How to use Projections or Quotes when Choosing Life Insurance and Annuities

In choosing annuities and life insurance plans with cash values, it is a good idea to shop around. In shopping around, decisions should not be made on projections, but on the terms of the contract. Proper decision making would certainly entail some worthwhile investigation. A projection is a quote that anticipates the future fund values given a projected interest rate and defined contributions. A projection should not be the sole basis of a purchasing decision.

An agent once argued that a fixed-rate quote is not a projection. It does not matter whether we are dealing with fixed-rate or variable plans. That a fixed-rate quote is as good as gold is an unfortunate fallacy. Reality has it that the declared interest on a fixed annuity, for example, can fluctuate. Even in the case of a fixed-deposit with guaranteed rates, a projection cannot tell the full story. The provision would usually be that the client must keep the investment to term. The important thing about a quote would be how representative it is of a fund’s past performance and how well it anticipates future performance.

Where quotes on fund values are made available, it is important to know what guarantees are offered. With variable annuities, the average projected interested rate is not likely to be realised. Some companies offer a few columns showing future values at various projected interest rates. While there is usually some indication on the quote that it is only a representation, projections for minimum guaranteed rates are not typically presented to clients. You would actually have to work out what the worst-case scenario is. To make a comparison between a plan that offers declared rates and one that offers fluctuating rates is difficult. It is important not to assume the best, thereby following the principle of financial prudence in planning.

Before being dazzled by projections, you must understand the provisions of the plan outside of accumulation rates. Even those who search for the best offer sometimes make the mistake of going for what appears better on paper. It is crucial to select substance over form and expectations over hope. Special attention must be paid to issues like surrender charges, other penalties and clauses which serve the company too much better than it serves clients.

When I took my first annuity a few months after I started working, the agent breezed through the process. I first became aware of a paid-up clause when I received the contract. The paid-up clause ensured that I had to meet all payment obligations, or else. I eventually had to surrender the underperforming annuity before the company converted it into a paid-up annuity, which would have provided a pension of $53.00 monthly in forty years! I checked that if I surrendered, I would eventually receive a pension thirty times that value if I invested the surrender value alone, with another company. Never allow favourable quotes, haste or sweet-talk from sales representatives to exercise inordinate influence over your final decision.