A reader, whom I’ll call Lady J, recently asked me if I could value her future insurance annuity scenarios vs. her current cash-out value. She wanted an annuity valuation done in the same manner as the Pension Lump Sum Case Study I wrote for the Pension Series. The question intrigued me. My initial reaction was, yes, I could. Since a Defined Benefit Pension (DBP) is just another phrase for an annuity; I didn’t think it would prove too hard if she could provide the appropriate details. I told Lady J as much, and she promptly supplied me with details I needed.
Surprisingly, the annuity valuation proved both easier and harder than I initially thought. Easier in the sense that based on the numbers provided by Lady J, my Master Pension Value Calculator spit out an answer to her question in no time. Harder in the sense that once I reviewed the terms of her annuity policy, and the facts surrounding her initial investment, it forced me to ponder numerous “what if’s”. Thus, consider this article in two parts. First, I walk through the facts surrounding Lady J’s situation and the process of annuity valuation. Second, I address a few different issues, both good and bad, I noticed with this annuity. Continue reading The Golden Albatross vs. The Insurance Industry (Part 2): Annuity Valuation Case Study
Let me level with you up front: I don’t have a lot of experience with insurance products — especially the type that mirror investments. Prior to my experience related in the below story; the only other time I dealt with insurance investments was successfully extracting Mrs. Grumpus from one of the two products she invested in as a young worker in her home country. Up to now, I really hadn’t given them a lot of thought. As a result, I never held strong opinions about them in either direction. Maybe the most I ever felt was lucky for not getting involved with them — which I suppose is better than the regret I routinely express from other investment choices!
Of course, I’m not completely unaware of the arguments for and against such products. I hear them routinely denounced on several podcasts I listen to. Jill Schlesinger from “Jill on Money” is probably the most vocal, but certainly not the only one. The costs associated with such insurance “investment” products are often what draws the most negativity. Insurance sales people who push insurance products as a panacea to all money problems, is another issue that stirs emotion the wrong way.
This post is something of a mash-up. Everyone loves a good mash-up, or at least that’s what Mrs. Grumpus tells me before she tragically dances and sings around the kitchen. She’s a great singer, but an awful dancer. As a result, her mash-ups are unique. Personally, I hear the word “mash” and think about my favorite part of the brewing process. Some may think of whiskey, but that’s distilling.
In any case, for this article, I combined the pension case study of a reader and the hard work of a ChooseFI listener. We’ll call the reader “Ms. Money Penny” and the ChooseFI listener “Q”. Money Penny is the secretary in the older Bond films, always flirting with that “big man-slut” (a Mrs. Grumpus term) Bond, and wishing she could go on adventures with him. I always got the feeling that Money Penny was bored and that she lived vicariously through the stories Bond would tell her. Boring is exactly how my reader Ms. Money Penny described her finances to me in her email. In this case, boring is a good thing … make that a great thing. Sticking with the analogy, if I were Bond, I might want to live my financial life vicariously through her. Ms. Money Penny, as you’ll find out, is in a really good place.
In all the Bond films, old and new, “Q” is the guy with gadgets. Not just any gadgets, but THE gadget that always gets Bond out of whatever pinch he’s in. Q’s made it all, from a mini-helicopter with missiles to an exploding pen, and a mini-SCUBA canister Bond could carry in the pocket of his tuxedo. It’s convenient that Q always knows what to invent in advance of Bond’s dilemma. If we only had his prescience! Continue reading The Pension Series (Part 13): The Master Pension Value Calculator