Berkshire-Hathaway, Buffett’s investment vehicle, recently entered into a deal with the insurer Cigna to reinsure some variable annuity guarantees of Cigna. No doubt this will be viewed as Buffett entering the annuity, especially the variable annuity, market and be used as a sales tool for variable annuities. Don’t fall for that line. There are a lot of things wrong with that view.
This article does a good job of laying out what Buffett really is doing, why he’s likely to make money doing it, and why it has nothing to do with whether or not you should buy an annuity. Buffett’s not buying variable annuities for himself. He’s on the other side of the table, and that should make you skeptical about buying a variable annuity.
Buffett’s a smart guy, so I’m sure that he looked at the actuarial life expectancy of the policies, and factored in what I call “the rider procrastination factor.” This Stanism (Stan The Annuity Man speak) is based on an industry estimation that over 60% of lifetime income riders are never turned on by the policy owner. In other words, the person bought the annuity guarantees for a future lifetime income stream, but never seem to turn that switch on. Typical of Americans to have the lifetime benefit and never access it, and I’m sure that Buffett factored that into his decision to reinsure these Cigna policies.