Maybe it was a “60 Minutes” segment that ruined annuities for you. In it, ruthless, dishonest and reprehensible salespeople targeted particularly vulnerable individuals and sold them high-commission annuities with very long holding periods, yielding minimal, if any, benefit for the purchaser.
Or maybe it was your next-door neighbor, Bonnie, who recounted her deceased husband’s ill-advised annuity purchase, which essentially disallowed him access to most of his retirement savings up through the very day he died.
Certainly, you’ve not escaped the overwhelming amount of bad press about annuities’ outrageous expenses, their illiquidity and their confounding riders and benefits.
While some annuity products, by my evaluation, actually are quite awful, I contend the majority of these horror stories from the annuity sales trenches owe blame to the salespeople and not the product.
What it isn’t
Annuities are not mutual funds, stocks, bonds or any other exchange traded Annuities are not mutual funds, stocks, bonds or any other exchangetraded security or derivative. An annuity is defined simply as a fixed sum of money paid out regularly over a consistent period of time. A recurring annual or monthly payment of a fixed amount of money, like your company pension, is an annuity.
Knowing that an annuity is simply a stream of income, it makes sense that many annuity products exist primarily in service of fulfilling that goal at some point in the owner’s lifetime (or after his or her death). Vast and varied are the types of annuity products created by insurance companies, and because products don’t often continue to exist in the absence of demand, let’s consider a few different types of annuities and why they might be used.
But first, let’s investigate why those much maligned annuity salesmen have met the intractable ire of the popular press.
The bad stuff
Some annuities are notorious for hiding their high fees within their riders, subaccounts, bonuses and surrender-penalty structures. And while this ongoing internal cost will reduce an investor’s returns, the potentially greater impact on your money lies in the product’s “surrender penalty.”
Some annuity companies are notorious for imposing surrender periods that disincentivize withdrawing more than 10 percent of the investment per year by imposing high percentage fees on excessive withdrawals. I’ve seen these fees reach as high as 18 percent, and while many products now have no surrender period at all, others can last 20 years or more.
What’s to like?
Annuity products, when sold by knowledgeable and ethical individuals, can benefit the owner in a number of ways.
As an insurance product, its investment value will remain taxsheltered while it is held within the annuity. Many investors who have already maxed out their retirement savings choose to take advantage of the tax-deferred growth available through annuities because these products are not restricted by the same laws that govern IRAs, 401(k)s and other qualified or retirement plans.
Additionally, many of the bells and whistles offered as riders to the annuity facilitate investment in capital markets while at the same time guaranteeing protection of principal or even growth of the investment at minimum defined rates. For the levels of protection, the flexibility of a la carte benefits and the often plentiful internal growth opportunities, it is easy to understand the broad appeal of these products to the right clients at the right time in their lives.
What to know
While regulatory agencies oversee much of the annuity sales markets, too often unscrupulous salesmen run lucrative, if predatory, practices for years right under the regulators’ noses. We’d like to believe that honesty and empathy would prevail, but through years of experience with individuals who have been bilked to great financial detriment, I have come to believe that a modest amount of protection can be achieved through the under-appreciated practice of posing pointed and informed questions before signing anything.
When considering purchasing an annuity, my first question would be, “Why do you believe this to be a suitable investment for me?”
Next up, I’d focus on requesting the “all in cost” of the product. While it’s nice to hear the cost presented in conversation, it’s nicer still to have a document with those costs itemized. Ask for it.
Another good question? Simply ask, “How long is the surrender period on this product, and can I see the surrender schedule?” The surrender schedule lists the penalty that would apply to excessive withdrawals each contract year. In my opinion, very few individuals, if any, need to have an annuity with a surrender period greater than seven years.
The complex annuity
As you can see, these products are incredibly complex and while the benefits often warrant their addition to a portfolio, much consideration should be given to alternate strategies prior to buying an annuity. It probably goes without saying, but find a qualified professional you can trust to review the costs and benefits of any product prior to purchase.
… Let’s investigate why those much maligned annuity salesmen have met the intractable ire of the popular press.
Anthony M Conte is managing partner at Conte Wealth Advisors with offices in Camp Hill and Fort Myers, Fla He has a master’s degree in financial services and the Certified Financial Planner(TM) certification, and he welcomes your emails at tony conte@contewealthadvisors.com
Registered Representative Securities offered throughCambridge Investment Research, Inc , a Broker/ Dealer,Member FINRA/SIPC Investment Advisor Representative Cambridge Investment Research Advisors, Inc , aRegistered Investment Advisor Cambridge and Conte Wealth Advisors, LLC are not affiliated.
Anthony M. Conte managing partner at Conte Wealth Advisors
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