Kathleen: “My Dad got one of those stocking stuffers, but he hasn’t read it. He’s 83 and doesn’t read as quickly as he once did. He reserves his reading hours for the important stuff — the morning newspaper and Sherlock Holmes. So he hasn’t read your discourse on why-not-to-buy-an-annuity, and I never dreamed it would be important to him.

“However, the folks at the brokerage through whom my parents have invested for the last 30 years suddenly tried to sell my folks an annuity last year. My parents asked my opinion about this (a request that is out of character for them, but one that I take very seriously), and I’m trying to advise them well. But I’ve run out of ammunition in what’s turning out to be a battle with the brokers, and I’m hoping you can tell me where to find another stockpile. No pun intended. Here’s the deal.

“My Dad has a generous retirement plan, complete with very generous survivor’s benefits for my Mom, if needed. The two of them live comfortably on that income, so they never touch their investments, many of which are in stocks, bonds, and a family of mutual funds (owned by this brokerage house, of course).

“Last fall, the brokers advised my folks to buy an annuity (knowing little about my folks retirement plan or investments through other brokers). The major selling points were: First, guaranteed income for the surviving spouse. Second, tax free growth.

“We informed the brokers that income guarantees were already in place. We said my folks weren’t interested in paying fees to get in and out of something they didn’t need in the first place (surrender fees were something like 15% prorated over the first 10 years). The brokers urged us to give it some thought anyway and get back to them. We didn’t.

“The guaranteed income didn’t carry much weight, but the tax free growth did. My Dad is one of those folks who firmly believe the government gets way too much of his money in the first place, and just the sight of the I.R.S. acronym is enough to trigger a diatribe. So the brokers scored a direct hit on that one, but it wasn’t enough to sell the annuity.

“They called my folks a few times over the last three months to talk about ‘this or that,’ always asking whether my folks had come to a decision about the annuity. This needling succeeded in making my folks start to doubt their own common sense — after all, ‘if these brokers are so convinced we need this, maybe we really do!’

“Last week, the brokers presented a different package, a ‘Freedom’ annuity with ‘no’ initial or surrender fees. They are advising my folks to invest a tripled amount of money in this annuity, as opposed to the surrender-fee-laden annuity they originally offered. I can only guess that the amount tripled in order to make up an equivalent sales commission for the brokerage house, assuming a no-fee annuity pays a smaller commission than a heavily-fee’d one does.

“In a rather heated discussion at the brokerage house on Friday, I countered the ‘no fee’ arguments by showing my folks the mutual fund management fee numbers in the prospectus. The brokers parried with the statement that these fees were negligible, then launched the most deadly missle. They told my folks that putting their money into an annuity guarantees it against liability lawsuits, something that no other investment instrument can do. ‘If somebody decides to sue you tomorrow for any reason, they could take all your money except what’s in this annuity — the courts can’t touch this money.’

“Now this is a powerful argument to my folks. The older they get, the more menacing the world seems to be. And it makes me livid that these brokers are exploiting this fact by offering them an annuity, of all things, to protect them from the evils out there.

“But I don’t have much time for anger because I’m sure the brokers will be following up a.s.a.p. on this latest attempt. So, I’d be grateful if you’d answer these two questions: First, is it true that an annuity protects assets against liability claims? Second, doesn’t personal liability insurance do the same thing? I.e., if you’re worth $100,000 and you buy $100,000 of personal liability insurance, then your assets are protected, right?”

It sounds to me as if the main evil out there that your folks need to defend themselves against are these brokers.

One thing you might do is use Personal Fund’s Mutual Funds Cost Calculator to check out the funds your folks have been sold. If the fees are high and the performance mediocre, as I suspect may be the case, your folks might begin to see that the brokers’ first interests are their own commissions.

I’m not saying an annuity is never a good idea for an 83-year-old, especially if he/she seceretly “just knows” he/she will live much longer than the actuaries think. (The actuaries think an 83-year-old in good health will live a LONG time. Click here to play Northwestern Mutual’s “Longevity Game” and see how long you and your parents will live.) But the reason for buying an annuity at age 83 is peace of mind, not tax-deferral, and you should shop around like crazy for the best buy — NOT buy it from someone trying to sell it you. Be a BUYER, not a SELLEE.

To begin to get an idea of what sort of lifetime income your folks might expect from a fixed annuity, you might try getting a quote on-line from Berkshire Hathaway Life.

Now as to your specific questions:

<< Is it true that an annuity protects assets against liability claims? >>

Let’s assume that it is. So what? Because, in the first place, your parents are highly unlikely to be sued, and, second . . .

<< 2. Doesn’t personal liability insurance do the same thing, i.e., if you’re worth $100,000 and you buy $100,000 worth of personal liability insurance, then your assets are protected, right? >>

No, but you’re on the right track. Your parents should pay the $150-$250 a year it will cost to buy a $1 million “umbrella” liability policy. In the highly unlikely event they are sued, this extra $1 million would ordinarily be more than enough. If they wanted, they could buy even more.

But note: The coverage you need is not based on the size of your assets, but rather the cost of potential lawsuits. Having $100,000 in liability coverage will not protect even a $38 net worth if you lose $200,000 in a lawsuit. Right? The coverage would still leave you $100,000 short, which would wipe out your $38 net worth and still leave you $99,962 in the hole.

And note: Umbrella liability policies sit on top of your existing auto and homeowners liability coverage. The umbrella carriers require that you carry high levels of liability coverage before they will write that extra $1 million . . . so your folks may need to increase their coverage in order to qualify to buy an umbrella policy. (Note also that umbrella policies cover you against most kinds of personal liability, but not professional liability or liability connected with your business. If you poison all your dinner guests by Cooking Like a Guy™, and they sue, you are covered. But if you open a Cooking Like a Guy™ diner and poison them, or amputate the wrong patient’s leg, you’re not covered.)

To obtain umbrella coverage, start by calling your existing auto or homeowners insurer and asking what they have to offer. As I say, for most people, a $1 million umbrella should not cost much more than $250 a year, if that.

Coming Soon: What Berkshire Hathaway — Warren Buffett’s company — wants to sell you.

 

 

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