The Society of Annuity Facts and Education (SAFE) responds to “Why I still hate annuities: Here are the reasons these investments are bogus”
April 22, 2019 by SAFE
Dear Mr. Fisher,
We are longtime readers and subscribers to USA Today, and are always interested in discussing the facts about annuities. That said, we found some errors in your article “Why I still hate annuities: Here are the reasons these investments are bogus,” and would like to clarify some misconceptions.
It is important to establish that annuities are insurance, not intended to perform favorably against investments. Insurance has a cost. For that reason, the performance of even variable annuities (which offer the greatest potential return of all annuity types) will not be similar to investments with no insurance component. Therefore, it is disingenuous to compare annuities to investments; these products are not intended to perform similarly.
Some of the points we would like to make follow:
- Those selling annuities, relatively speaking, are paid half of what those selling mutual funds are. On a ten-year annuity, the salesperson would receive an average commission of 5.03% at point-of-sale1. This is less than 0.50% annually over the annuity’s term, yet mutual funds typically pay the seller 1.00% annually.
- While a “single, big sale can fund a year at Yale” on an annuity, that is also true of a mutual fund. Based on the 2019 cost to attend Yale2, the average take-home commission of an annuity salesperson is only 7.50% of a single year’s attendance at this college.
- The suggestion to “buy an inexpensive term policy” for anyone needing life insurance is reckless, as term insurance is only good for a specified term. When that term expires, and the purchaser can no longer qualify for life insurance as a result of health problems, how will they cover their life insurance needs? Unless the purchaser can self-insure, everyone needs permanent, cash value life insurance.
- Indexed annuities generally do not pass the dividends of the index on to the purchaser because the purchaser is not directly invested in the index. Indexed annuities’ performance is merely based on the performance of the index, through the use of options.
- The insurance company does not “keep the rest” of any index performance above-and-beyond the participation rates, caps, and spread rates on indexed annuities. The participation rates, caps, and spread rates declared on these products are a function of option pricing, and the market’s performance above these rates is not retained by the issuing insurance company.
- The potential earnings on indexed annuities are limited through the use of participation rates/caps/spread rates because there is no opportunity for losses on the annuity. The ability to have unlimited upside performance, coupled with no downside risk, is not available in any investment that we are aware of, much less on an insurance product.
- The largest-selling segment of the fixed deferred annuity market is annuities that guarantee the credited rate for a set term, typically the entire surrender charge period. While the rates offered on these annuities are low, relative to indexed annuities and variable annuities, they do offer the guarantee that the purchaser will earn a specified rate of interest every single year of the contract. This is a proposition that is unmatched by other insurance products that guarantee a paycheck-for-life. In fact, these annuities function very similarly to certificates of deposit (CDs). However, CDs tend to credit considerably lower rates than fixed annuities: presently the national average on CDs is only 1.44% (taxable)3, while the average on fixed annuities is 2.63% (tax deferred)4.
- Annuities are most-often used to help Americans with just over $100,000 in investable assets to protect. However, Fisher Investments is far-removed from this demographic of Americans, as the firm only assists the 2.00%- those with investable assets of at least $500,000.
Annuities aren’t “bogus.” There is no such thing as a bad product in any line of the financial services business. There is, however, such a thing as an unsuitable sale. We wouldn’t expect the executive chairman of an investment firm, that sells products that compete against insurance and annuities, to suggest that annuities may be a suitable solution for some. However, we would expect such an individual to limit their public opinions to products where they have legitimate credibility. Saying your “firm often helps people exit deferred annuities” is another way of saying that you make money replacing deferred annuities.
The #1 fear of Americans is running-out-of-money in retirement. Annuities are the only financial instrument that can guarantee the purchaser an income they cannot outlive. As a result, it would seem appropriate that annuities are strategically, and solely-positioned to properly address the concerns of our nation.
While a mixture of stocks and bonds may be appropriate for some, this combination will not solve the purchasers’ needs for a guaranteed paycheck for the rest of their lives. SAFE supports that idea that it is best to listen to each individual consumer’s concerns, needs, goals, and objectives, before suggesting products as a solution. No solution is omitted for consideration prior to such a discussion. This method ensures that each client’s purchase is truly what is in their best interests.
As with all financial products, we encourage consumers to do their research, understand all the terms and, based on their own circumstances, decide what is best for them. Whenever possible use a trusted financial adviser and understand their licenses, know their background and their experience.
Sheryl J. Moore
Chief Research Officer
The Society for Annuity Facts & Education
1Wink’s Sales & Market Report, 4Q2018
4 Wink’s AnnuitySpecs Tool, www.LookToWink.com
The Society for Annuity Facts and Education (SAFE) is a non-profit organization committed to educating consumers about annuities, and providing them with the information they need to consider whether an annuity is appropriate or not. For more information visit us at www.SAFEannuityeducation.org or call us at (800) 952-SAFE (7233).