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Annuities 101: The Good, the Bad and the Ugly
Whether you are buying an Annuity, replacing an Annuity, or reviewing the Annuity you already own, Annuityknowitall.com is here to give you the unbiased opinions that you need to make the right Annuity decisions -- with less stress and fewer mistakes.
There are so many moving parts to an Annuity that I am here to tell you it is virtually impossible for you to know all the “ins and outs” of any Annuity!
I’ve been in the insurance business for almost 30 years, and offering my clients Annuities for the past 20 years as a staple of my business. The axiom in the insurance business is that, “Annuities are sold and not bought.” This statement is generally true in many respects. Therefore, educating yourself is absolutely vital – and never more so than when you are considering an Annuity.
Most recently, especially in the state of Florida, many new laws were enacted regarding Annuities, trying to protect America’s “Senior” population during the purchase of Annuities -- and rightfully so, as they are the number-one target of Annuity scams. The other reason is that, for the average person, Annuities are so darn confusing whether one is buying them or even just reviewing the contract on Annuities they already own!
Annuities are Legal Instruments written by attorneys and interpreted by attorneys, and in general, they legally favor the Insurance Company. Your best option is to, “Know thy product or die by thy contract.”
After many years of seeing clients who purchased Annuities from other agents no longer in the business, I can tell you it usually starts with a phone call, and then the client shows me their existing contract. They usually say something like, “What do you think about this one?” after they throw three inches of legal paperwork on the table with a thud. Invariably, I ask them, “Do you understand and know what you bought?” Then, I start by asking questions to see if they’ll ever even use this Annuity for what the Annuity was intended. Most clients never even use the Annuity for the purpose they originally intended, or even what they thought they bought it for!
I get very concerned when clients explain to me how their existing Annuity works and what their agent (who isn’t in the business anymore) told them about how their Annuity works. They believe their Annuity is the best thing since sliced bread. Well, I am here to tell you that, in most cases, there is nothing further from the truth! The Annuity does what the Contract says it will do; nothing more and nothing less.
Oh, and by the way…each and every Annuity Contract is different and unique, and each one does something different. Not only that, all Annuities are not created equal! This is why I am here to help uncover the truth behind any Annuity that you own, want to own, or know about, as it relates to you and your specific needs as an Annuity consumer!
I don’t need to tell you who Clint Eastwood is, but I’ll remind you of one of his most enduring roles in the famous Sergio Leone “spaghetti westerns” that made him a household name: The Good, The Bad and The Ugly.
If you can remember that movie, you’ll be halfway to understanding which Annuity may be right for you.
Any Annuity that fits your specific seeds!
I am not going into great detail on these Annuities; I am just going to preface myself by saying that these are the better types of Annuities for a larger cross-section of retirees and seniors that will fit many of their needs. However, they can be just as complicated as Variable Annuities, but with lower annual fees. More importantly, your principal is protected and not exposed to market risk as it is with Variable Annuities.
Index Annuities may also be confusing and complicated, but offer many benefits over other Annuities for the right investor. Again, you need to know what “Velvet Handcuffs” you’ll be wearing with the product and for how long. You don’t want to buy a 15- or 20-year Surrender Charge Contract if you are age 80 or 85, but at 65 it might work. It just depends on your specifics. Suitability is the key here; your circumstances must be suitable to purchase an Index Annuity, and it must meet your needs in regards to when you need to access your money, and how you can access money.
Any Annuity that does not fit your specific needs!
I have been licensed to sell Variable Annuities since 1982 when there were only three companies offering them. I thought they were a very good product then for younger people who were maxed out on their 401(k) or IRA, and needed an extra vehicle to defer taxes. These products are designed for younger consumers and not for seniors -- and I still believe that today.
Unfortunately, the Variable Insurance Companies were losing sales over the past 10 to 15 years, due to all the attention to the success of Index Annuities. So, they (the Variable Insurance Companies) reinvented the wheel with Variable Annuities. They now work like a Fixed-Index Annuity and an Immediate Annuity, all rolled up into one -- except for one “Bad” thing: The product is still a Variable Annuity with all the fees and charges they had before, but now with bells and whistles the average Senior probably won’t ever use!
I can go on and on here about Variable Annuities, but I will instead give you some reasons why they are classified as “The Bad” in this limited example.
Just so you know, I won’t sell you or anyone else a Variable Annuity, because I believe other Annuities can accomplish the same thing without the fees, and without risking 100% of your principal!
Fees, Fees and More Fees…
Variable Annuities are notorious for fees, and this is where you should start, no matter what the Annuity you are buying or already bought is called. How do you pay for your Annuity? Through fees!
According to Morningstar , the investment research firm, the average expense is 2.44% with a Variable Annuity, but on average I have found it’s actually anywhere from 2.5% to as high as 4.5%, according to my own research and the NASD (now known as FINRA) website. Worse, even if your account is losing money, they still charge you those fees. What kind of investment charges you a fee even when you are losing money? Variable Annuities!
