HomeQualified/RetirementLife Insurance and Annuities may be Right for Retirement Despite Money Magazine

Life Insurance and Annuities may be Right for Retirement Despite Money Magazine

Let me say this first and foremost, I generally like Money Magazine, but I was so angry when reading this month’s issue.  It wasn’t just one article but rather the combination of two articles.  On page 29 there is an article titled, “Keep Your Nest Egg Safe from Uncle Sam” by Karen Cheney and the other titled, “New Doubts about a Once Sure Bet” written by Walter Updegrave.

Ms. Cheney’s article initially discusses the real basics on tax deferred accounts (i.e. max out your 401(k), get in an IRA, maybe a roth if you can).  Then Ms. Cheney uses the title “unusual shelters” and gives us the “gems”:

  1. Retirement plans for the self employed
  2. Non Deductible IRA
  3. Health Savings Account

However, If a person are participating in a 401(k) the person most likely won’t have the opportunity to start a self employed qualified account, and even if, they can start one there will be limits as to what they can put into them since they are participating in a different employer based qualified plan (in her example they were maxing the 401(k) already which would affect what they could contribute to certain accounts).  I will concede that the  nondeductible IRA isn’t a horrible idea and one of my fav bloggers loves his HSA savings strategy (Tough Money Love’s Super Charged Roth-HSA).   However, they are hardly unusual shelters by any means.

This doesn’t seem like a big deal – why did I get Annoyed?

Ms. Cheney’s article is her last section titled, “Say No to Insurance.”  Ms. Cheney argues that insurance based products should never be used.  Her reasoning?

  • Fees on annuities
  • Surrender Charges
  • Cash Value Life Insurance also has “big fees”

So why did I get angry?

One, I generally disagree with the statement, never.  Whenever anyone says never you should be suspect!  I have personally been involved in cases where we used life insurance for purposes of retirement.  Hell, the IRS even has a multiple rulings and guidelines based upon the use of these non-qualified deferred compensation plans! Go ahead and google it, apparently Ms. Cheney did not.  I can usually ignore this ignorant “Suze Ormanesq” advice, but this leads me to my second and third ‘problems.’

Why do I think Annuities and Life Insurance Product May be Reasonable for Some People’s Retirement?

We will ignore the cases of highly paid executives that are looking to save more than the “advanced” (please note the sarcasm) deferred planning Ms. Cheney highlights, and look at every day people (myself included).  My 401(k) is down about 25% this year! Am I worried, not really I believe in the market, but what if I told you there was a product that would limit your downside risk for 2% of expenses and your minimum growth of 5% is guaranteed by a mutual company that has been around for 150 years would you at least be interested in chatting?

Ms. Cheney would then argue that I couldn’t touch the money because of Surrender Charges (e.g. basically a penalty for trying to escape early) – my response? Go ahead and try to take your money out of your 401(k) before 59 1/2 you’ll get bitten by a penalty from the IRS at 10% (on top of income taxes due).

Some people have lower risk tolerances then others, and so is it unreasonable for a person to get their exposure to equities in their 401(k) and then use an annuity to hedge against risk as opposed to a non-qualified regular old investment account?  I think it is reasonable.

My Third Problem

My last problem, is found less than 10 pages after the original article.  It is an article questioning the safety of annuities yet the article clearly states, that not one major insurance company went out of business and in total 2 insurance companies went out of business in 2008.   How many banks went out of business?  Disclaimer:  I have said many times, I work for an insurance company but do not sell products.

Full Disclosure: I work for an insurance company but not in a selling role.  I have never received any commissions for the placement of products.



  1. Great analysis here. As you say, there are exceptions to most every rule of personal finance. I actually have some cash value life insurance that I have had for years and intend to use in retirement when I need some tax free income (e.g. return of premium). I’m not a fan of equity indexed products but a fixed annuity is on my agenda to consider. Keep this good stuff coming.

    And thanks for the mention.

  2. TML,

    Another thing you can do with the Cash Value (depending on circumstances) is borrow against it. This way you let the dividends pay back the loan to a certain extent and you enjoy even more of the the money tax free! This MAY cause the policy to collapose so you have to be really careful.

  3. I agree with your analysis; esp the strategy of using cash value life insurance as part of a retirement plan, providing a more certain level of income.

    Money and kiplinger’s are beholden to the mutual fund industry. Just look at the majority of the ads on their pages (fidelity, Franklin, et al). Their articles consistently favor the “philosophy” of the mutual fund industry which is to invest in Funds.

  4. Well said. I have been using annuities for years with my clients with no problems at all. I am surprised she didn’t mention state guarantee funds as well that insure against insurance companies going out of business in the first place. My state is $300,000 for annuities just in case the insurance company doesn’t make it. Of course that is assuming that the state hasn’t used the funds for something else – like the social security fiasco.

    By the way did you know that with all of SuzeOrmans hate against annuities she actually gave them a good write up in her book – The Road To Wealth? Crazy! I couldn’t believe it! A friend pointed it out as I wouldn’t be caught dead reading it personally. I did read that though and bought one just to show my clients when they say..but annuities are bad and that Suze Orman says.. you know how it goes.

    Thanks for the post!


Please enter your comment!
Please enter your name here

Related Articles

Recent Comments