Monday, March 29, 2010

Allstate: Trying to fool investors?

In a new ad for Allstate, the actor Dennis Haysbert scoffs, "These days, money market funds are paying less than two percent, so forget return on investment. Let's talk about return on insurance." He goes on to say that Allstate will pay you back up to five percent of your premium at the end of the year. So insurance is a better "investment"?

Come on now. Do money market funds ever offer a big return, relative to other options? They typically pay just a couple of points above the short-term interest rates set by the Federal Reserve, because they're very safe investments. That means when the Fed's rates are low, so are money market rates. But the reverse is also true.

So, if the Fed had short-term interest rates at 6 percent, and money market funds were paying 8 percent - much more than Allstate's end-of-year "return" - would Haysbert change his tune? Actually, his comment wouldn't be any more relevant. If money market funds are paying 8 percent, corporate bonds are likely to be paying 10 percent or more. That means money market funds don't stack up any better in terms of "return on investment", whether the Fed sets rates low or high.

Allstate's "return" is actually a way to charge different premiums to people at different risk levels, ex post. If you don't have an accident, you pay less. Sound familiar? That's exactly the kind of "lemon-dropping" that was just made illegal for health insurance companies by the new health care reform.

P.S. One other thing - a certain company called Allstate Bank offers money market accounts of their own... and they only pay 0.35 percent.

1 comment:

  1. This country, a number of people in professions like sales, advertising, real estate, investment, and insurance live on deceiving the people who need to buy things for making a living. When we grew up, the cans and containers were of standard size. Now, if you buy something, the weights are going to be less than what you might think (15 oz for typical 1 lb containers or 29 oz for typical 2 lb containers). What these thugs are trying to do?? I guess we folks are going to fall victim to that trap by seeing the price little cheaper than the true price of 2 lb stuff without realizing that the amount in that container is less. I wonder how these people can go to bed while thinking all the time how to cheat other people!!