Annuity Case Studies

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Jim And Jane

Jim and Jane (both age 56) had just returned from Jim’s father’s funeral the previous week. Jim’s father (in his late 70’s when he suddenly passed away) had lived a happy and full life, but he was not particularly financially astute and did not leave his wife in very good financial condition, without even a life insurance policy to fall back on. Jane was determined this not happen to her. Jim needed to get life insurance in place (not just the measly $25K of coverage through his employer), and she was going to make sure of it. She was mentioning this to several co-workers when one advised Jane to talk to her son, a licensed life agent. The next day the co-worker’s son, Josh, called Jane at work and set up an appointment to meet with her and Jim in their home the following evening.

The next evening, Jim and Jane welcomed Josh into their home. They liked him almost immediately. He was a bright, personable, well-dressed, good-looking young man with a very confident air. He showed them various life insurance policies and Jim and Jane selected one they thought would meet their needs and their budget. As they were finishing up the application process, Josh made a casual remark about the economy and the current low-interest rate environment. Jim and Jane quickly agreed it was horrible; their savings could not even keep up with inflation with the current low-interest rates. With a little more casual conversation Josh found out they were keeping $100K (an inheritance from Jane’s mother last year) in a Certificate of Deposit (CD) while they tried to figure out where best to put it.

In a thoughtful manner, Josh said, “Well, would you be interested in learning how to earn 14% on that money for the next ten years – guaranteed?” Jim and Jane were speechless. Would they be interested? Well, of course, they’d be interested! But Josh quickly got up to leave. He was already running late for his next appointment, he said, and couldn’t tell them more right now. But he made another appointment with them for next week at the same time and promised to get their life insurance application submitted and issued as soon as possible.

The next week Jim and Jane again welcomed Josh into their home. He came with glossy brochures and printouts and showed them the product, which he called a fixed index annuity. He likened it to a pension plan with lifetime income they could not outlive and which would continue until the surviving spouse’s passing.

Josh said, “This product is guaranteed by the insurance carrier. They will credit your account 14% simple interest every year based on your initial purchase price. That’s right – if you give them $100K they will credit your account with $14K every year for the next ten years – guaranteed. After the ten years is up, your income account will be worth $240K – guaranteed in writing. There is no other carrier that guarantees such a high-income base value. And after ten years you will be able to start drawing an income of $700/month for life even after one of you passes away.” He also told them other things about the annuity, all of which were factually correct.

Jane was a bit more skeptical than Jim, and she wondered about the safety of their money and how the carrier could afford to make such a guarantee. But Josh assured her they were rated very highly and could make the guarantee because of Jane and Jim’s commitment to keeping the money in the plan for the full ten years. Besides which, the state had a program which would kick in if the carrier ever went belly-up. Jim and Jane were thrilled. They couldn’t fill out the application or write the check fast enough. Before he left, they even gave Josh the names and phone numbers of 4 of their relatives they thought should be in on this good deal too. They certainly slept comfortably that night.

About six months later, around the water cooler at work, Jim was talking to one of his best work buds, Mike. The conversation turned toward retirement. Mike said:, “Yeah, me and Marcy bought one of those annuity things about six months ago. With a bonus, our $100K is guaranteed to grow to $215K in ten years.”

Jim thought: “Ha! I got one on him!” He said: “Really? There must have been something in the water. Jane and I bought one also about six months ago. Our $100K is guaranteed to grow to $240K in 10 years.”

A puzzled look crossed Mike’s face. “Huh. That’s weird. Maybe we bought different kinds of annuities. Marcy and I bought a fixed index annuity, and we’ve been guaranteed an income of $845 per month for the rest of both of our lives after the ten years. How about you?”

Now it was Jim’s turn to look puzzled (and a little bit pale, too). Not wanting to answer the question, he was grateful when a co-worker interrupted to remind them the staff meeting was about to start. Jim and Mike dropped the subject and went off to join the meeting.

On his evening commute home, Jim felt a bit uneasy. How could Mike and Marcy have purchased the same type of annuity with the same amount of money but get a higher payout off of a lower income guarantee? The $145/month difference was $1,740 a year. Over a 10-year period, they would receive $17,400 more than Jim and Jane. How could that be? He was confused. Did he and Jane make a mistake? Did they get cheated? Should he tell Jane? Pulling into his driveway, he decided not to say anything to Jane just yet. He would do some investigation on his own first. After all, he didn’t want to worry her.

Jim and Jane are like many people who do not work with a financial professional on a regular basis. They consult with one when there is a need (notice Jane did not try to buy life insurance herself via the Internet) and readily trust those whom they like and with whom they perceive a connection.


Muriel is a highly successful research scientist in the biotech industry. At age 50 she is a bit burnt out and determined to retire at 60. Early on, she decided science was her specialty, not money, so she has always used a professional money manager at one of the largest and most well-known brokerage houses. And for the most part, she has not been displeased with the performance of her portfolio over the years even though she kept getting switched from adviser to adviser as people came and went through the brokerage house. She is a conservative investor who routinely gives up some gain to obtain safety.

