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The Hamster King
04-06-2009, 08:01 PM
My father died last month and I'm helping my mother with his estate. We've wrapped up most of the details, except what to do with the payout on his life insurance. I'm not looking for professional investment advice, just suggestions in case there's anything obvious we've overlooked.

A little bit of background:

* My mom's in her late 80's. We're looking for something rock solid with a decent short-term return.
* She currently has retirement funds that are adequate for her monthly expenses.
* However, with my father gone she's contemplating moving out of her house (which is paid for) and into a senior apartment where she would be paying monthly rent.

The insurance company is offering to roll the insurance over into an annuity that would provide monthly payments. The payments would be largely tax free. If she went with a plan that would pay out the money over ten years it would be equivalent to the money earning about 1% annual interest. If she dies before all the installments are paid, the remainder would be paid out to her estate.

My question is: Is this a reasonable plan? It seems like most other places to park the money would either be riskier or would tie up the money in ways that would prevent her from drawing on the principal if she needs it.

Harriet the Spry
04-06-2009, 08:09 PM
One popular approach is "rolling CDs." Divide the money among 6 CDs, each coming to maturity in a different month. That way she could access 1/6 of the principal in any month, or all of the principal in 6 months. If this gives her adequate access to the principal, she could probably do better than 1%, especially if the economy improves.

Really Not All That Bright
04-06-2009, 08:24 PM
Why not just stick it in a high-interest savings account? You can get 3% and have access to all of the principal whenever you like.

Ace309
04-06-2009, 08:45 PM
One popular approach is "rolling CDs."

One issue with this is that interest rates are low right now. Since similar rates are available from "money market" deposit accounts (not funds) it may be simpler and provide the same return to go with RNATB's suggestion of a higher-yield savings account. If you go this route, bankrate.com (http://www.bankrate.com/compare-rates.aspx) has a very good tracker for rates.

The advantage of a liquid deposit account is that the rate floats freely, whereas a CD will lock you into a rate for the length of the deposit. The disadvantage is that you will be charged a fee for more than four or six withdrawals per month (not an issue in your case) and there's theoretically a higher rate on the CD because of the certainty of leaving the money deposited (and the penalty for early withdrawal). Neither will risk your principal.

Tom Tildrum
04-06-2009, 09:45 PM
The insurance company is offering to roll the insurance over into an annuity that would provide monthly payments. The payments would be largely tax free. If she went with a plan that would pay out the money over ten years it would be equivalent to the money earning about 1% annual interest. If she dies before all the installments are paid, the remainder would be paid out to her estate.

Are you saying that the principal of the annuity could be drawn upon?

The Hamster King
04-06-2009, 09:49 PM
Are you saying that the principal of the annuity could be drawn upon?Yes.

The Second Stone
04-07-2009, 12:42 AM
1 percent is not all that hot. I have heard that John Hancock is paying 7 percent on annuity. I have no idea whether this is true or not.

Bolt the Nut
04-07-2009, 02:49 AM
My condolences on your Father’s passing. It is good of you to help your Mother.

Regarding the annuity, does the 10 year version continue to pay if your Mother lives beyond 10 years? If it “expires” after the end of 10 years, then a 1% return is very poor, and you would be better served by putting the money in a savings account at a bank (or a money market mutual fund at a low-cost company such as Vanguard). If it continues to pay until your mother passes away, then the low rate is “buying” you the chance at more than 10 years of payments. Whether or not that is a good bet is up to you (and your Mother) to decide.

Two additional thoughts. First, are the annuity payments indexed for inflation? Even a modest annual inflation rate can seriously erode the value of a payment 10+ years in the future. (For example, if you are getting 1% and inflation is 3.5%, you will effectively be receiving ~78 cents on the dollar in 10 years.) Second, what is meant by “largely tax free”? If the insurance payment is tax free, then you would most likely only pay tax on the 1% “interest” component of the annuity, not the “return of principal” invested. If you take the money and invest it in a savings account, you would likewise only pay tax on the interest it earns, not on the original amount deposited (if you withdraw it). In this case, the annuity does not have any real tax advantage, as the vast majority of the payments are simply giving you your money back.

Evil Economist
04-07-2009, 03:24 AM
Why not just stick it in a high-interest savings account? You can get 3% and have access to all of the principal whenever you like.

Which high interest savings accounts are paying 3%?

FRDE
04-07-2009, 04:48 AM
That does not sound like an annuity to me.

An annuity is a bet with the provider that you will last longer than they reckon, and if you die earlier than they reckon, then they scoop the pot.

What they seem to be offering is some sort of long term 'investment' that pays out a combination of capital and interest until the capital is depleted.

Personally I would not deal with them as they are misleading, if intentionally then they are sailing close to the wind, if unintentionally, then they are thick.

Your best bet (at present) is to park the money in a safe bank account, and wait until interest rates rise. The rolling CDs suggestion sounded sensible, but at current rates it might not be worth the adminstrative hassle.

Note: if you buy long term Govt (or other) Bonds and interest rates rise, then the value of the bonds will plummet.

For now, in your case, a bank deposit account involves the least hassle and keeps your options open.

Avoid anything complicated or difficult to get out of.

Really Not All That Bright
04-07-2009, 08:31 AM
Which high interest savings accounts are paying 3%?
http://www.money-rates.com/savings.htm

Of course, if dad's life insurance payout was a significant chunk of money, you can get much better rates than that from E-trade and the like.

The Hamster King
04-07-2009, 09:12 AM
Thanks for the info, guys. This was really useful.

Dead Cat
04-07-2009, 09:24 AM
Whatever you do, it's normally best to shop around, and take professional independent advice (which would normally incur an extra fee) if you are unsure. The best product will depend on what is important to you. For example, if the most important thing is securing an income for life, a lifetime annuity is likely to be appropriate. If capital preservation is the priority, then you want something in cash.

In the UK, "annuity" usually means an investment that is guaranteed to pay a certain level of income for the rest of the annuitant's life, but you lose all the capital at the outset, as FRDE says. This means you are giving up the right to the capital in exchange for a secure income. For an 80-year old woman, the return should therefore probably be around 10%. If it is exactly 10%, that means that if the annuitant lives less than 10 years, the insurance company "wins" - if more than 10 years, they "win".

Bolt the Nut is right to mention inflation - the figures above assume you get a "level" (i.e. non-increasing) annuity. This means that inflation will tend to reduce the real value of future payments. If you want to include an inflation factor in the annuity (i.e. have the income payments increase in line with inflation), this will likely reduce the initial income by about 30-40%.

I can try to explain further if necessary but my answers will be based on my experience of annuities in the UK so may not be that helpful. Again, if in doubt, seek independent professional advice.

Really Not All That Bright
04-07-2009, 09:27 AM
In the UK, "annuity" usually means an investment that is guaranteed to pay a certain level of income for the rest of the annuitant's life, but you lose all the capital at the outset, as FRDE says. This means you are giving up the right to the capital in exchange for a secure income. For an 80-year old woman, the return should therefore probably be around 10%. If it is exactly 10%, that means that if the annuitant lives less than 10 years, the insurance company "wins" - if more than 10 years, they "win".
That's what it means here, too. I would guess that the OP is being sold something like an "annuity-based investment vehicle" or somesuch.

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