line he had been taught.

Very likely... I agree.

Dave Donhoff
Leverage Planner
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Hi smolkod,

He's promoting the use of annuities through a book called "Bank on Yourself" by Pamela Yellen.

OK... this is a strategy that prefers whole life as its accumulation & collateral center piece. If I may dramatically reduce it to short strokes, here is what I would say;

A) Its better than nothing, but barely...
B) Its extremely safe for nervous sleepers, like a 15 FRM mortgage... and equally overexpensive (if you were aware of the lost opportunity costs with this methodology you'd choke!)
C) The entire premise is to accumulate your savings in a cash value whole life contract, then
D) Instead of borrowing money as you normally might on credit cards or car loans for life's consumptions, you borrow from the insurance company using your life contract as collateral.

The *MAJOR* failure in the whole scheme, in my opinion, (and frankly it is so egregious TO ME I cannot believe this has lasted the multiple decades it has, let alone grwn as widely as it has,) is as follows.

Whenever you borrow against your policy, you are to make a repayment amortization schedule, with an imaginary made-up repayment interest rate, and "pay yourself your own profits." (Thus their terminology of "banking on yourself.")

Its silly because obviously you are no more profitable by 'declaring' your imaginary repayment interest rate to be 2%, 5%, or even 50% per year... you are simply moving earned income from one pocket against the repayment of the policy loan, capturing savings equal to the interest rate charged on the outstanding balance. There is zero interest rate arbitrage or profits involved.

In essence, it is a forced savings program using a long outdated product that underperforms its newer alternatives... but again, just as with expensive fixed rate mortgages, it makes people "sleep at night" (mostly because they are not viscerally aware of how much they are paying for that slumbering privilege.)

====================

Hi AJ,

Since Dave sells these types of policies, he's biased towards them.

That's not true at all. As you can read above, I am very much *NOT* in favor of underperforming financial products that don't fit a person's profile. (Whole life still has its place... but the percentage of good use has dramatically plummetted the last 15 years or so.)

Further, the only products I favor, I favor because they have superior safety and/or performance... I design what works into my client plans because I favor their results, not the other way around.


Since I've had some bad experiences with life insurance and annuity salespeople, I'm biased against them.

As a blanket? Everything?

Dave Donhoff
Leverage Planner
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The salesperson that sold the annuity that I saw told the buyer that the annual return was a minimum of 6%, and that the same 6% could be distributed yearly without surrender charges.

It appears you and Dave are talking about two entirely different products.

Dave mentioned fixed annuities that payout "interest" very much like a CD would. The current interest rate is guaranteed for a fixed period of time (often for the duration of the surrender charge period). They also have a minimum interest rate that might be anywhere from 1% to 3% (for example). It was not uncommon for many fixed annuities to pay 4% in the past few years. It is fairly uncommon now. Fixed annuities have no market risk.

What you are talking about appears to be either a variable annuity with a rider that guarantees either income or withdrawals or a fixed index annuity with a similar rider. These two products could not be more different. About the only thing they have in common is tax deferral.
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As a blanket? Everything?

Pretty much, yes. Even after explaining that I have no dependents and a (completely unnecessary, but it's free, except for the small amount of imputed income that gets taxed) life insurance benefit through work, I am still amazed that life insurance salespeople try to convince me that I need life insurance - generally 'for savings'. Ummm, no thanks - my savings are just fine without having to pay for unneccessary insurance, too.

And after my experience with the annuity salesperson, pretty much done with them, too.

AJ
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I agree - am taking my funds out of my annuity and NOT putting (despite their (SUGGESTIONS) into dividend paying stocks -- good luck!
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just read my post -it may be unclear - i meant not into any other life insurance annuities!
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