Financial Planning Stuff You Need to Know » Insurance

Why Guaranteed Value Variable Annuities are not what they seem.

Chris Long — Tue, 08 Jun 2010 22:41:13 +0000

Many of my clients have been sold a type of variable annuity that has a guaranteed value and a minimum guaranteed annual payout after a holding period. The guaranteed payout is often 5% of the guaranteed value. So if the guaranteed value is $100,000 you would get $5,000/year regardless of what the investment value of the annuity is. If the value of the annuity rises above $100,000 you would get 5% of that higher value.

Sounds like a great deal. Upside potential and downside protection.

Well a fellow NAPFA advisor analyzed one of these annuities on the insurance company’s website. Here is what she found:

On a $100,000 contract the guaranteed payout was $416/month. This compares to $609/month for an immediate annuity (a different animal)
In order for the contract value to grow above $100,000 there would have to be a return of at least 9%/year. This is because the internal expenses (fees, premiums, commissions etc. were 8% per year!)
Assuming 3% inflation the annuity growth would have to be 12% per year. That would be very difficult to achieve over the long-term!

If someone offers this type of product to you. Take the time to analyze it looking at what rate of return you would have to achieve in the long-term in order for your payout to rise.

As an alternative consider a combination of an immediate annuity at retirement for some guaranteed income, along with a combination of stock mutual fund investments for long-term growth.

Consumer Reports Updates its Homeowner Insurance Ratings

Chris Long — Wed, 12 Aug 2009 13:27:22 +0000

The September 2009 issue of Consumer Reports Magazine has a report rating homeowners’ insurance. The three top rated companies were Amica, USAA, and Chubb. USAA is limited to people who have a connection to the military. All three carriers were rated highly for paying claims in a timely matter and the amount of the settlement.
Popular carrier State Farm was rated mid-pack and Allstate was near the bottom of the rankings.

The article has some great advice about raising your deductibles to save money, avoiding small claims which could raise your rates or get your dropped, and checking rates every few years.

You can read the article at www.consumerreports.org/ (online subscription required)

Don’t Forget about Flood Insurance

Chris Long — Mon, 15 Sep 2008 22:48:23 +0000

With the record rainfall and flooding we have had recently, the topic of flood insurance comes to mind. Your homeowners insurance does not cover damage from flooding. In order to be protected in case of a flood you need to purchase flood insurance through the Federal Flood Insurance Program.

You can find out more information about flood insurance at www.floodsmart.gov . At this website you can find out the flood risk in your area, review what coverage is available, and the cost, and find out which agents sell federal flood insurance in your area. The cost of flood insurance is the same no matter which agent you purchase it from.