A good insurance idea for 50+ year old CD buyers

A fixed annuity is very much like a CD, but they are issued by insurance companies. One major difference is that there are usually IRS penalties for use prior to age 59 1/2. They grow tax-deferred.

They typically are for longer time periods than CDs. A surrender charge is a penalty that one pays for removing money early. In a CD, this is typically 6 months of interest. With a fixed annuity, it is usually significantly hire. They are designed to be longer term products. As an example, an annuity may have a surrender period of 6 years. The surrender charges will decrease every year. For example, it might be 6% in the first year, 5% in the second year, etc.

The key to my idea is that the product needs to have a "non-rolling surrender charge" combined with the ability to add money.

Ex. Mrs. Jones invested $25,000 on November 1st 2003. The product has a 6 year non-rolling surrender charge. This means that her surrender charge period is over on November 1st, 2009.

If she put additional money into her contract on January 13th, 2007, her surrender charge period is still over on November 1st 2009. Any money that she contributes today will have no surrender charges at all because it is after November 1st 2009.

InsuranceExpert said:
This idea is only good for people in their 50's or older because annuities have IRS penalties for money pulled out before age 59 1/2.

If people like this idea but are not in your 50's, it is relatively easy to open an annuity with $100 or less now and let it sit so that when you reach 59 1/2 your surrender period has already passed and you can start using it.

So the point of this post is to describe some financial instrument that doesn't exist? Because the best annuity I currently of is USAA and they have a 2.75% rate, 1.5% min guaranteed, 4% first year bonus and 7 year surrender penalty. There's no company offering 4% rate currently with 2% min guaranteed, first year bonus, and 0 surrender.

If we are gonna describe fantasy financial products, how about a fund that gives 5% above CPI inflation or 5% above oil prices, whichever is higher with a minimum guarantee return of 3%. 10% matching first year bonus. This instrument can be held for 100 years, is completely tax-free, but can be sold early with no penalty. Also on Valentines day, the bank sends your significant other a dozen roses and a box of flowers.

EDIT: I apologize. I re-read the first post and it says 6 years ago those were the annuity rates. That is more reasonable than today's deflation rate. I am still keeping my witty banter in this post such that it may amuse someone

tolamapS said: Ok, thanks for the answers above.

So how come the money in the annuity is allowed to grow tax free. Is this yet another tax loophole benefitting the semi-legal insurance industry?

Its not a loophole, it's a specific law allowing annuities to grow tax free. If I had to guess, it's a trap by the IRS because if you withdraw the money before age 59.5 from an annuity then you owe a 10% penalty on earnings and any partial money you take out is considered earnings first - its not until you take out all the earnings that you take back your principal which is non-taxable.

flyboy said: Other than chasing tax deferred growth in an annutiy versus taxable growth in a CD what is the "insurance idea" that your topic title refers to?

An annuity is an insurance product.

Glitch99 said: InsuranceExpert said: I've seen lots of CD threads and this idea is something that may have some interest for many of those people.

Buy a fixed annuity that has the following characteristics:

1)First year bonus rate
2)History of treating renewal rates fairly
3)Non-rolling surrender charges
4)Ability to contribute additional money at any time
5)Decent guaranteed minimum rate
6)Financially strong company
The big question - how easy is it to find an annuity that includes all 6 of these characteristics?

And number 2 implies that your success with this strategy will still be completely at the mercy of the annuity company. It sounds pretty subjective to be a 'characteristic', could you explain this detail further?

You are making a good point, but that is really the least important characteristic. Also, a company that has a history of treating people fairly will most likely continue. It's in their best interest. If renewal rates aren't fair, brokers won't continue to sell the product and people who are past the time period of having surrender charges will remove their money.

The #1 reason why I'm recommending this for CD buyers is that starting a contract today means that in the future, they'll have a place to put away money that most likely will pay higher than CD's and grow on a tax deferred basis.

tripleB said: So the point of this post is to describe some financial instrument that doesn't exist? Because the best annuity I currently of is USAA and they have a 2.75% rate, 1.5% min guaranteed, 4% first year bonus and 7 year surrender penalty. There's no company offering 4% rate currently with 2% min guaranteed, first year bonus, and 0 surrender.

If we are gonna describe fantasy financial products, how about a fund that gives 5% above CPI inflation or 5% above oil prices, whichever is higher with a minimum guarantee return of 3%. 10% matching first year bonus. This instrument can be held for 100 years, is completely tax-free, but can be sold early with no penalty. Also on Valentines day, the bank sends your significant other a dozen roses and a box of flowers.

EDIT: I apologize. I re-read the first post and it says 6 years ago those were the annuity rates. That is more reasonable than today's deflation rate. I am still keeping my witty banter in this post such that it may amuse someone

Just to be clear. This product exists today, but your description is off. The 4% rate isn't the current rate. It's only the rate for new money. The surrender charges are non-rolling, so if someone contributed money today and the contract was started 6 years ago, their new money would get 4.25% and they could get it out with no surrender charges. The rest of their money would still be getting over 3%.

Basically, what is being created by opening a contract is that in the future, one will have what should be the best place to put short term cash.

I would be very skeptical of anything that is pushed by people who would benefit from it. Especially by a group that pretends to be a professional group but has no code of ethics that governs their behaviors. If I had to buy such a product I would treat it just like I am buying a used car from a used car dealer. I wonder what Suze Orman and alike say about annuities.

RS4Rings said: InsuranceExpert said: A fixed annuity is very much like a CD, but they are issued by insurance companies.
Have had these pushed on me many times but I have one reason that keeps me from doing them, Unlike CD's they are not federally guaranteed. The insurance company guarantees them and most likely you wont have a problem if you go with one of the big companies. But I want absolute zero risk on my money and don't want to worry about them going BKIs AEG big enough?

