Annuities have gotten a lot of bad press lately, mainly because there are some terrible annuities out there- which I will list later -as well as some terrible “advisers” selling them. The “Top Ten” myths are ubiquitous, appearing on numerous websites such as http://www.annuitiesinstitute.com
These myths appear to be propagated principally by journalists, none of whom have or are required to have any industry training, licensure, or regulatory oversight. Although I wholeheartedly welcome well-intentioned investigative journalism, all I’ve seen so far with respect to annuities is sensationalism. Just because someone somewhere got burned by a crook peddling a lousy annuity does not mean annuities are not excellent options for many investors. If it did mean that, then we should also never buy a used car.
The best defense is an educated consumer. So please take time to review the myths debunked below as well as the ending comments.
Myth #1: Every Annuity is a Variable Annuity
Very often, the risk properties and high expenses of the variable annuity are incorrectly attributed to all types of annuities, undermining consumer knowledge and confidence in non-securities based annuities such as fixed, immediate and indexed investments. Nearly half of all annuities purchased have nothing to do with stock market performance, and, offer guarantees through fixed minimum interest rates, guaranteed lifetime income, and future protection against loss of principal and earnings. They should not be lumped together with Variable Annuities. Plus, you can actually have the best of both worlds with index annuities which allow you to participate in market gains but not losses with lower expenses than most mutual funds.
Myth #2: Your Insurance Agent Isn’t Qualified to Offer Financial Planning
Some investment managers will diminish the value of annuities on the grounds that insurance representatives do not need securities licenses to provide investment advice. However, a securities license is only required when selling speculative investments where the potential for loss exists. Many insurance providers focus on fixed and indexed annuities for retirement where loss to principal and earnings is not an option for our clients. We undergo continual training and professional courses year round to improve our knowledge and capabilities for senior planning. In addition, we are deluged with product offerings from many companies and are therefore kept aware of the full range of annuities available on the market. But as a matter of fact, I am securities licensed so that I can discuss and give advice on most financial vehicles. I also own my own Registered Investment Adviser Firm in Oregon, Duell Wealth Preservation.
Myth #3: Fixed Annuities Will Never Outperform Inflation
The fixed annuity offers security in knowing you are guaranteed a set interest rate over a specific period of time, and is often used to give long term investments more tax-advantaged growth far superior to CDs. Some investment advisers are against fixed annuities because of their perception of future inflation. They feel that some risk must be taken to grow savings to maximize personal wealth. But for investors who cannot afford to lose any more of their life savings, risk should never be a substitute for long term planning and the many available income guarantees.
Myth #4: All Commission Based Insurance Planners Are Biased
It wasn’t all that long ago that fee-based planning was created by large financial firms to ease client fears of non-objectivity. Their goal was to maximize medium term earnings and residual income while having more direct control over client investments. Ironically, many within that field do not even actively sell fixed or immediate annuities for safe retirement income purposes. They focus only on securities with minimum account requirements before they even offer investment management services and support. In further contradiction, earning reports for 2001 showed that only the top ten percent of insurance planners earned as much as the average stockbroker did. Crooks will be crooks no matter how you pay them. Would you rather pay 1.5% of your money for the next 20 years in “wrap” fees to your broker, or, pay a one-time commission of 0% to 5%?
Myth #5: Annuities Are All About Penalties and Surrender Charges
Like the 401k and IRA, the annuity takes advantage of special legislation passed by Congress that provides tax incentives for us to save more money for our retirement. The long term savings approach allows annuity providers to offer higher interest rates, guarantees, tax deferred accumulation, and advantageous planning benefits for tax and distribution planning. No one would typically write negative articles about how an IRA or 401k incurs unnecessary penalties for accessing money prior to age 59 ½, so why would they criticize annuities for similar parameters? IRS makes the rules, not the annuity companies. Plus, annuities exist for which there are no surrender charges, if you are willing to give up some other features.
