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Sound Advice: July 15, 2020


“An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.”
Ambrose Bierce

One can only marvel at the broad scope of insurance schemes created in the pursuit of fat commissions for insurance agents.  From the simplest plans, such as whole life, to the ultracomplex, which no one understands but promises to provide rewards beyond one’s wildest dreams, it’s an area where fear and greed work together to soften the brain of the buyer and enrich the pocketbook of the seller.  

There are certainly risks requiring the protection of properly selected insurance, but the range of products developed to generate hefty ongoing profits is ever-expanding.  The industry continues its efforts to stay ahead of people who are struggling to understand what these products are and why they need them.

One example is life insurance, which has numerous permutations.  Life insurance is needed to provide protection for lost income when a spouse dies, mortgage debt, and education for children.  These specific risks are well covered by term insurance, which is far less costly than whole life.  The latter, typically sold as a worthwhile investment (which it is not), is more expensive and tends to generate more substantial commissions for the selling agents.

Annuities are worse.  They come in two varieties: fixed and variable.  Both bring big commissions to the sellers.

Fixed annuities, in their simplest form, are akin to rolling the dice.  The agreement provides the annuitant with a regular fixed payment over his/her lifetime.  If you live longer than statistics suggest, you may be a winner.  If you’re gone quickly, you lose and the company wins.  Why?  Because when you buy the policy, you transfer a specified amount of money to the insurance company with no possibility of return.  

For fixed annuities, there are variations both in terms of timing and survivor’s rights that reduce the risk to the buyer, but these variations lower the ongoing payment stream.

Variable annuities are quite different.  For one thing, the funds transferred can be withdrawn.  For another, there is usually no ongoing stream of income.  Their best and perhaps only worthwhile use is as an option for tax-deferred investing when all other ways of sheltering income have been exhausted.  But like most insurance products, the fees for variables can be nosebleed high.  

And then there are the ultracomplex schemes that require sophistication and concentration to decipher the techniques involved in outwitting the IRS, leading to newly found avenues of wealth preservation and enhancement.  Here, too, if it sounds too good to be true, it is too good to be true.  

N. Russell Wayne, CFP®


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