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Question involving a large life insurance check

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Question involving a large life insurance check

Old 11-03-05, 05:22 AM
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Question involving a large life insurance check

Preface: when my mom died 3 years ago, my dad added my name to his checking account so I could access it with no problems in the event of his death. Because of this, when I log on to my account through the bank's website I can not only look at my account, but his. He doesn't know I can access his spending patterns, and truthfully I don't snoop into them. However, I can't help but see the total in his account because I have have 2 side-by-side links to click on, depending on which account I want to access.
So, tonight I was logging on to check my balance, and notice that my dad's account has taken a hit to the tune of $50,000. Curiosity (and the fear of identity theft) overruled by desire to maintain his privacy (understandably in this situation I think), and I discovered that a 50K check was written to a life insurance company.
Question: how concerned should I be that my dad just gave roughly 70% of his life savings to life insurance? He already has plenty. I'm not too familiar with life insurance, so I don't know if this is typical or not. But it's definately enough to freak me out, because it looks to me like something someone would do if they're anticipating some major health problems.
Old 11-03-05, 05:55 AM
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It sounds like he either wants to make sure you're taken care of in the event of his death or he's planning to purchase a lot of bull semen on the black market.
Old 11-03-05, 07:49 AM
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It's probably worthwhile to discuss this with him. Just want to make sure he;s not being snookered.

(But seriously, your dad, phatboy, a gallon of bull semen, and five chicks).
Old 11-03-05, 10:36 AM
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My guess is that he purchased an annuity.
Old 11-03-05, 11:14 AM
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Originally Posted by tbone
My guess is that he purchased an annuity.
That was my guess as well.
Old 11-03-05, 11:18 AM
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More that likey it is something like that, but definately ask him about ASAP.
Old 11-03-05, 11:47 AM
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I'm a total idiot about these things, but what's an annuity?
Old 11-03-05, 11:50 AM
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It's like the inverse of TAKING the lump sum.

You put aside a large amount of money that is then paid back to you (presumably with interest or some sort of return) over time, like lottery winnings would. The key is if you can invest your money better than the return on the annuity, then you shouldn't do it.

And oftentimes they are written to only provide fund to that person during their lifetimes. So, if the person passes away one year into the annuity, the insurance company keeps the balance.

http://en.wikipedia.org/wiki/Annuity

Last edited by Y2K Falcon; 11-03-05 at 11:54 AM.
Old 11-03-05, 11:57 AM
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Alternatively there are also charitable gift annuities in which instead of taking the money yourself the organization/charity gets the pay out. It's entirely possible that's what was done here, although usually those are set up in the will/instructions to the estate.
Old 11-03-05, 12:14 PM
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Originally Posted by nemein
Alternatively there are also charitable gift annuities in which instead of taking the money yourself the organization/charity gets the pay out. It's entirely possible that's what was done here, although usually those are set up in the will/instructions to the estate.
I doubt you would want the money to go out while you are still alive and might still need it for living expenses/long-term care.
Old 11-03-05, 12:26 PM
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As I said it wouldn't be a usual thing to do, but it certainly is a possibility...
Old 11-03-05, 01:45 PM
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Thanks for the responses. I hadn't even thought of an annuity. I guess I'll just have to bite the bullet and ask him about it.
Old 11-03-05, 10:26 PM
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Yep, talk to him.

From Clark Howard's site (he's a talk show host, consumer affairs):
(emphasis added)
The time to buy an annuity is NEVER! - May 18, 2005
Clark wants to talk again about variable annuities and the damage they can do to seniors’ bank accounts. Road shows where variable annuities are sold are popping up all over the country. The target is “nursing home age” people and the hook is a free meal. Once the salespeople have them hooked, they push annuities with a 7 percent guarantee on investment. Sounds impressive right? Well, what these people aren’t told is that annuities have huge commissions that eat up your money. In addition, the penalty to get out of an annuity is 17.5 percent of the money you invested. And the 7 percent is not a guarantee at all. So, in sum, there is never a time when people – older folks especially - should buy a variable annuity. The groups that are supposed to regulate this industry are doing nothing. So, it’s up to you to protect your money and to tell your relatives about it. If your parents tell you they that they have gotten an invitation to a free breakfast, tell them not to go and treat them to a breakfast yourself.