Myth #6: Never Invest Your IRA Money in an Annuity
A frequent caveat found within tips on how to qualify your financial adviser is to automatically disregard anyone who ever recommends an annuity within an IRA. The should-be obvious exception to this is when safety is paramount, loss to principal is not an option, and a fixed annuity offers a higher rate of return than other forms of traditional conservative savings. More often than not, fixed and indexed annuities way outperform other non-security investments when protection of principal and earnings is paramount. The annuity would have been selected for its interest paying capabilities as a growth investment and it’s pension-like income features, not as a tax deferred tool within a tax deferred account. The tax deferral is free, granted by IRS.
Myth #7: Only Deal with Big Names You Are Familiar With
While people typically gravitate towards big companies with names that are instantly familiar, brand visibility doesn’t automatically equate to the best rates, service, performance or safety. Need I bring up AIG, Enron, Citi, etc.? Many planners can be placed into two categories when it comes to helping select annuities for a retirement plan: those who only sell products that their parent company creates, and those who remain independent to ensure they have access to the widest possible range of products on behalf of their clients. Restrictive affiliations and objective advice do not normally go hand-in-hand as they can limit the guidance you receive for key financial decisions. Make sure the adviser you select is not restricted in the advice and recommendations she can make to you.
Myth #8: Only Deal With Registered Investment Advisors
Much of the criticism towards annuities comes from professional asset managers who earn their commission as a percentage of the total money they manage- and keep at risk, by the way -for “maximum growth” (or, these days, maximum shrinkage). Many of them forget that not every investor is after great wealth in the stock market, and too often seniors are talked into placing their money into vehicles that could instantly reduce their life savings. There is a significant difference between the professional investor who wants to aggressively grow her multi-million dollar portfolio, and the retiree with $150,000 that will likely need every single dollar- and more -to get through their retirement without outliving their savings. Having said that, I do happen to be an RIA. You should
only deal with legal fidcuiaries
Myth #9: Indexed Annuities are Often Sold Inappropriately
Well, this is actually not a myth. It’s true. Every product on the face of the earth has been sold inappropriately. But the opinion of some stockbrokers is that equity indexed annuities are never suitable for retirement planning. A top complaint is that they limit the total earnings an investor can receive during upswings in market performance. The EIA, though, was purposely created as a hybrid investment product that combined the growth potential of the stock market with the safety features of a fixed annuity. While upsides may be capped at 7% to 12%, an investor never has to worry about losing principal or earnings, and typically has several options by which to guarantee minimum interest rates paid regardless of market performance. As far as suitability goes, according to consumer data from the National Association of Insurance Commissioners, in 2004 equity indexed annuities reached sales of $23.3 billion [$50+ bil. by 2008], with only 38 closed complaints nationally, or $614 million of sales for each complaint received.
Myth #10: Our Financial Designation is Better Than Yours
Many planners and consumers rightfully look to financial designations as an indicator of professional service, dedication, and commitment to excellence on behalf of clients. Some investment groups go so far, though, as stating that only two designators should be utilized for financial planning, ChFC & CFP, and that the rest should be instantly dismissed. I tend to agree. But, ironically, many of the members within these two bodies do not even carry insurance licenses [I do], as they focus on risk based investments (oxymoronically referred to as “securities”) for aggressive growth purposes. They offer little support to risk-adverse seniors looking for maximum security and safety for their life savings. Regardless of her financial designations, always make sure that your financial adviser understands your risk tolerance and provides service and products suited to your individual investment requirements. Ask for guarantees. They do exist.
Annuities provide real advantages, ranging from competitive interest rates, to guaranteed income for life, to the often cited tax deferral advantages of compounding principal and interest over long periods of time in preparation for retirement distributions. They also offer many unique and beneficial ways to protect estates, avoid probate, and pass money to future heirs.
Many individuals looking for safety within their investments are being exposed to significant and unnecessary risk to their savings and are not even aware of it. To maximize the safety of retirement plan, ensure you deal with a knowledgeable adviser who can provide independent and objective advice, buy only from reputable companies with a strong performance history in annuities, and never agree to anything that concerns your retirement and financial security that you don’t fully understand. That’s worth repeating: never agree to anything you don’t fully understand.