There are many bells and whistles sold with Variable Annuities, but my opinion, and that of many other experts, is that the Death Benefit Rider is the worst of all, and I will explain why.
The Death Benefit Rider:
Basically it gives you a death benefit based on your account’s highest level, and is locked in if you die. Sounds good, right? Wrong! And there are several very important reasons, first being you have to die so someone else gets your money…not that great a proposition, if you ask me. Who wants to die in order to free up the money in a Variable Annuity? No one! You want your investments to grow and make money while you live. This is not a product you want to be stuck with in life or death. I can show you the way to get away from your Variable Annuity, if you want to.
According to Limra, an insurance-industry research group, less than 1% of Variable Annuity policies paid a death benefit from 2002 to 2004.
If you want a death benefit, then buy Life Insurance and don’t buy Variable Annuities for a death benefit.
Here’s how it works: If you die and leave the Variable Annuity to your beneficiaries, it’s all taxable at the beneficiaries’ tax bracket anyway. If you bought Life Insurance, it’s generally 100% tax-free…and you don’t pay annual fees for a death. Makes sense, right? Yes!!!
This is not rocket science; it’s money.
I can’t believe how many Seniors (who are very savvy, frugal, and smart with their money) are conned into buying something they know nothing about and the agents themselves don’t understand.
I mean, it’s astonishing.
The big picture is that you must know what you are buying; if not, don’t buy it.
Before I go any further, I must let you know that it’s impossible for me or anyone else to explain everything you need to know about Annuities in their entirety. The only way to come close is by defining your financial suitability and needs as a starting point, and then finding the product that best fits those needs. That’s what I do, and that’s what I get paid to do.
A Word on Opinions…
Most clients ask their friends, their neighbors, and anyone who they think can help them with their Annuity purchase. This is a good practice, but does not even come close to what you should be doing when it comes to researching the purchase of an Annuity, especially a Variable Annuity.
Any Annuity that sounds too good to be true!
1. Hybrid-Type Annuities
Let’s go in-depth a little bit here, to provide you some insight into my professional opinion on certain Annuities that you may want to stay away from. And that, if you already own one, getting rid of it might be your best option, depending on your specific needs.
Rule number 1: Always get a second opinion from a second source!
That means, don’t ask the guy or gal who sold you the Annuity in the first place if it’s a good Annuity; ask an Annuity Expert.
Rule number 2: Find out if you should replace your old Annuity.
Every Insurance Company and Agent gets paid when you purchase a new product, so of course they will always have a new deal, better than the one you own now. Generally, a new contract will benefit you -- but not always. If you have an older Annuity paying you a Fixed Guaranteed Rate of, say, 3% or higher, it may not benefit you to move it to a new product, because rates have come down. Be careful.
The 1035 Exchange, the replacement, the switching, or upgrading to a new Annuity may not be in your best interest every time, so ask how and why this will benefit you immediately, as well as in the long run. New Surrender Periods lock you up for years to come and you may have limited access to your money, so be aware that there are what I call “Velvet Handcuffs” that come with a new contract.
Rule number 3: Annuities come with Velvet Handcuffs.
Remember, if you’re buying any Annuity, they all come with a large number and variety of rules. The most important thing to know is how those rules affect your ability to access your money when you need it.
You also need to know how they function, and you especially need to pay attention to these terms: Surrender Charges, Penalty-Free Amounts, Annual Fees, Rider Fees, when you can take payments and for how long, how the Death Benefit works, etc., etc., etc.
There are many hybrids of all Annuities and each one may do different things to accomplish your goals as an investor, but for the most part I recommend my clients stay away from the most complex Annuity contracts unless you completely understand how they work or what they will do for you.
I tell my clients, “If I don’t understand it and the company can’t explain it, then how are you going to understand it?”
Most contracts are confusing and complicated, so I only offer my clients the ones I know and understand, and that reach their investment goals and objectives.
If you own an Annuity, want to transfer to another Annuity, or if you just want to review your current Annuity, then contact me and I’ll help you through the tough stuff -- and help you make (common) sense of what Annuities can and cannot do for you.
I never charge a fee, and I am only compensated when -- and if -- you purchase an Annuity from me. My best clients come from my competitors selling them the wrong Annuity products. I have clients who literally took years to realize that I did indeed know something that their Annuity salesmen didn’t know, and that’s when they come to me for a review or consultation!
Whatever you do, be careful. Whether or not you ever use my services, there are too many con artists and thieves in the real world looking to take the unsuspecting for an easy ride with Annuities. So, do your research, ask the questions, and take your time. Never, ever be in a rush -- especially with Annuities, as they are too costly if you make a mistake. As I always tell my clients, it’s your money, not mine, so take your time and make the right decision. And calling us first is the first step to helping you make the right decision.
Retirement Network Advisors