Annuities, Insurance, And My Soap Box

Includes: GE, MET, PRU, T, VZ, XOM
by: Regarded Solutions

Not a day goes by when I do not get at least 2 or 3 annuity or insurance solicitations, many of which are offered by MetLife (NYSE:MET) and Prudential Financial (NYSE:PRU), just to name a couple.

These are NOT investments, nor should they be confused with the world of investing in any way shape or form.

Investing in a basic core portfolio of dividend-producing large-cap blue-chip stocks such as AT&T (NYSE:T), General Electric (NYSE:GE), Verizon (NYSE:VZ), ExxonMobil (NYSE:XOM), will allow you to maintain control of your finances, your future "older years", and (more than likely) greatly outperform these insurance products.

The Latest Annuity Insurance Product

The latest "product offering" is a real peach. Not only does the insurance company want your money at age 65, but they will "hold" the money for you so when you reach the age of 85, they will THEN begin paying you a monthly guaranteed amount for the rest of your life.

Now let's just think about this for a moment. We give the insurance company a chunk of money (the desired amount is $50,000) at age 65. There are no "guaranteed" rates of return or interest aside from the promise to pay you a set monthly amount 20 years hence, forever.

Are you confused yet?

Here are some "highlights" of this product called "LONGEVITY INSURANCE":

  • A one time payment of $50,000 (could be more or less) at age 65 is "all" that's required.
  • Based on the $50,000 payment, at age 85 (20 years hence) the insurance company (in this case MetLife) will pay a guaranteed monthly payment for as long as you live.
  • A male who buys this product will receive $1,481/month.
  • A female who buys this product will receive $1,184/month (girls live longer than boys).
  • The same $50,000 purchase would buy an immediate annuity which would pay only $290/month paid monthly as soon as you fork over the money.
  • The intention of this product is to allow folks a level of comfort in knowing that when they reach 85, even if they have spent all of their money, they will have a new monthly income stream "kicking in" just in time.
  • Read this Kiplinger article via Fidelity Investments for more details.
  • Of course you have given the insurance company $50k to play with for the next twenty years before YOU get anything, and if you ask me, it is an awful "deal".

How About Some Facts

I think the first thing we should look at are the actuarial tables used by several reliable resources. Actually they are used by the insurance companies themselves to insure that they are going to make a hefty profit, and not just act philanthropically to our older seniors.

First we should just briefly outline what you can potentially receive (in total) at various ages. For the sake of this article I will stick with the male who buys this product at age 65 for $50,000 (all totals are rounded up and approximates)

  • Live to age 90 and you will have received $90,000
  • Live to age 95 and you will have received $180,000
  • Live to age 100 and you will have received $270,000
  • Live to age 84 years, 11 months, 363 days and you will have received ZERO

Obviously the sooner we start working out, changing our diet, and making sure our genetic structure is correct, the more money we might get. That being said, let's now look at those actuarial tables that the kindly insurance companies use.

Here is the table used by the Social Security Administration. It says that if you were 65 in the year 2007, they anticipate that you have another 17.19 years to live, on average, as a USA male citizen. That works out to be about 83 years of age. Check my outline above to see how much you will have received. ZERO.

We all know that the Social Security Administration has been under intense scrutiny of late, so let's use another resource that the insurance companies use. This is the Government's Center For Disease Control Manual. All 563 pages of really interesting facts and figures, and I believe it is probably the single most referred to manual by virtually every insurance company, whether it is for a life insurance policy, a health insurance policy or an annuity. The risk management teams of the insurance companies probably have copies of this on every single employees desk, and could be incorporated into their S.O.P. manuals when chatting with a potential "client"!

This manual/publication, from 2010, shows that the average life expectancy of a 65 year old USA citizen is calculated to be 82.6 years of age, as of 2007 findings.

By referring to this publication you can easily see that it also goes into detail about virtually every condition someone might have and how long they might live if they happen to have the conditions noted.

I will say that more and more folks are living beyond age 83, or even age 99, as the miracles of modern medicine have been able to keep us alive longer. The insurance companies plug in those abnormally longer lives to figure out precisely how much to charge everyone in fees, so no matter what, they will profit.

The fact of the matter is that living into our 90's is the exception and not the rule. Insurance companies know that, but regular folks really do not (or don't want to) grasp our own mortality that easily.

Truth be told, most folks who buy these ridiculous products will never see a dime.

How About Paying Ourselves The $50k?

Now here is where I really get confused by some folks' logic for buying one of these insurance products. Let's say we simply invest $50,000 in an account that has a well diversified portfolio of dividend-paying, mega blue chip stocks, like AT&T, GE, Verizon, Exxon Mobil, just as examples. How much would we have if we did not touch the money in 20 years (age 65-85)?

By using a very basic and simple calculator, lets look at some numbers based on the return on investment:

  • A $50,000 investment that returns 6.5% annually (from dividends reinvested of roughly 4%, and an equity growth of 2.5% a year) will be worth roughly $191,000 in 20 years
  • By adjusting the rate of return to the "standard" overall average return of the life of the equity markets, which is around 8%, the total value will be worth $262,000 in 20 years
  • If we outperform the historical averages and have a total return of 10%, the total value would be $402,000 in 20 years
  • If we under-perform the averages and our return was only 4.50% (barely keeping pace with inflation) our total value would be $125,000 in 20 years

OK, so now let's just take the middle of the road amount and assume roughly $300,000 in total value at the age of 85. Not only will you have complete and total access to every penny for 20 years, but if you just let it grow, you will also have complete and total access to a cool $300k, JUST IN TIME!

At age 85, you would then be able to withdraw $20,000 a year to over age 100 if you want or need to, or spend the entire amount on a nice retired residence condo with plenty left over, or use it for anything you feel like using it for. Don't forget, that if you only took out the 4% withdrawal rate so many advisors love to advise, you can take out $12k a year and probably not put a dent in the principal, FOREVER.

My Opinion

Think about all of these products very carefully before you jump into one. If after seeing ALL of the facts, you still feel that it is right for you, then that is up to you of course.

I think that if you want to "give" money to an insurance company, at least they should give you shares for the money you put up, but hey, now I am talking about investing ... right?

Disclosure: I am long GE, XOM, T.