Annuities and Insurance - Revealing Offers

Q. So glad I stumbled onto your website. I wanted to ask you a question about EIAs. There's this company called #### which endorses Equitables Annuities. They had no cap in terms of growth and guaranteed 6% a year. Are you familar with them? The representative stated something to the fact that if you invest $15,000 today; you'll have the same amount as you will get from Social Security.

Also, I know I read how you prefer term insurance vs. permanent. Unfortunately, I didn't stumble upon your website until now. I have had a permanent life insurance policy for a year. I know that in the first year 90% of my premium went to the agent. My question is -- shoud I stop now and take my losses? I like the idea of borrowing against your policy and being protected. The reason I didn't choose term is because currently I'm 30 years old; and I figured in 30 years I might still be working, but may not be as healthy.

Thanks for the advice.


A. Thanks for your questions and I'm glad you enjoy the website!

Like many things in life, the devil is in the details. When an agent tells you that a variable annuity provides a guaranteed 6% return, he/she is not telling you the whole story. This 'feature' is generally termed the guarantee minimum income benefit, but each company has their own name for it.

The problem is that there are all sorts of details attached to earning that 6%. Typically, you have to do some form of annuitization to get it and they don't allow you to annuitize for the first 7-10 years.

I will have an article that will cover why I think this is a sham benefit in a couple weeks, but here are just a few points. First, only 2-3% of policy holders annuitize. Most insurance companies charge .50% per year for the benefit and they collect it on the entire balance every year--EVEN IF YOU NEVER USE IT.

Secondly, the insurance company knows that the probability of you owning that policy in 7-10 years or that the market won't provide higher returns is very, very small. If the market returns higher than an average of 6% per year then you've paid for nothing.

The big question is why is the salesperson (that's all they are!) recommending a variable annuity in the first place? If this is an IRA there are better places for it that allow you to retain your flexibility and earn more. If it's after-tax money, he/she is probably telling you it's a great way to defer taxes. This is bogus because with current tax rates it is better for you to pay the taxes now (be able to deduct any losses) and to have complete control/access to the money.

I don't know if the #### rep is the one who also sold you the life insurance policy, but I find it interesting that the recommendations all seem to be for the highest paying commission products. If so, I would highly recommend finding another advisor or doing it yourself.

If you find another advisor, find one that is fee-based or charges by the hour.

Concerning your life insurance, there are several things to keep in mind. Your situation will change remarkably over the next 30-40 years. You will undoubtedly need more life insurance along the way because the death benefit on this policy won't be enough to cover your needs. Inflation alone will keep it from meeting your needs.

The agent talks about the ability to borrow from the policy, but the funny thing is you are only borrowing your own money! That money is only there because you paid in 'extra' in every payment.

It's true your health may change as you get older. I recommend buying term policies for the additional insurance you will need along the way. I know you can get 20-year term and I'm sure there are companies that offer 30-year term.

If you buy term insurance that is convertible, then you are covered should you become uninsurable.

I don't know what to say about your existing policy...

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