remind you that if you can act quickly, it is
even better than that with the immediate
10% bonus. ‘And rest assured,’ the agent
might continue, ‘if for any reason both you
and your spouse die before having received
a total of several years of annuity payments
equal to your accumulated balance, then
the insurer will make a final substantial
payment,’ and provide details about such.
The agent will also definitely mention the
insurer’s A or A+ ratings and other factors
to allay any possible concerns or questions
about the insurer’s financial strength. “For
a healthy 50-year-old couple, like you
two, looking for a safe and yet attractive
retirement vehicle this certainly sounds
good, doesn’t it?” Sales manuals and
instructors, of course, teach such language,
and agents know that after asking such a
trial closing question to be quiet and to wait
for the consumer’s response.
WHAT WOULD YOU THINK
continued from page 44
THE BIG QUESTION
Assuming the couple lives another
30 or 35 years, what do you think the
couple’s rate of return (ROR) will be on
this product? Paul, a 52-year-old, Phi Beta
Kappa from an Ivy League school where
he majored in economics and computer
science certainly found this annuity
attractive. His wife, Mary, a year younger
and an economics major as well, was
valedictorian of her class at their alma
mater. Both have worked extensively
in business, now living and working in
Oregon, and currently managing a seven-
figure retirement nest egg. They would not
qualify as anyone’s idea of dummies.
Too Good To Be True?
THE GUARANTEES of this ar- ticle’s retirement annuity have not been explicitly studied, so
no opinion is herein offered regarding
whether or not there are some contrac-
tual provisions that would modify or
constrain the above described annu-
ity’s values if the insurer failed. It can
be a very interesting separate study
to examine what rate or return an in-
surer must actually earn given all of
its actual costs to be able to provide
its “guaranteed” returns. There is a
very fine line between “guarantees”
that are very attractive and “guarantees”
that are too good to be true. Unfor-
tunately, many routinely mistake the
latter for the former; recall Equitable’s
1980s Guaranteed Investment Contracts
(GICs) that virtually forced this insurer
into its second failure in the 20th cen-
tury when it had to be rescued by AXA,
the big European insurer, in the early
1990s. Now this insurer, AXA-Equitable,
rides around most amusingly in a con-
vertible car on TV as the 800 lb. gorilla.
May we all come back from the dead to
such blissful experiences! NU
seemed very attractive, especially since it
was all guaranteed. So they called me, to
ask my opinion.
When I explained that the annual rate
of return over this chosen 35-year period
would be 5.43%, Paul and Mary were both
quite surprised. They thought they had
properly understood the annuity. Paul
explicitly recalled their agent’s calculation.
Mary also trusted her own financial skills
and arithmetic. How could this actual
rate of return be so much lower than what
their agent, who on his web site touts “his
sophisticated mathematical and financial
knowledge,” had explained, or that Mary (no
dummy herself) had calculated? After all,
this annuity’s returns are entirely guaranteed;
this retirement product is not like a typical
mutual fund or other investment where
future performance is uncertain.
(Moreover, such guarantees are
provided by the insurer itself, and hence
are really dependent upon the insurer’s
future financial performance. Life insurers’
financial performances can be and have
been significantly misunderstood, as all
should recall the major financial collapses
of: Baldwin United, Equitable, Executive
Life, General American, Mutual Benefit, etc.
In contrast to bank failures and in contrast
with the public’s perception of insurer
failures, consumers of failed insurers have
often been seriously financially harmed
as regulatory actions to “protect all the
policyholders” typically have involved
“locking-in” policyholders to years of
inadequate returns in order to preserve the
myth that the policy’s purported guarantees
have been preserved. )
A spreadsheet showing the correct
calculation (see “Doing the Math on p.
50) it uses the financial formula for the
internal rate of return on a stream of
payments/investments and receipts/
returns. The agent’s mistake is that it fails
to take into account the compounding
of money over time; it is simplistic,
incorrect, and misleading. As those who
know the financial “Rule of 72” know, if
a sum of money doubles over 10 years,
then its average annual rate of return
is not the 100% gain divided by the 10
