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Best Annuities: Insurance for Living Long

Forbes Magazine authors Ian Ayres and Barry Nalebuff tell us why annuities are so important in “Insurance You Want to Collect.”  While most insurance payments you receive mean that something bad has happened, such as a death or fire, annuities actually protect against the fact that you will live a long life.  Ayres and Nalebuff point out that if you’re being specific, annuities should actually be called life insurance and traditional life insurance truly is death insurance.  It’s an interesting way to look at things to say the least.  While many people hesitate to buy annuities because of the chance that they won’t recoup all of their money, the authors believe that the purchase of an annuity is a small risk very worth taking.

There are two mistakes they think people make regarding the best annuities.  It is tempting to add on a death benefit rider so that if you die soon after buying your annuity, you spouse will receive your payments throughout their lifetime.  Since you receive around 15% more each month without the death benefit, it could be in your best interest to skip that instead of trying to save 15% more each month during your working years.  The authors also recommend prefunding an annuity each year that you are working and starting early.  The more you prefund, you can actually end up with 25% more money in your investment.  Prefunding is just like a private version of social security, but it is actually fully funded by you.  They believe that a great annuity product is inflation-adjusted, prefunded at a young age, and has no death benefit rider.

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