Worth it to buy an annuity?

December 20, 2009 6:21 PM

Apparently I qualify to buy an annuity as part of a class action settlement. Is it worth it?

I got a notice of settlement in the Douglass et al v. American United Life Insurance Company class action suit saying that as a class member, I am eligible to buy a tax-deferred AccumAnnuity II that will accrue interest at 1.25% higher than what's available to the general public. According to this page, the rate would be 3.7% + 1.25% for year 1, going down from there to 3.35% + 1.25% at year 7. That's certainly better than the 2% I'm getting from a CD or savings account.

So, assuming this is not a scam (I don't think it is), should I do it? I don't have much in savings, but I could probably swing a small amount (like $5k) and still keep a healthy emergency fund. I am in my mid-thirties, healthy, married, no kids. I have less than $15k saved for retirement so far, but I'm maxing out my contribution every year. I save about 20% of my income. Aside from student loans at 6% interest and a mortgage I make 13 payments on every year, I have no debt. I live in Massachusetts, if it matters.

Thanks in advance for any advice.

posted by acridrabbit to work & money (7 answers total)

I was in a similar situation many years ago, and did buy the annuity. Within two years, the life insurance company filed bankruptcy and I lost all of it, which thankfully was not much. YMMV.
posted by raisingsand at 6:27 PM on December 20, 2009

The company has a decent AM Best rating, so raisingsand's situation seems pretty unlikely.

Your student loans are costing you 6%, while the best you can do with this annuity is 4.6%. You'll do 1.4% better throwing the money at your loans in the long run.

In the short run though, this may not be worth it, as $5k isn't likely to lower your monthly payment at all, so any gains would only be realized in the long term. A 30-year, 4.6% annuity is going to pay out slightly under $300 a year.* Which ain't exactly chump change, but it's getting pretty close. You may find that the money is more useful to you liquid.

I'd say that last consideration may be the most important. In the very long term, the student loans are your best bet. In the intermediate term, the annuity seems reasonable--it's more money than you'd have otherwise, even if the ultimate net is lower than paying down the loans. In the indefinite short term, you may find that you could use that $5k for something unexpected.

Decide how comfortable you are with the risk of fluctuations to your cash flow and how long a time horizon you're willing to deal with.

*The shorter the term of annuity, the higher the payment, but the lower the ultimate return.
posted by valkyryn at 6:42 PM on December 20, 2009

If the interest rate on debt > return on an investment -->pay off the debt.
posted by dfriedman at 6:46 PM on December 20, 2009

One consideration to keep in mind: class action settlements that result in the injured parties (members of the class) doing more business with the party that injured them seems a poor way to deter future bad action by the party sued.
posted by orthogonality at 7:31 PM on December 20, 2009 [1 favorite]

According to the document you linked, you only get the 1.25% bonus for the first 3 years.

If you invest $5000, the additional 1.25% return is going to amount to less than $200 after 3 years. Is that enough money to entice you into a different financial plan than you'd otherwise choose?

I agree that paying off debt before investing in bonds/annuities makes sense. But be sure to compare to the effective post-tax debt rate if you are able to deduct student loan interest on your tax return. (i.e., if you're in the 25% tax bracket and can deduct student loan interest, your effective loan rate is 4.5%)
posted by monstrouspudding at 7:34 PM on December 20, 2009

class action settlements that result in the injured parties (members of the class) doing more business with the party that injured them seems a poor way to deter future bad action by the party sued.

I get the sentiment here but that doesn't really follow. Each class action suit has its own unique facts and you can't make the inference that one settlement which encourages injured parties to do business with the company that has injured them will induce other companies to get sued. Law (and companies' decisions) does not work that way.
posted by dfriedman at 7:41 PM on December 20, 2009

This is a terrible class action settlement. The lawyers probably made out like bandits and get millions in cash but what do you get? You get to give a crooked insurance company more money! As monstrouspudding pointed out, your theoretical benefit here amounts to only a couple of hundred dollars spread out over several years. You would be better off to put it behind you and continue to pay off your loans, and max out your 401(k) and IRAs for both you and your spouse.

From the sound of it, the insurance company sold you a tax-deferred annuity in an already tax-deferred plan. They are crooks. Stay as far away from them as you can. Hopefully you got most or all of your money back. Take this as a lesson learned to away from deferred annuities and don't mix insurance with investments.
posted by JackFlash at 11:05 PM on December 20, 2009