Core Principle Series – Scenario #2 – Jan and the annuity

Jan just turned 68 this year and is glad to have the new year bring the potential of better days. Her husband died last June and gratefully he did have a life insurance policy of $250,000. After burial expenses and some medical bills, she had $200,000 left. One evening her grandson, the responsible one, came to visit and had a really good business idea that he wanted her help with. Before the evening was over Jan wrote him a $15,000 check and hopes that he pays her back when the business is successful. A month later Jan found that the grandson had used her money for a newer truck and had since decided not to pursue the business. Jan was very angry about what happened and wanted to make sure that didn’t ever happen again but didn’t know what to do about it.

Later that week, she received a phone call from the same insurance company that had the life insurance policy of her husband and the person on the line recommended that she put the money she had left in an annuity. Doing so would make it so her family couldn’t get to the money, it would give her a guaranteed rate of return, and would continue to pay a monthly amount until she died. This sounded good and risk free so she put the remaining $185,000 in the annuity.

Two months later, Jan slipped on some water that had spilled on the kitchen floor and fell really hard. When she tried to stand, the pain shooting through her back and leg told her that something was very wrong. Jan found that she had broken her hip. The surgery went well but she found the recovery to be very slow and her balance was never the same. The in-home nurse told her that she needed to have a ramp based sidewalk installed to the back door and have the ‘step down’ floor to the living room filled in. The cost for these things was going to be $20,000. Jan thought that she’d just have to take the funds out of the annuity. When she called to do that, she was advised that she couldn’t do that without cancelling and rewriting the policy and there would be a 10% cancellation fee for cancelling in the first year. She would lose $18,500 of her funds in addition to the $20,000 she needed for the alterations to her home.


We’ll use this scenario to discuss the “10 principles of smart investing” over the coming days. As a reminder, those 10 principles are:

Ten core principles of smart investing:
1. Don’t put all of your eggs in one basket
2. If it sounds too good to be true, it probably is
3. Urgent and only available today = wrong
4. Follow the money
5. Buy low and sell high
6. The balance of risk and reward
7. Fail to plan, plan to fail
8. The endowment mindset
9. Whose money is it?
10. Fact based on an observation of one

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