Comments on Ellen Roseman’s articles on annuities in the Toronto Star


Ellen Roseman published good articles in the Toronto Star lately (here and here) about longevity risks, and how it can be addressed by annuities. Below is my email sent to her. I wrote the letter because a few of my own posts in the past year were devoted to related issues, and because there are some rather important omissions made in the article, and specialist expertise is used that under some scrutiny turns out to be a partial and biased response, thereby spreading of less than full truth. Not a rare phenomenon at all, but here it can be easily documented at least. Too bad the article cannot be commented where it appears online; that way at least some of the more careful readers could get warned about the shortcomings. I’m glad to report that Ms. Roseman didn’t take it as a personal attack but responded kindly and with an open mind. It’s important to mention this because the opposite happens so often when one dares to criticize something. The chance for progress and learning is much better if we practice collaboration, questioning, debating, meaningful communication, and exploring jointly in various fields, planning and finance included.
 
   

  • Subject: Comments on your “Getting income for life even if a life insurer fails” Toronto Star article

    Dear Ms. Roseman,

    It’s very good you devoted attention to the issue of financing longevity risks in your May 16 and May 30 articles. I’d like to offer a few critical comments that you may want to incorporate in further articles.

    While it is true that in a common life annuity the purchaser gives up all the money, in return for an income stream of unknown length (so in a sense your using the term ‘gambling’ is perhaps warranted, … especially if one acknowledges that the alternative is also ‘gambling’ about returns and inflation rates), it is also true that survivors’ interests can be properly protected even when buying an annuity. You mentioned the insured annuity concept, and you gave an example of a purchase where there is a 4 year guaranteed payment period should the (in your case joint) annuitant/s die soon. In fact, this guaranteed payments period can be as long as 25 years, or it can last until all the premium is paid back. In addition, some companies offer annuities where there is a lump sum return of (not yet paid out) premium at death. In case of a deferred annuity, should the death happen before the income payment commences, there may be even a good interest paid on the premium that is paid out as death benefit. To mention these features would have been important, I believe; purchasing an annuity is not necessarily and completely such a ‘one-way street’ as you wrote, and consumers’ concerns can often be addressed.

    On the other hand, there are some positive aspects of annuities that probably don’t concern many seniors although they should, and you could have mentioned those when comparing annuities with GICs or bonds. I’m referring to pension splitting opportunities, potential pension tax credit eligibility, potential for creditor protection, probate bypass opportunity, and beneficiary designation advantages. It would have been interesting also to ask why are annuities so poorly promoted. (Hint: check out selling incentives.)

    When you answered the questions of the 77 years old couple, the answers could be somewhat different if careful and full shopping around of what is available had been done. I run quotes today for two people whose 77th birthdays are today. (Annuity calculations, as you most likely know, are done according to exact birthday, not simply by age in years, and premium changes occur very often, … another difference from insurance rates.) In your article, a $140,903.50 premium is given as the price to be paid for a $1,000 monthly income flow for this couple, with a four year guaranteed payment period. The first sign that not careful shopping around for the minimal premium was done is that there is a company that offers this income stream for less: $138,932.21. There is a second indication of discriminatory shopping around as well, and it’s related to the length of the guaranteed payment period selected. If we select a five year guaranteed payment period instead of four, the lowest premium will be better: $138,929.69 or $138,986.28 (depending on whether we’re talking about prescribed or non-prescribed annuities). How can a better annuity be bought for less? It’s because some companies don’t offer annuities with 4 year guarantee, but they offer it with 5.

    The next issue where the discriminatory screening of available choices shows is when you answer the question regarding the inflation protection of the income stream. Instead of a straightforward answer, a 3% indexation is priced. There can be arguments for or against the wisdom of wanting inflation indexation as opposed to fix 3% indexation, of course, but the point here is that there was a question/request, and the answer given doesn’t address that completely. These seniors (and readers) are led to believe that what they were looking for doesn’t exist, or perhaps that the 3% indexation is undoubtedly as good as what they were asking about (and against this assumed equivalence, actually, there can be strong arguments made). In fact, the price for the full inflation indexed annuity would be significantly higher (above $207,000), … but that’s not a good reason for pretending that this option is not even available.

    I noticed that there is no claim in the article about the shown examples being the best available, or about attempting full description of features. Size limitation of the column must be a challenge too. Finally, I’m aware of the benefits of not overwhelming readers with too much details. Still, I think the article would have benefited from more precision and details, and an unbiased scanning of all options.

    Regards,

    Laszlo

    Laszlo Kramar, M.Econ
    Certified Financial Planner
    Phone: (647) 722-9751 (Toronto)
    http://personalfinancialplanning.ca , http://asset-aid.com

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