SEC blasts variable annuities - June 9, 2004
The Securities & Exchange Commission just released a report blasting the sale of variable annuities. These types of annuities contain massive risks and tax problems, and are sold by people who work strictly for commission. They use cute names like “Tax Advantage Account” and “Retirement Savings Account” to make them sound safe. But don’t be fooled; you will have to pay unbelievable expenses each year. You will pay 10 times the amount of fees in variable annuities versus regular mutual funds. If you’re unfamiliar with variable annuities, imagine them as mutual funds wrapped up in insurance plans. The idea is that when you die, if your account is worth less than it was when you opened the account, your relatives will get paid out for insurance. But if you spend the money before age 59 and a half, you get clobbered in taxes. Although the SEC claims that variable annuities are suitable for some people, Clark sees no good reason for anyone to get a type of annuity like this.

Don't spend your money on annuities! - March 16, 2004
Annuities are selling like crazy these days. Statistics in Business Week show that Americans spent $126.4 billion last year on variable annuities. It’s a product Clark wants you to stay far away from these products. Insurance agents try to pitch annuities as “great retirement plans.” In actuality, you’re buying mutual funds that are wrapped inside an insurance plan. It offers you the opportunity to avoid paying tax until you use the money for retirement, which sounds good. In other words, it’s tax deferred. The catch is that these annuities have monstrous expenses. Your money gets eaten up. Tax laws have changed again recently, making it even more of a bad decision to own these things. According to the new laws, the maximum tax on annuities is 35 percent. On regular mutual funds, the maximum you can be charged is 15 percent. But people continue to invest in them. So, what do you do if you already own them? Don’t put any more money into them. And, if someone trying to sell annuities approaches you, run the other way. Annuity salespeople love to target people who own their own businesses and the self-employed, so watch out.

Tax-deferred annuities are money pits - November 19, 2003
Clark has been getting tons of calls from listeners who have been ripped off in annuities. First of all, what’s an annuity? Under the tax code, annuities are an investment vehicle you buy for retirement savings. And money in an annuity grows tax-sheltered until you take it out after age 59. When you take it out, you pay full tax on the earnings. Tax-deferred annuities may have had a place in someone’s portfolio up until the early ‘90s. But at that time, changes were made to the tax code. And today, the only reason annuities are sold is so they can be sold again. Because of that, they are the most expensive investments out there and they have huge commissions. A tax-deferred annuity has expenses that are10 times greater than a low-cost mutual fund. So, with all of the massive commissions and yearly fees, you give up two cents on every dollar. It’s like starting backwards every year. Getting out of annuities is also a hassle. You are charged massive “surrender fees” as high as 7 to 10 percent if you want to cancel the account. So, annuities are much easier to get into than to get out of. Granted, there are several different kinds of annuities. Teachers have annuities for retirement and that may be the only thing available through their work. But tax-deferred annuities are different. So, if you’re in an annuity and you want to get out, you can do what’s called a “transfer” to either TIAA-CREF - tiaacref.org or vanguard.com. They charge much less than regular companies. And, you only want to transfer if you’ve gotten out of the “surrender charge” time, which usually last 5 to 7 years. Another annuity is called an “immediate payout annuity,” and these are very technical and esoteric. The bottom line is that you need to save the maximum you can in your retirement plan at work. That is the first priority. Your second priority is to get out of debt. Opening a Roth IRA is also a good idea. And then start investing for your child’s education. But if a salesman starts pitching “tax-advantaged accounts” or annuities, know that it is not in your best interest.

Stay away from annuities! - June 30, 2003
Congress has changed several tax laws over the last few years and some of them are pretty confusing. On the other hand, some are them are very beneficial to you and me. Income tax rates, for example, have dropped quite a bit, especially for people who make high incomes. People with families are also going to see a nice chunk of change from the IRS. But tax laws phase in and out and have what are called “snap backs.” So it’s hard to figure out what’s going on when everything changes from year to year. But Clark has a very important warning about your money as it relates to the new tax laws. Annuities are now even more poisonous for your pocketbook than ever. Things bought in regular accounts are subject to 15 percent tax, but money put in annuities is taxed 35 percent. Another gotcha is if you take money out of an annuity before age 59.5, you suffer an additional 10 percent penalty. So, the only beneficiaries of annuities are the salespeople who sell them. So, what do you do if you already own an annuity? Stop contributing to it.

