Annuity greed trumps common sense
January 9, 2013 by Stan Haithcock
Every day I receive calls and emails from people who say things like, “I just bought a 7% annuity” or “the annuity I own gives me all the upside and no downside” or “I bought the annuity because the company gave me a free bonus on my money.”
Unfortunately, they usually are calling me with the hope that I will validate their purchase and tell them that what they believe about their annuity is true. A lot of times they end up arguing with me because they can’t accept the contractual facts. It’s not only sad, but tragic because those people will eventually find out the truth about their annuity the hard way.
Everyone wants to think that they are more savvy than their friends, and that they have found a better deal. I’m sure that this was part of Madoff’s subtle strategy. That strategy is to make people feel that they are getting something that others are not and that makes them superior to the next guy. Annuity agents feed into this greed as well and have figured out if they tell you what you want to hear, then a lot of you will believe it to be true.
Below are just a few of the comments taken directly from recent conversations, and the true translation behind the dream.
‘I got a free 10% upfront bonus from the annuity company’
If you buy an annuity for the bonus, then its like buying a car for the stereo. Nothing in life is free, we all know that. Most of the bonuses offered are vested and you are charged an annual fee as well. Bonuses do work in some specific situations, but only when factored with the contractual guarantees.
However, that’s not how most agents push them.
‘I just bought a 7% annuity’
With the 10 year Treasury below 2%, there is NO annuity that has a yield of 7% (or 6%, or 5% for that matter). The 7% is an income rider and can only be used as a lifetime income stream. IT IS NOT YIELD. You cannot get it out lump sum and that total goes away if you die before accessing it for income.
Income riders work for target date income planning, but the agent wants your greed instinct to believe you have just found an unbelievable yield.
‘My annuity gets all the upside, and no downside’
This is a common sales pitch for the Indexed Annuity salesperson. Indexed annuities do protect the downside, but they provide very limited upside historically. There are caps on the upside which means that if the cap is 4% and the S&P 500 index grew 15%, then you would get 4%.
Also, with the majority of index annuities, you are a slave to the contract anniversary date, because that is when the annual growth is calculated and locked in.
‘I get all the upside, and a guaranteed floor as well with my annuity’
This is the variable annuity pitch, and one of the main reasons variable annuities represent over 75% of all annuities sold annually. The reality is that your choice of mutual funds (called separate accounts) are usually limited or poor performers, and the guarantee is usually an income rider that can only be used for income. You CAN’T have your cake and eat it too!
‘My annuity doubles for long-term care’
This is also part of some Indexed Annuity pitches. This benefit is actually for confinement care, not long-term care coverage, and is very limited and very hard to access the benefit. There will be horror stories in the future when people find out that their annuity really doesn’t provide long-term care.
This benefit should ONLY be owned as a small supplement to traditional long-term care, and not as a standalone solution.
‘I can take out 10% every year for free and it doesn’t affect my annuity’
Logic would tell you that this isn’t true, but that doesn’t prevent people from believing one of the oldest annuity misrepresentations that agents still use. The majority of deferred annuities will allow you to take 10% out of your annuity penalty free. However, taking money out will subtract from your total and will affect the contractual guarantees.
If an agent ever pitches a “too good to be true” annuity that will supposedly solve all of your problems, here is how to get to the facts quickly. Take a piece of paper out and write down exactly what you believe the agent said, and have that agent physically sign and date those great benefits he was so excited to tell you about. You and I both know that that agent will never sign that paper, and if he does, then he owns and is liable for those promises.
Always remember to own an annuity for what it WILL DO (the contractual guarantees), not what it MIGHT DO (hypothetical or theoretical returns). Have the agent only show you the contractual guarantees or worst case scenario, and make your decision solely on that premise.
The new culprit of these too good to be true pitches are the ever blossoming annuity online predators and email mega blasters. As the saying goes, “There’s a sucker born every minute” — so don’t be that next annuity sucker.
Always use your common sense. Annuity strategies work really well when you do.
