Is The Annuity Your Client Purchased Bad?
November 5, 2011 by Sheryl J. Moore
Lately, consumer inquiries through AnnuitySpecs.com have increased exponentially. One topic in particular seems to be at the forefront of these pre-retirees minds over the last six months: “Is the annuity that I am considering bad or good?”
This was likely fueled by a recent Barron’s article that I consulted on, “The Best Annuities,” which may have created a false impression that annuities are a commodity that Americans can shop for online like they do for their auto insurance.
Listen: there is no such thing as a “good” or “bad” annuity!
What makes an annuity “good?” For me, a long surrender charge is important, as I am pretty young. My retirement dollars are qualified; I won’t need access to them until at least age 59 and a half, so that I won’t be penalized by the IRS. I want to receive the very best credited rate or cap that I can find. So, that being the case, I am going to search for an annuity with a longer surrender charge. After all, the longer the surrender charge, the longer the insurance company has to invest my premiums to earn a return – and the greater interest the insurance company can therefore afford to pass on to me.
When it comes to my “dream annuity,” I don’t want a Guaranteed Lifetime Withdrawal Benefit (GLWB) or Guaranteed Minimum Death Benefit (GMDB). I absolutely love these features and the added protection that they can provide me, my spouse and my beneficiaries. When my annuity’s surrender charges expire, however, I am going to 1035 exchange the contract into a completely different, new annuity. If I elect these riders on my annuity now, I would lose the GLWB or GMDB values in the process of the 1035 exchange.
That being said, if you take my retirement dilemma’s “dream annuity” solution from above and try to sell it to my grandmother, I’d have your head.
My grandma is over 70 years old now and has been retired for nearly five years. Her health is not the best – but she is trying to improve her cholesterol, weight and high blood pressure. If successful, my grandma could easily live to be 90 years old or older. After working for a major telecommunications firm for over 40 years, she wanted to roll her pension into an annuity that could provide a guaranteed income stream that would continue no matter how long she lived. The annuity that best-fit her needs had a shorter surrender charge period so that if an emergency arose, she had depleted her savings and she needed more than 10 percent of her annuity’s value, the penalty for doing such would be relatively low. Grandma’s “dream annuity” also had a GLWB that could provide her with a structured income stream, while affording her the flexibility that annuitization could not offer.
“Good” annuities aside, let’s discuss the “bad.”
At the turn of the century, the words “two-tiered annuity” were uttered in disdain by many in the press. These annuities credited competitive rates and bonuses to the contract during the accumulation phase, with the benefits of the annuity being contingent on annuitization. Undoubtedly lawsuits that ensued as a result of unsuitable annuity sales involving these two-tiered products contributed to the negativity. However, did these lawsuits provide evidence that two-tiered annuity products were unsuitable for everyone? Did these lawsuits mean that two-tiered annuities were “bad?”
No. In fact, two-tiered annuities can most certainly be suitable for some people.
Nearly a decade ago, I had the occasion to speak with a woman who had purchased a two-tiered annuity. She had recently changed employers and decided to roll her 401(k) into a two-tiered annuity contract. Upon hearing about this woman’s chosen retirement solution, I decided to play the devil’s advocate. I asked her if she understood that she must hold the annuity in deferral for five years, and annuitize for a minimum 10-year period certain. I informed her that if she did not follow through as prescribed, she would forfeit her 10 percent premium bonus, her indexed gains as well as any fixed gains on the contract. In addition to all of this, I told her that she would receive only 1.5 percent interest credited on 87.5 percent of the premiums she paid into the annuity, retroactive to day one, if she did not follow-through with these minimum requirements.
“Yep. I know that,” she replied. She explained how she had a money market account with some funds that were “just in case of an emergency.” She had made the informed decision to place the greater portion of her retirement funds into a structured, two-tiered annuity with limited liquidity on purpose. Naysayers be damned, this boomer had taken control of her retirement future and chosen what was right for her, regardless of what she had read in the press.
Do not misunderstand my message here. Before you decide to send me a bunch of hate mail, or pooh-pooh me, know that I do not endorse ANY company or financial product. I am admittedly a big fan of indexed life and indexed annuities – but, I do not think that they are right for everyone.
What I want you to understand is that what is right for me, may not be right for you. And, the best annuity is the one that best suits your needs and goals.
Has there ever been an annuity product that is “bad?” No. Every annuity that is properly-priced is undoubtedly suitable for somebody. Has there ever been an annuity that has been a bad match for the purchaser? Sure.
The exhaustive suitability reviews that are utilized by the insurance industry today, however, are intended to eliminate such cases. These suitability reviews must be conducted by a knowledgeable, qualified insurance professional. This is the only way that one can ensure “good” annuities – which properly address the purchasers needs and goals are the industry standard. Make annuities available for sale via telephone or the web and forego the expertise of the sales professional and you risk consumers receiving the wrong solution for their retirement goals, effectively purchasing someone else’s “dream annuity.”
In light of all of this, I would ask that you not be surprised the next time you speak with me and ask “what is the best annuity?” and hear, after all, “That depends.” Is it the best annuity for me, for you or for someone else?
Sheryl Moore is President and CEO of AnnuitySpecs.com and LifeSpecs.com, indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at firstname.lastname@example.org.