Guaranteed income of 5% per year for life?

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peter31's picture
peter31
Status: Bronze Member (Offline)
Joined: Apr 1 2009
Posts: 32
Guaranteed income of 5% per year for life?

Good morning

Yesterday we met with an independent financial advisor who explained his firm's investment program including (quoting directly from his firm's brochure):

"An income guarantee for life with the upside of investing in capital markets for increased asset values and higher incomes...A return of capital guarantee through regular withdrawals, regardless of market conditions (my emphasis)...Guaranteed income of 5% per year for life...A 5% guaranteed capital bonus available each year for life if income not taken."

If the economy is growing and the stock market is rising at 5% per year or thereabouts, it would be easy to honour this guarantee.  However, if the economy was contracting and the stock markets were falling at 5% per year, I can't see how this guarantee could be honoured for more than a year or two.  I can see two possible outcomes:

1. The investment firm would discover an obscure loophole buried deep in the small print of the contract which would enable them to avoid making good on their promise; or

2. The investment firm would honour the guarantee for as long as it could make up the difference from its own reserves.  When the reserves were exhausted, the firm would declare bankruptcy and release itself from its obligations.  The personal assets of the financial advisor would be protected.

I would be grateful for any thoughts on this.  Am I missing something here, is there anything I should watch out for in the small print of the contract, are there any questions I should ask the financial advisor? 

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
Re: Guaranteed income of 5% per year for life?

 Sound's like he's pushing annuities on you.  Run for your financial life, for more reasons than one. 

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Re: Guaranteed income of 5% per year for life?
peter31 wrote:

2. The investment firm would honour the guarantee for as long as it could make up the difference from its own reserves.  When the reserves were exhausted, the firm would declare bankruptcy and release itself from its obligations.  The personal assets of the financial advisor would be protected.

Yep. You lose your assets, he doesn't.  Heads I win, tails you lose.  I'm with Ao.  This sounds like an annuity.  If you want to go that route big insurance companies were traditionally a much safer provider.  In our present and future turmoil they are in danger of going under too, and you would lose all your assets.  Even if they pay off, they now own your assets and you have nothing for others to inherit if that matters to you. 

Travlin 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Guaranteed income of 5% per year for life?

Two words:

Run

away. 

james_knight_chaucer's picture
james_knight_chaucer
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 160
Re: Guaranteed income of 5% per year for life?

'A return of capital guarantee through regular withdrawals'

In other words you give us $100, and we will send you $5 a year for the next twenty years. That's not so good is it?

'Guaranteed income of 5% per year for life'

Is there a minimum age at which you can apply for this? Or do they just mean the life of the policy?

My father invested in a similar scheme to this about 20 years ago called Jersey Phoenix Trust. I don't think he could have read the terms and conditions thoroughly though. Yes, it gave brilliant dividends of about 10% for ten years, but at the end of that time, all his cash was gone.

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