Response: Are annuities a good investment?
January 3, 2010 by Bill Stanley
ORIGINAL ARTICLE CAN BE FOUND AT: Are annuities a good investment?
Dear Mr. Stanley:
I am an independent market research analyst who specializes exclusively in the indexed annuity (IA) and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.
I recently had the occasion to read your article on Fox 21 News, entitled, “Are Annuities a Good Investment?” There were a number of inaccuracies and misleading comments in the article, and as Fox 21’s “resident money coach,” I am certain you want to ensure that you are disseminating accurate information to your readers. It is for this reason that I am reaching out to you, to assist with these mistakes.
There are three questions that must be answered, when looking into what type of annuity is right for an individual:
1. What level of market risk am I willing to assume with the annuity?
a. If more concerned about a high minimum guarantee, regardless of the lower level of interest accumulation, consider a fixed annuity.
b. If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest accumulation, consider an indexed annuity.
c. If willing to accept no minimum guarantee, in exchange for the possibility of unlimited interest accumulation, consider a variable annuity.
2. How soon will I be taking income?
a. If within the first year, consider an immediate annuity (offered in fixed, indexed, and variable types).
b. If it is further in the future, consider a deferred annuity (offered in fixed, indexed, and variable types).
3. How many premium payments will I be making?
a. If only a single payment, consider a single premium immediate annuity or a single premium deferred annuity.
b. If making more than one payment, consider a flexible premium deferred annuity.
Although you are correct that less than 10% of annuitants annuitize their annuity contracts (the statistic is actually that a mere 3% of clients annuitize), many simply wish to defer taxes during the accumulation stage of their deferred annuity. Income is not always the objective when an annuity is purchased. Therefore, it is disingenuous to spin the facts to indicate that not annuitizing is wrong.
In addition, your statement that annuitants “never start taking money out on a regular basis” is inaccurate. In fact, according to the American Council of Life Insurers (ACLI), annuitants withdrew $310.0 billion in annuity assets in 2007.Annuitization is not the only way for annuitants to access their money, Mr. Stanley. These consumers also have the option of receiving annual penalty-free withdrawals of their cash value (usually at 10% of the annuity’s value annually), taking loans, accessing monies in the event of terminal illness, disability, nursing home confinement, and unemployment. Guaranteed lifetime withdrawal benefits (GLWBs) give annuitants the option of receiving guaranteed lifetime income, without having to annuitize. Notwithstanding, the consumer also has the option of cash surrendering their contract, in order to receive their full cash surrender value.
Only variable annuities allow the consumer to “invest in sub-accounts.” Fixed and indexed annuities do not. Only variable annuities have fees, fixed and indexed annuities do not.
You are quick to compare annuities to mutual funds, but you fail to note that the risk profile of someone purchasing a “risk money product” like a mutual fund is far different that someone purchasing a “safe money product” such as a fixed or indexed annuity. I am certain your clients would appreciate your recognition of the differences here.
Your estimation that “annuities are a big gamble” is absolutely false. Even Suze Orman is quick to state that an annuity is the ONLY product which can guarantee American consumers an income that they cannot outlive. It is also inaccurate to allude the the payments not yet received by an income annuity purchaser belong to the insurance company. You know very well that the type of payout the consumer selects (i.e. life payout only or life and 20 year period certain, etc.) on their annuity dictates the future payments. With a life payout option, the client will receive payments for life- regardless if they die tomorrow or fifty years from now. With a life and 20 year period certain payout, they will receive payments for the rest of their life, or at minimum for twenty years from the date of purchase. However, the ownership of the annuity payment funds never shifts from the annuitant to the insurance company.
You indicate that annuities are “subject to unusually high levels of abuse by salesmen.” However, a recent study of the National Association of Insurance Commissioners (NAICs) Closed Complaint Database indicates that complaints on the most popular fixed annuities average less than four complaints annually per insurance company. Certainly we do strive for 100% customer satisfaction in this market, but I would say that four complaints per year is quite reasonable.
You indicate that annuities have “very high commissions,” yet the most popular type of fixed annuity has an average street level commission of only 6.47% as of 4Q2009. Compare this to the consistent, generous commissions that are paid annually on mutual funds, and I think that you agree that annuity commissions are very reasonable.
You indicate that “unless [the annuitant] pays extra, the payoff is fixed over time; it does not go up with inflation.” This is not true. Many different types of annuities offer Cost of Living Adjustment (COLA) riders and inflation-adjusted payments for annuitization.
You say that surrender penalties are “a bad thing” and further advise that no individual ever “buy anything with a surrender fees.” This clearly shows your lack of education about insurance product pricing. A surrender penalty is merely a promise by the annuitant to not withdraw all of their monies during a stated period; this allows the insurance company to invest the annuity payments for a specific duration, earn a competitive rate of interest, and pass on competitive interest rates to the annuitant.
Certainly everyone who buys retirement income products should be aware of any limitations on liquidity in their contracts- annuities are no different. Yet, you paint them as inflexible, illiquid products. In fact, annuities are available with surrender charges as short as one year or less. Annuities are some of the most flexible, liquid products available today. All annuity consumers are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties (some even allow as much as 20% to be taken annually). In addition, 9 out of 10 annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact these products pay the full account value to the beneficiary upon death, and I think you would have difficulty implying that these products are inflexible.
You are quick to point out things which you believe are a disadvantage of annuities. However, you fail to point out their benefits. Let me enlighten you with some of the top benefits of an annuity:
1. No fixed or indexed annuity purchaser has lost a single dollar as a result of the market’s declines. Can you say the same for variable annuities? Stocks? Bonds? Mutual funds? NO.
2. All fixed and indexed annuities return the premiums paid plus interest at the end of the annuity.
3. Ability to defer taxes: you are not taxed on annuity, until you start withdrawing income.
4. Reduce tax burden: accumulate your retirement funds now at a [35%] tax bracket, and take income at retirement within a [15%] tax bracket.
5. Accumulate retirement income: annuities allow you to accumulate additional interest, above the premium you pay in. Plus, you accumulate interest on your interest, and interest on the money you would have paid in taxes. (Frequently referred to as “triple compounding.”)
6. Provide a death benefit to heirs: all fixed and indexed annuities pay the full account value to your beneficiaries upon death.
7. Access money when you need it: fixed and indexed annuities allow annual penalty-free withdrawals of the account value, typically at 10% of the annuity’s value (although some indexed annuities permit as much as 20% of the value to be taken without penalty). In addition, 9 out of 10 fixed and indexed annuities permit access to the annuity’s value without penalty, in the event of triggers such as nursing home confinement, terminal illness, disability, and even unemployment.
8. Get a boost on your retirement: many fixed and indexed annuities provide an up-front premium bonus, which can provide an instant boost on your annuity’s value. This can increase the annuity’s value in addition to helping with the accumulation on the contract.
Mr. Stanley, I see that you are a registered representative and sell securities products. I am not certain that the Securities and Exchange Commission (SEC), nor the Financial Industry Regulatory Association (FINRA) would appreciate you advising your readers in this manner. Even your broker dealer’s compliance department would most likely have trouble with the misstatements in this article. I encourage you to contact me in the future, should you have a need for the facts on annuities. I am more than happy to ensure that your clients and Fox 21 receive accurate information on these insurance products.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax