The Golden Albatross vs. The Insurance Industry (Part 2): Annuity Valuation Case Study

Insurance Annuity Valuation Question

Annuity Valuation

What me worry?

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 1): Fees

What’s Your Opinion on Insurance Products?

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.

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