RS4Rings said: InsuranceExpert said: A fixed annuity is very much like a CD, but they are issued by insurance companies.
Have had these pushed on me many times but I have one reason that keeps me from doing them, Unlike CD's they are not federally guaranteed. The insurance company guarantees them and most likely you wont have a problem if you go with one of the big companies. But I want absolute zero risk on my money and don't want to worry about them going BK

I'm really interested in hearing more from you, RS4Rings, and all of those that "greened" his post. For instance, I'm curious how much more would a fixed annuity have to pay than a bank account for you to be willing to put in some money? 1%, 2%, 3%,4%, 5%?? I agree with you that company strength matters. It seems to me that if the big, strong mutual insurance companies are going to fail, the value of the FDIC insurance isn't going to have much meaning for bank accounts.

My client from earlier in this thread wants complete flexibility with her money. She's getting 4.25% and can remove her money at any time. The money is with a 150 year old AAA rated insurance company. Is this really too much risk for you? Please take this as a question and not an argument.

katx said: Here is what Suze Orman has said about variable annuities:

“I hate them with a passion – a passion! – especially in a retirement account like an IRA. Variable annuities have all these extra fees and tax issues and penalties, but – oh, that’s okay! – because they give you a tax deferral. But a retirement account is already tax-deferred without all those fees. It’s absolutely ridiculous. I think variable annuities exist for one reason only: to make money for the financial advisers who sell them.”

Here is my guess: next to whole life, annuities give the highest commission to ins salespeople.

That's nice that Suze feels that way about variable annuities. How does she feel about house plants? I ask because they are of equal relevance to this conversation.

The commission also carries no relevance because it's not paid by the client. How much did the bank teller earn as a bonus when you bought your CD? Who cares. It has no relevance.

FWF, you are missing out on a good thing here if you think that I'm some insurance guy just trying to sell you something here.

InsuranceExpert said: flyboy said: InsuranceExpert said:
This idea is only good for people in their 50's or older because annuities have IRS penalties for money pulled out before age 59 1/2.

If people like this idea but are not in your 50's, it is relatively easy to open an annuity with $100 or less now and let it sit so that when you reach 59 1/2 your surrender period has already passed and you can start using it.

In general, you are correct. However, I simply don't know if any annuities exist with the characteristics that I described that will allow someone to start with a contribution this small.

They are out there. In general though they are offered by companies that only sell through captive agents. I own one with $75 in it. I have not seen such a product sold by a broker, you are correct about that.

Xnarg said: katx said: I would be very skeptical of anything that is pushed by people who would benefit from it...Repeat that daily.

Is there anything that you purchase that someone doesn't benefit from the sale? I can't think of anything.

InsuranceExpert said: The money is with a 150 year old AAA rated insurance company. Is this really too much risk for you? Please take this as a question and not an argument.New York Life?

InsuranceExpert said:

Who is AEG? Maybe you are talking about AIG. Did anyone who had a fixed annuity with AIG not get paid?
Only because the Government bailed them out, Do you think bailouts will keep happening? I don't.

InsuranceExpert said: katx said: I would be very skeptical of anything that is pushed by people who would benefit from it. Especially by a group that pretends to be a professional group but has no code of ethics that governs their behaviors. If I had to buy such a product I would treat it just like I am buying a used car from a used car dealer. I wonder what Suze Orman and alike say about annuities.

Skepticism is fine. Not trusting insurance agents is fine. Treating the purchase like a used car purchase is fine. Being clueless to the product is not so fine.I agree with all your points, even the part that I am clueless.

We have a fixed amount of time in our lives. We also have interests in certain subjects and get bored with others. I cannot research everything to death myself. After doing research on a subject myself, my best approach to "finding facts" -- be it in politics, social issues, religion, finance, car repair, choice of AC -- is to listen to expert advocates of both sides and make up my mind based on the quality of their positions (much like what a jury does).

Based on comments by likes of Orman and my previous series of exchange with you, I would not touch an annuity with even an 11 feet pole.

What happens to the money "saved" in the annuity when the holder dies?

soxfan1 said: katx said: InsuranceExpert said: katx said: I would be very skeptical of anything that is pushed by people who would benefit from it. Especially by a group that pretends to be a professional group but has no code of ethics that governs their behaviors. If I had to buy such a product I would treat it just like I am buying a used car from a used car dealer. I wonder what Suze Orman and alike say about annuities.

Skepticism is fine. Not trusting insurance agents is fine. Treating the purchase like a used car purchase is fine. Being clueless to the product is not so fine.I agree with all your points, even the part that I am clueless.

We have a fixed amount of time in our lives. We also have interests in certain subjects and get bored with others. I cannot research everything to death myself. After doing research on a subject myself, my best approach to "finding facts" -- be it in politics, social issues, religion, finance, car repair, choice of AC -- is to listen to expert advocates of both sides and make up my mind based on the quality of their positions (much like what a jury does).

Based on comments by likes of Orman and my previous series of exchange with you, I would not touch an annuity with even an 11 feet pole.

You do realize that variable annuities and fixed annuities are completely different products right? That would be like saying I don't want auto insurance because I heard that life insurance is a scam.

Fixed annuities have no internal fees that the customer sees at all. The rate you are quoted in a rate for term policy remains the same for the entire period, just like a CD. In ones with the bonus rates, you are somewhat at the mercy of the insurance company, but like IA said the companies that tend to pay well get a reputation for that and continue to pay well.I have to be honest. I had no idea the two were different. In fact I did not even notice the difference in the term until someone mentioned it. I will be further honest: I won't want to buy even aspirin from a snake-oil salesman. Sorry.