SEC says annuities must be disclosed - November 14, 2002
Clark often gets calls from listeners about a type of investment called a variable annuity. A variable annuity is something sales people love to sell because they have monstrously large commissions. Unfortunately, when you buy one of these annuities, you don’t really know how much everything will cost. For every dollar you put in, you end up spending about 2.5 cents in fees and expenses, in general. And if you want out of these investments, you will usually pay between five and 10 percent. One advantage is that the money you put into an annuity isn’t taxed until after you retire. But, you have to own one usually 35 years or longer to make it worth it. Sometimes the salespeople don’t even use the word “annuity” when they sell it to you because of the negative connotation annuities carry. So you may not even know what you’re buying. The key is that whenever you’re discussing investments with someone – even if you’re intimidated or bored – you need to know what you’re buying. One new rule adopted by the Securities & Exchange Commission is that companies are required to tell you what you are buying in what’s called a “prospectus.” Normally, people don’t read these documents, because they are quite tedious and boring. But it’s time to take some responsibility here. Even if you trust this person entirely, read the prospectus. You want to read the “fees, expenses and commissions” section. If someone has taken advantage of you, proving it is nearly impossible. Also, keep an eye on your parents and their investments. Parents who are aging are from a generation that is more trusting, and they may need your help.
Old 11-03-05, 10:42 PM
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Originally Posted by Y2K Falcon
It's like the inverse of TAKING the lump sum.
Sorry, had to snicker when I saw this. I think you're right though, it was probably an annuity.
Old 11-04-05, 11:13 AM
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If it was a whole life ploicy he may have borrowed against it at some point and decided to repay it, but more than likely it is an annuity.
Old 11-05-05, 11:06 PM
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He mentioned it to me tonight. It is indeed an annuity. I asked him if he knew what he was doing, he says the bank told him it was a very good investment to make right now. My understanding from what he said was that he has to leave the money untouched for a certain amount of time while it collects interest. If the money is pulled before that time is up, a certain percentage is taken out of the interest. I'm still concerned he got a bit hoodwinked, but I guess the only thing I can do is trust his judgement.
Old 11-06-05, 11:17 AM
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Originally Posted by Tom Banjo
He mentioned it to me tonight. It is indeed an annuity. I asked him if he knew what he was doing, he says the bank told him it was a very good investment to make right now. My understanding from what he said was that he has to leave the money untouched for a certain amount of time while it collects interest. If the money is pulled before that time is up, a certain percentage is taken out of the interest. I'm still concerned he got a bit hoodwinked, but I guess the only thing I can do is trust his judgement.
Would he mind if you took it a step further? This sounds like it could be dangerous, or, it could be something as simple as a CD. The word "annuity" is not bad in and of itself.
Old 11-06-05, 11:27 AM
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Originally Posted by Y2K Falcon
I doubt you would want the money to go out while you are still alive and might still need it for living expenses/long-term care.
Depends on how well off you are, or generous. It's used a lot when giving money to charities. Depending on your age, you might be able to buy a $500K life insurance policy for a one time cost of $50K. You then pledge that amount to your favorite charity (put it in an irrevocable trust), and have them name a building after you.
Old 11-06-05, 08:37 PM
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I talked to him a little more about it today, and I feel a lot better. Without going into detail right now, what he did was a pretty good deal.
btw-melbatoast, thanks for the e-mail. I didn't get it until today because my fiancee downloaded it to her laptop and then went out of town without telling me I had mail. But, I didn't have a wireless connection where I was at so I couldn't respond back just then. I think I better just change my e-mail here so this will quit happening...
Old 11-06-05, 09:38 PM
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Well, I don't like annuities because I think there are better options, but if he does get one it's best that he went through the bank instead of an insurance salesman. At least the bank won't rape him.
Old 11-06-05, 10:24 PM
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Annuities are like adjustable rate mortgages....I may not like them, but they are still a very good thing depending on one's situation.

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