Annuity Myths

Uncertainty in the stock market and the credit crunch many people are very worried about their investments and having enough money to last them. So many are using that fear as an easy target to suggest a negative view of annuities with a special criticism of commissions paid on annuities.

Myth # 1 – Annuities are all about penalties, surrender charges and fat commissions.
Surrender charges are a much maligned advantage of fixed annuities-not a disadvantage. If you have to sell a stock, bond, mutual fund or other investment vehicle – 1 year, 2 years or more down the road to meet an unexpected emergency, can you say for certain what that investment will be worth at the time?

The advantage of the fixed annuity, including Indexed Annuities, is that the minimum value after surrender charges is clearly stated in the contract and in the disclosure statements. The value can only be higher, never lower, than what is expressly stated.

Fixed annuities guarantee a set interest rate over a specific period, which is often used to give long-term investments more growth return and tax advantages than bank certificates of deposit. 

For investors who cannot afford to lose any of their life savings, risk should never be a substitute for long-term planning and new income generation.

The equity indexed annuity (EIA) was created as a hybrid accumulation vehicle, combining some of the growth potential of the stock market with the safety features of a fixed annuity.  EIAs generally offer several options that guarantee minimum interest rates paid, regardless of performance.  While potential upsides may be capped at 7 to 12 percent, investors do not have to worry about losing their life savings.

**Variable annuities are a different product than Fixed or Equity Indexed annuities and we do not promote these products. A variable annuity is also a contract with an insurance company for a specific period of time, but when you deposit money into a variable annuity, the money is used most often to purchase different mutual funds within the insurance contract.

Myth # 2 – Of all the products offered to investors, few are more controversial than annuities.    The conventional wisdom is that annuities are sold, not bought.  In other words, if there were no annuity salespeople, investors wouldn’t buy them.  And/Or – Annuities are generally sold in a high pressure environment by financial planners and salesmen who have a strong economic incentive to sell this product.

The performance of a mutual fund, stock or bond is based on how the stock market performs. Fixed and immediate annuities are not based on stock market performance. They offer guarantees through fixed minimum interest rates, thereby offering protection against loss of principal and earnings.

Annuities are straightforward, with no potential for agent salesmanship or client misunderstanding – – YOU KNOW WHAT YOU ARE GETTING. Nothing is left up to chance or agent interference. The insurance company in the policy (contract) spells out that exactly how your annuity works.

Myth # 3 – The sales commissions associated with annuity sales are higher in comparison to other products. Regarding commissions, the annuity is not a high compensation product. It is structured differently from other accumulation vehicles and over time generates similar commissions to other comparable products. 

The largest difference is: “100% of the deposit” earns interest from dollar one.  Additionally, liquidity is the ability to get your money out of an investment in a timely manner without undue costs. Annuities, like bank certificates of deposit, impose early withdrawal penalties on investors who take their money out before a period of time agreed up front.

Banks do not pay commissions on a Certificate of Deposit.  However, “.they do pay salaries” to employees to open a CD (Certificate of Deposit). Where does the money to pay the salary come from? 

Commissions on common stock, bonds, and mutual funds initially seem to be generally lower than the commissions earned on annuity sales but those commissions come right off the top of the funds invested, meaning less actual money invested.  Over time each product generates similar commissions to other comparable products.

Mutual Funds have: Costs Despite Negative Returns — Investors must pay sales charges, annual fees, and other expenses  regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares.  Capital gains taxes: You’ll incur capital gains tax liabilities just from holding a mutual fund, even if you later sell the fund at a loss. The amount of capital gains tax liability you incur is up to your fund manager—not you—because he or she decides how much stock to sell and how often to sell it.

Stocks Cost:  Each time you “Buy“ or “Sell“ a stock, you’ll pay commissions. Another factor to consider with a stocks is the Volatility: Volatility refers to the amount that an investment’s value tends to fluctuate investment’s value. Generally, individual stocks are much more volatile than mutual funds and annuities. If volatility makes you uneasy, annuities are a better choice than stocks.

Myth # 4 –   A quote from Forbes magazine typifies the low regard in which annuities are held. Tax deferral “is just about the only good thing you can say about these investment products,” Forbes wrote under a headline that asked: “How gullible can investors get?”

Some of the criticism toward annuities comes from professional asset managers who earn their commissions as a percentage of the total money they manage and keep at risk for growth. Too often, seniors are talked into placing their money into vehicles that could instantly reduce their life savings.

There is a big difference between the professional investor who wants to aggressively grow a $1 million-dollar portfolio and the retiree with $150,000 who likely needs every dollar to get through retirement without outliving savings.

The latter may achieve their retirement goals just fine working with a licensed insurance agent or advisor who is not necessarily an RIA.  Financial firms created fee-based planning to ease client fears of non-objectivity. Their goal was to maximize medium term earnings and residual income, while having more control over client investments.

A securities license is only needed when selling speculative investments with the potential for loss. Many insurance providers focus on fixed and indexed annuities for retirement, in which loss to principal and earnings is not an option for their clients. They also undergo continual training and professional courses.

In the final analysis, there may be no real right or wrong in this issue. The only real requirement that planners must satisfy is ensuring that their clients understand the costs (both real and opportunity costs), fees and risks involved in their investments, whether they are annuities, mutual funds, CDs or any other vehicle.