Everyone In the Pool

Jonathan Clements  |  May 16, 2015

RISK POOLING is a great way to handle life’s financial pitfalls, and we’re happy to do it—most of the time. When we buy life insurance or we purchase a homeowner’s policy, an insurance company may be selling us the coverage. But what we’re essentially doing is tossing our dollars into a pot with other people. Those who see their homes burn down, and the families of those who die, collect big checks. Those of us who remain standing—and whose homes remain standing—don’t collect on our insurance policies. We’re out of pocket, but you won’t hear any complaints.

Unless, that is, we’re talking about a form of risk pooling known as an income annuity. Income annuities come in all kinds of flavors, as I detail in my latest column. But the idea is basically the same: We pool our money with other retirees. The insurance company that manages the pool is able to promise handsome income for life because it knows that, while some retirees will collect checks until they’re age 95, others will only collect until 75.

Why do folks—who happily buy life, health, disability, auto and other insurance—balk at this type of risk pooling? Maybe it’s the taint associated with the label “annuity.” Most of the abuses over the years, however, have involved equity-indexed annuities and tax-deferred variable annuities, not the income annuities I favor—immediate fixed annuities and deferred income annuities, otherwise known as longevity insurance.

Or maybe it’s the double bummer: If we die early in retirement, not only do we fail to get much back from our big annuity investment, but also we’re well and truly dead. Hate the idea of sinking $100,000 into an income annuity and then keeling over a few years later? There’s a silver lining: At least it isn’t a decision you’ll live to regret.

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