One night she accompanied her boyfriend, Ben to a complimentary steak dinner given by a local investment adviser. The speaker gave a presentation on something called a fixed index annuity. Wow! It looked great. There were apparently many benefits to owning this product, especially if one expected a long life. (After all, with her mother at age 92 and still going strong, Muriel herself could easily have 30+ years in her retirement.) Muriel didn’t pay close attention to all the details (remember, money was not her specialty) but she was impressed. She was also loyal. Declining to make an appointment with the presenter, she made a mental note to call her investment adviser.

So, bright and early the next day Muriel called up Alex, her investment adviser, to inform him she wanted $500K of her portfolio placed into an annuity.

Alex, a charming and persuasive man, did his best to talk her out of it. “Annuities are not for you, Muriel. You are still a full ten years away from retirement. Our analysts are predicting a big growth year for stocks right now. You should stay invested there.”

But all for naught. Muriel was adamant the money be reallocated. Reluctantly Alex acquiesced. He admitted, “Well, I’ll look into it, but I don’t know a lot about annuities.”

Rather than being put off by his admission of ignorance, Muriel took it as a good sign he was apparently upfront and forthright about his shortcomings.

A few days later Alex called her back. “OK, I’ve spoken to a few other people here at the brokerage, and I’ve found a great annuity for you. You place your money into a selection of mutual funds; I can help you pick out which funds would be best for you. But regardless of what the market does, the annuity company will guarantee you 8% per year, and if after ten years you have not withdrawn any money they will double your initial purchase price. Then, they will base your income on the higher of the value of the mutual funds or the doubled amount. It’s a win-win situation! If the market goes way up, you will capture all that growth but if the markets tank between now and then, you still have the guarantee your money will be doubled at the end of the ten years!”

Alex was happy, Muriel was delighted, so she decided to relax her regular conservative investment strategies and opted for some riskier high-growth stock plays Alex recommended for the rest of her investment portfolio.

Six weeks later, Muriel was at a dinner party where the conversation turned toward retirement planning. “As it happens, I’ve just purchased an annuity to use for my retirement,” she announced.

Her dinner partner was very interested. “Really? What type?”

Muriel was thrown for a loop. “Well, the regular type, I guess. It’s an annuity.”

“But what type of annuity? Variable? Fixed?” Her dinner partner persisted in his questioning.

“Fixed, I guess,” she said slowly. “I have been guaranteed 8% a year growth on my money. That is what it is fixed at.” Muriel didn’t like speaking about things she knew little about, and her face was growing red. Mercifully, right then a man at the other end of the table knocked his wine over, and everyone at the table was distracted in cleaning up the mess.

On the way home, Muriel felt a bit nauseous, and it wasn’t from the salmon mousse. What on earth had she bought? What was a fixed annuity and what was a variable annuity and what was the difference between them? And what was this premium thing and why would she want a flexible one? And why hadn’t Alex explained all this? What had she done? As much as she liked leaving things she didn’t know much about to professionals who presumably did, she disliked being caught out in complete ignorance. Alex’s admission of “not knowing a lot” now loomed large before her and started to gnaw on her peace of mind. Never one to hide from a problem, she determined to begin researching annuities on her own.

What she found surprised her. It appeared Alex sold her a variable annuity (not a fixed index annuity), the credited interest rate (often called a roll-up) was 8% simple interest (not compound) based on her initial purchase price, and the fees were a whopping 4% per year.

Muriel is like many people who use financial advisers regularly and rely on them to manage all or most of their financial assets. These “trusted advisers” may or may not have discretionary authorization to make financial decisions for the client but for the most part, the client relies on the adviser to select the best course of action. After all, they are the experts, right? And aren’t they being paid for their expertise?


Bill is an easy-going, go-with-the-flow type of guy who loves to be physically active outdoors. He owns his own small landscape maintenance service and when not working can be found either golfing, swimming, or cycling. He sometimes still gives surfing a go! At age 66 he’s decided to turn his business over to his son and retire.

Bill’s income was always modest, and over the years, life circumstances sometimes prevented him from contributing to his retirement savings at all. However, he did manage to put away some money and gains from the market built the account up to $165K.

He is fortunate in that his late wife’s mother left them a small house very close to the beach. When they moved in about 35 years ago, the property was worth $115K. It is now worth close to $950K. There is no mortgage on the property.

The amount of Social Security retirement benefits Bill is eligible for is not enough for him to live on and still participate in all the activities he enjoys. He knows he’s going to have to dip into his $165K IRA.

As a dedicated financial do-it-your-selfer, Bill prided himself on knowing something about finances. He knew all about the critical rule of only drawing 4% per year from your retirement savings while keeping it fully invested for maximum growth. He didn’t need advice from anyone. As long as he stuck with the 4% rule, he was sure he’d be fine.

