Over the past decade or two I doubt I‘ve ever had a financial issue create more extreme responses from clients and prospective clients then the subject of Annuities. Just the mention of the word can bring either a frown or a smile to the face of the person I’m speaking with. It’s really interesting to watch when I bring it up in one of our educational workshops with a group of people. How is it that one financial word can bring such a range of emotions and responses?
To better understand the answers that will follow, I often use this illustration. When I say the word “Nitroglycerine” what do you think of? For some reading, the initial response is “TNT” – an explosion. And yet for others reading a smile might come across your face because you are thinking of a small pill to place under your tongue that can save you from a heart attack. Isn’t it interesting that the same word based on your knowledge and personal experience with it, can either kill you or save your life.
I believe this is the fundamental issue with the word “Annuity”. Some have been “sold” the wrong kind of annuity for the wrong reason and feel that it could have financially killed you. It would be like a Doctor prescribing “TNT” for a heart condition. And yet others utilized the right kind of annuity for the right reasons, and it enabled them to achieve a certain financial goal much as when a Dr. prescribes a nitroglycerine pill and it saved their patients life.
So digging a little deeper what are some of the reasons there is so much Chaos surrounding Annuities?
#1 There are 4 different types of annuities that are distinctly different and yet most lump them all together. These are:
A. Single Premium Immediate annuities: These are the oldest form of annuity and basically are turning your deposit into a pension like payment. I personally have only recommended one of these in my career, as for the most part there are more efficient ways available to create retirement income without giving up control of your money.
B. Fixed Annuities: This type of annuity is simply a guaranteed rate of return for a specific period of time. They typically are sold from 2-10 year period of times with 5 years being the most common. These are often used as CD alternatives
C. Variable Annuities: This form of annuity is actually a type of Security in that you can invest in a variety of stock, bond and alternative funds known as “Separate Accounts” inside the structure of an annuity
D. Fixed Indexed Annuity: This is the newest generation of annuities only being created in past 20 years or so. This type of annuity guarantees the principal against market loss much like a fixed annuity but instead of a fixed rate of return, the returns are tied to the performance of an “index” such as the S&P 500. The concept being you get “some” of the up of the market without the downside of the market.
So as you can see, when you just say the word “Annuity” it really doesn’t tell you what type of investment it is, much in the same way saying “Mutual Fund” doesn’t tell you what type of investments your are actually invested in.
#2 There are many variations of each type listed above.
To make things even more confusing there are many different variations of each type listed above. They come in a variety of time commitments, growth potential due to restrictions of the particular insurance company, investment strategies available, penalties, fee structures, and a host of other variations.
#3 There are many different features that can be added to achieve certain goals for a fee.
In my opinion this is where it really creates Chaos. Since annuities are created by insurance companies there are a variety of features that can be added that in essence are “insurance” protections. These can include things such as Enhanced Death Benefits. Guaranteed Income Riders, Principal Protection on Variable annuities that are invested in stock and bond funds, Interest Bonus payments day one, Long Term Care Enhancements, and a host of other features. Most of these features are optional.
#4 Many financial industry professionals misrepresent pros and cons of annuities due to their own personal agenda.
Meaning if you are a stock broker, you would probably prefer people to invest in stock oriented investments. If you are professional money manager, you would probably prefer people to invest in your proprietary portfolio. If you are an insurance agent you would probably prefer your clients invest in your company’s annuities. So commonly financial professionals only focus on an annuities negatives or positives without providing a well-balance overview of annuities.
Hopefully you can see due to the reasons listed above and others not mentioned so this blog post doesn’t become a book, why there is so much Chaos when it comes to annuities.
As an independent advisor who functions in a Fiduciary Capacity this greatly saddens me. Because there are many people whose personal needs and desire would dictate that the right type of annuity with the right features in the right amount can play an important role in assisting them in achieving their retirement goals and yet avoid them due to the negative things they have heard.
On the other hand, it saddens me that I’m frequently reviewing annuities owned by prospective clients that were “sold” to them for the wrong reasons with the wrong features in the wrong amounts and are hindering them in achieving their goals and needs.
If you would like to have a well balanced discussion on annuities to clear up some of the chaos feel free to reach out to me through the contact links on my website or give me a call at (865)288-7685 to see how annuities fit into my Four Cornerstone Process and if they are right for you.
Feel free to also ask for my Annuity 101: Making sense out of the Chaos white paper that will go into great detail regarding the issues raised in this blog.
Have a great day and thanks for reading!