Ben Franklin’s revenge

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Seems a Frenchman, named Charles-Joseph Mathon de la Cour, mocked Benjamin Franklin after Franklin wrote “The Poor Richard’s Almanac”, which taught Americans in the 1700s  how to save and invest wisely…

It’s actually one of his better books… novelettes… pamphlets… whatever.

The Frenchman wrote a parody piece called “Fortunate Richard” where he relentlessly mocked Franklin’s “unbearable spirit of American optimism” (as the Philadelphia Inquirer put it)…

In one of the stories in his parody, the Frenchmen wrote about Fortunate Richard leaving a small sum of money in his will, which could only be used 500 years later… after it had collected a buttload of interest…

Truly insane.

I mean… no one would be dumb enough to try that, right?

Franklin read the parody, which was clearly mocking him and his Poor Richard’s Almanac, and… instead of getting angry… he thanked the Frenchman for giving him such a great idea.

… and so he amended his will and left 1,000 pounds sterling, each, to the city of Boston and Philadelphia. The investment was set up as one of the first known annuities in American history (an annuity is a form of insurance).

That’s roughly $8,800 total. Before his death in 1790, he stipulated 2 payouts… one of them 100 years after his death and the second 200 years after his death.

From the book, “The Elements Of Investing”:

“After 100 years, each city was allowed to withdraw $500,000 for public works projects. After 200 years, in 1991, they received the balance—which had compounded to approximately $20 million for each city.”

Incidentally, that’s a compound annual return of just under 5%… for 227 years!

I find the whole thing really very amusing but… it’s all just foreplay.

Let’s get to the good stuff.

Life insurance and annuities are both built on the same basic platform: mortality and risk sharing.

Insurers take in premiums and invest them. The way those munnies are paid in and distributed in the future determines whether the insurer sells you a whole life policy or an annuity.

Life insurance (since about the early 1900s) is designed so that you pay in small premiums relative to the death benefit and get a big pot of munny later on when the contract matures (usually when you’re very old and near the end of your life)… while annuities are set up to accept a big pot of munny upfront and then they distribute it out over a very long period of time (usually for as long as you live).

So, you can think of an annuity as “life insurance in reverse.”

Both have very similar guaranteed rates of return once you adjust for the fact that annuities don’t embed the mortality charges into the product (they simply take it out of future interest earnings).

In fact, a great way to understand your life insurance policy’s guaranteed return on cash value is to look at your insurer’s fixed annuity interest rate. They will be very close, if not identical.

Most whole life policies actually pay MORE than a fixed annuity only because the insurer pays dividends (a share of the insurer’s profits) in addition to the guaranteed rate, which a fixed annuity does not.

Anywho, something to think about… or not.

Either way, there you have it. Evidence that slow and steady really does win the race.

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David Lewis, AKA The Rogue Agent, has been a life insurance agent since 2004, and has worked with some of the oldest and most respected mutual life insurance companies in the U.S. during that time. To learn more about him and his business, go here.