Bill called up his discount brokerage house (where he had opened his self-directed IRA oh-so-many years ago) and requested an amount equal to 4% of his IRA. The customer service representative who helped him (he never spoke to the same one twice) noticed he was withdrawing funds from his IRA and offered to transfer him to a financial adviser who could go over his options with him. Perhaps Bill would like to hear about income producing products such as annuities? Or bond funds? Was Bill sure he wanted to keep all of his funds in high-growth vehicles?

Bill was a little alarmed. Annuity? He didn’t need any stinking annuity! He knew all about annuities. Thirty years ago his Uncle Mel had one. Uncle Mel, who keeled over three months into his retirement. The insurance company ended up keeping EVERY last penny Mel had put into the thing. Bill chuckled softly. Did they think he didn’t know anything? “Nah, I don’t need to speak to any adviser. I’m not an annuity type of guy. I’ve got this all planned out already. Keep everything just where it is.”

The next seven months were glorious for Bill as he got into his active, fun retirement. But one morning his son approached him with a serious look on his face. “Hey Pops, you don’t still have all your money in the stock market, do you? It sure is a wild ride these days. Be careful.”

Bill shrugged. “It’s always been a roller-coaster. You just have to stay with it.” He took a look at the paper. There had been some wild swings lately. But wasn’t that just normal?

Five months later, as he approached the one-year anniversary of his retirement, Bill was not so cheerful. The market was down a whopping 27% from where it had been the previous year. He felt more than slightly sick as he gazed at the statement. The $115,632 balance looked dismal. Did he need to stay the course? The market would bounce back, right? The $4,625 he withdrew from his IRA for the upcoming year was a significant drop from the $6,600 he had withdrawn the first year. But he was willing to stick it out. He cut back on some of his activities, canceled his regular ski trip in the winter and just sucked it up.

Things brightened a bit over the next year but not much. And just before the second anniversary of his retirement, while the market as a whole was up slightly (1.2%), the growth funds he was in dropped 3% compared to the same time the previous year. Aarrrggghhh! Bill was beside himself. Another drop in income! Not a huge drop, this was not going in the right direction.

Bill’s friends commiserated with him over their morning get-together at the local coffee shop. His friend Jeff suggested he check out purchasing an annuity. “Bill, with your limited cash you need to make sure it lasts as long as possible. I started out with less than you: $150K. I bought an immediate annuity and am getting $8,250 per year income off of it for life. And if I die before I’ve used up all the money, my daughter is guaranteed to get at least the difference between what I’ve received and what I paid for it. And if I live long enough to receive all of my money back, they’ll continue paying me that same income as long as I am alive to receive it.”

Bill did the math. He was the same age as Jeff. Had he purchased the same product Jeff had, he would be receiving $9,075 per year without ever worrying about his income going down or going away! With his system, he would get less than half of that this year.

The next day Bill sat down at his computer to start researching annuities. Were annuities different now than in Uncle Mel’s day? He quickly found more information than he knew what to do with. A lot of the information was quite negative, with many fancy, impressive-looking websites with many experts (he could tell they were experts because they had initials after their names) adamantly opposed to them. But he did find some positive things. His head was reeling by the time he ended his Internet session.

He decided to take a leap and called his discount brokerage. This time he did ask for the annuity department. The person he spoke to sounded very pleasant and was very helpful although she used a lot of terms Bill didn’t understand and went through the information too quickly for Bill’s taste. But Bill finally made out he could get a 5.75% payout on the $107,677 left in his IRA in an immediate life annuity. This came to $6,191 a year. He thanked the woman for the information and hung up. But darn! He had forgotten to ask what would happen if he dropped dead three months after starting his income from the annuity. He would have to call back tomorrow.

Bill was undecided. Part of him wanted to just take the $6,191 a year and not have the fear his income would continue to be unstable or decrease. He wanted the financial security. But part of him feared something else: he feared he would lose out when the market started going back up. It always did, right? He just had to wait it out, right? If he bought the annuity now, then he could never make that money back. He felt confused and was unsure what he should do.

In the end, Bill’s greed won out. He was confident the market would be coming back. And he wanted to be there when it did. He told himself when his account was back up to his original $165K (he was that sure a significant upswing would be happening) then he would buy the annuity and relax. So he cut back yet again on his expenses, stocked extra antacids for when the market roller coaster gave him indigestion and got a prescription for sleeping pills when he couldn’t sleep due to anxiety.

Additionally, he jettisoned those underperforming funds he was in and selected better funds – the funds which were top-rated last year. He started skipping his morning bike ride and coffee with his friends so he could check on what the market was doing. Retirement was good, yes?

Bill is a typical financial DIY-er (do-it-yourself-er). With a self-directed IRA or other retirement savings fund and information from the Internet they feel they can handle all this investment stuff just fine.