Insurance and Annuities

[moda0306]

Annuities:

Has HB discussed or anybody thought about whether, at some point, it'd be smart to purchase an annuity contract for lifetime income?

Insurance:

What are peoples opinions on being properly insured?  My personal philosophy is insure for the big stuff (with high deductibles)... home, life, disability, health, auto liability (part of my theory is that if you have to insure the loss of your car, you probably couldn't afford it in the first place.  A stretch, but I at least limit my comprehensive by having a very high deductible).  I firmly believe it's stupid to insure little things like rings and to have low deductibles.  Insurance is for whollops to my wealth, not pin pricks.

Thoughts?

[AdamA]

auto liability (part of my theory is that if you have to insure the loss of your car, you probably couldn't afford it in the first place.

Agree 100% here.

In general, my philoshphy is the same as yours. 

I'd also add that you should treat an insurance company like a bank where you're going to park a lot of money for a long time.  ie, you want to make sure when you need it, they have it. 

Probably goes without saying on this website, though. 

[moda0306]

Well I've come to realize that while a car is quite an invaluable tool, so is a pen or a computer and price is not always indicative of the value you'll pull from it.  People fool themselves about "maintenance" and "hassle," when an AAA card and good mechanic is all you need to properly prevent anything too inconvenient from happening.  They then use those excuses to purchase a brand new (or close to) car, that they almost always buy on credit, because they can't afford to pay cash for it.  Now they have something that can be destroyed or seriously damaged, but not only could they not afford to pay for the car, they can't afford to replace it either, so they buy comprehensive insurance... often with a low deductible.

My theory is that you should be able to afford your vehicle twice.  Once to buy it, and another time to replace it.  If that sounds asinine, then you probably couldn't afford it to begin with.

[Pkg Man]

Insurance:

What are peoples opinions on being properly insured?  My personal philosophy is insure for the big stuff (with high deductibles)... home, life, disability, health, auto liability (part of my theory is that if you have to insure the loss of your car, you probably couldn't afford it in the first place.  A stretch, but I at least limit my comprehensive by having a very high deductible).  I firmly believe it's stupid to insure little things like rings and to have low deductibles.  Insurance is for whollops to my wealth, not pin pricks.

I agree also.  While slightly off topic, this is part of the problem with health care costs.  For example, why should my insurance premiums be used to pay for my co-workers birth control pills?  This is not something that should be insurable, it is general maintenance at best.  It would be like buying insurance that covers an oil change and rotation of your car tires.  But this is what we get when governments get involved in mandating what type of coverage can be offered and what cannot.

[Storm]

Insurance:

What are peoples opinions on being properly insured?  My personal philosophy is insure for the big stuff (with high deductibles)... home, life, disability, health, auto liability (part of my theory is that if you have to insure the loss of your car, you probably couldn't afford it in the first place.  A stretch, but I at least limit my comprehensive by having a very high deductible).  I firmly believe it's stupid to insure little things like rings and to have low deductibles.  Insurance is for whollops to my wealth, not pin pricks.

I agree also.  While slightly off topic, this is part of the problem with health care costs.  For example, why should my insurance premiums be used to pay for my co-workers birth control pills?  This is not something that should be insurable, it is general maintenance at best.  It would be like buying insurance that covers an oil change and rotation of your car tires.  But this is what we get when governments get involved in mandating what type of coverage can be offered and what cannot.

I totally agree, but it's actually more cost effective for your insurance to pay for birth control than it is to pay for babies... Just saying... 

[Lone Wolf]

Same philosophy here.  Insurance should be insurance.  It needs to be there to shield you from ruin in situations that would truly "break the bank".  Think catastrophic storm damage, house fires, or exceedingly costly medical problems.  Minor fender benders and standard jewelry?  Not so much.

The reason is that insurance providers are allowing you to rent their ability to bear risk.  If you are able to accept this risk yourself, you should pocket the "profit" from taking the risk.  And if you can't, a cheaper alternative is to avoid the risk in the first place.  If the risk is mandatory (such as risks to your house or health that are beyond your control), then insurance is a great idea.

High deductible and only for the "big stuff" is the way to go, I'd say.  The obvious exception are situations where the price of the insurance is subsidized or distorted in some way.

I totally agree, but it's actually more cost effective for your insurance to pay for birth control than it is to pay for babies... Just saying...   ;D

Ha ha... I agree with the premise as well.  Insurance is by nature inefficient and severely dampens pricing signals.  High deductible, catastrophic forms of insurance cause far fewer distortions.

Some states even mandate that you cover things like fertility treatments.  This leads to the working class family just trying to insure themselves against true catastrophe having to subsidize a wealthy person's fertility treatment or hair replacement therapy.  Procedures that are never covered by insurance (for example, Lasik) retain their price sensitivity and generally remain very affordable.

[moda0306]

So are annuities ever good ideas for a PP investor?  I tend to think not, or maybe a very basic minimal annuity (SS seems to fit the bill).  

Basically, I tend to have the impression that these aren't going to be priced favorably and play on the fears of retirees.  I don't think the return would be reasonable enough to make them worth while, especially when you look at the risk-adjusted return of the PP.

[MediumTex]

The PP itself can be very annuity-like in the drawdown phase.

I don't know why you would pay the fees for an annuity when the PP can create a very stable stream of income with built-in inflation protection.

[cowboyhat]

I thought the appeal of an annuity was that it allows you to lay off your risk of outliving your savings in the situation where you are cannibalizing your capital to provide current income. The weakness of the strategy is that inflation may erode real value of the annuity payments to the extent that they become insufficient to support you before you die of other causes. It seems a difficult choice.

[julian]

If there is one thing I am 100% sure of, any fixed index or variable annuity is an absolute 100% scam! If u look closely, you will fnd that at best you will earn 3% on your money. It is very simple math. When an insurance company offers a "bonus" for investing and/or a 6-8% income stream you know it is too good to be true. As a financial professional licensed to sell annuities I can safely say the only peopel who make money in annuities are the fsales person (7-10% commission) & the insurance company. If you are on this site, you are far too smart to invest in something as bad as an annuity.

[moda0306]

How do they work??  My impression is that a retiree takes part of their wealth, say $100k, and pays it to the annuity provider, for which they get a certain dollar amount (maybe adjusted for inflation) that they are guaranteed to receive until they die... sound about right?

So those rates are usually as low as 3%?  That's pretty bad when you consider you're giving up the principal.

If you're 65 and you've invested 25% of your portfolio in 30 year treasuries at 4.6% (as part of the PP), that's 30 years of guaranteed income, plus you get to keep the principal.  Combine that with all the other protections of a PP and you'd think that the PP makes a great retirement asset strategy as well.  Especially when you'll be paying no state taxes on your interest, and capital gains rates on your dividends.

[julian]

How do they work??  My impression is that a retiree takes part of their wealth, say $100k, and pays it to the annuity provider, for which they get a certain dollar amount (maybe adjusted for inflation) that they are guaranteed to receive until they die... sound about right?

So those rates are usually as low as 3%?  That's pretty bad when you consider you're giving up the principal.

If you're 65 and you've invested 25% of your portfolio in 30 year treasuries at 4.6% (as part of the PP), that's 30 years of guaranteed income, plus you get to keep the principal.  Combine that with all the other protections of a PP and you'd think that the PP makes a great retirement asset strategy as well.  Especially when you'll be paying no state taxes on your interest, and capital gains rates on your dividends.

You are 100% correct. I live in Florida & see newspaper ads & hear radio shows that tout 100% BS annuities. It should be illegal