The “death Insurance” you propose is called an annuity. It’s a very standard and common product. However in practice it is almost always a bad investment. You get higher returns at less risk in an index fund with a large bond component. There may be very special cases where it makes sense for very wealthy individuals, with particular tax or estate issues, but for most of us an annuity is a ripoff.
That article is about deferred annuities which when used correctly are basically a tax-advantaged retirement account. There are lots of kinds of deferred annuities, some of which are gimmicky, all of which charge some fees to capture some of the tax subsidy.
Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.
So their actuary says, “this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we’ll break even on his premiums”. And the actuary’s boss says, ok, pay him x-.12x.
Banks could compete on that −12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you’re losing out on, and it’s usually far more than the risk you’re mediating by not putting it all in an index fund.
Basically, the bank is an unnecessary middleman. But a) they’ve got good salespeople and b) most people don’t control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.
*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.
When I asked that, it just said “actuaries”. Based on the time of the last edit, I can only assume that you edited it before I actually posted.
Instead of offering annuities they could just put that money into the stock market.
They’re not mutually exclusive. I would assume they’d invest the money they’re holding. I guess it needs to be a little more complicated if you add that you don’t mind a chance of them losing some of your money, but it can still be done.
The “death Insurance” you propose is called an annuity. It’s a very standard and common product. However in practice it is almost always a bad investment. You get higher returns at less risk in an index fund with a large bond component. There may be very special cases where it makes sense for very wealthy individuals, with particular tax or estate issues, but for most of us an annuity is a ripoff.
That article is about deferred annuities which when used correctly are basically a tax-advantaged retirement account. There are lots of kinds of deferred annuities, some of which are gimmicky, all of which charge some fees to capture some of the tax subsidy.
Immediate annuities are “death insurance.”
There’s no reason in principle it has to be a bad investment. What’s stopping banks from lowering prices to compete against each other?
Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.
So their actuary says, “this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we’ll break even on his premiums”. And the actuary’s boss says, ok, pay him x-.12x.
Banks could compete on that −12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you’re losing out on, and it’s usually far more than the risk you’re mediating by not putting it all in an index fund.
Basically, the bank is an unnecessary middleman. But a) they’ve got good salespeople and b) most people don’t control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.
*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.
Can you explain further?
If that’s an honest question, you’ll need to be more specific.
When I asked that, it just said “actuaries”. Based on the time of the last edit, I can only assume that you edited it before I actually posted.
They’re not mutually exclusive. I would assume they’d invest the money they’re holding. I guess it needs to be a little more complicated if you add that you don’t mind a chance of them losing some of your money, but it can still be done.
Yes, sorry, I realized quickly after I posted that “Actuaries” was both inaccurate and unhelpful.
And it’s much more complicated.