Are Annuities a Good Investment?
“Don’t lose money in the Wall Street casino!” the radio announcer blared. “It could take a lifetime to make up your losses in the stock market.”
Unless your lifetime is extremely short, he’s dead wrong.
This is the fear tactic used to sell annuities. And getting suckered into buying an annuity could be the biggest mistake you ever make.
Basically, the way an annuity works is you give an insurance company your money and in return they pay you an income stream, usually for the rest of your life. In some annuities, if you die before you’ve received all of your money back, too bad for you. The insurance company keeps the money.
That’s really how most of them basically work.
There are some annuities where that’s not the case. Family members can receive cash back or even continued monthly income after your death, but you’ll pay extra for that.
Essentially, you’re betting the insurance company that you’re going to live longer than they think you will. They take your money, invest it (using similar strategies as R.O.I. but without the active management) and pay it back to you in dribs and drabs with high fees (with steep penalties if you want to withdraw more than the contract states). The insurance company uses actuarial statistic analysis to ensure they will come out ahead and pay back overtime a small portion of the gains (due to fees, surrender charges, etc.) that you would have accrued if invested. If the insurance company makes bad bets or the economy goes belly up your entire money may be at risk based on the health of the insurance company.
Annuities are such terrible investments that the minute the government passed a law specifying that financial professionals had to act in their client’s best interest, annuity sales fell of a cliff.
In 2016, new rules were passed by the Department of Labor that stated that brokers have to act as fiduciaries. That means they had to put their clients’ best interest ahead for their own.
Believe it or not, prior to the rule being passed stock and insurance brokers could sell you anything they wanted, whether it was right for you or not. So typically, they sold whatever paid the highest commission. Often, the salesman won’t use the word “annuity” because it will usually send the potential investor running the hills. Be very careful when considering these insurance contracts.
Annuities pay extremely high commissions, often 7% or higher of the total amount. So, if a client was sold a $200,000 annuity, the salesperson might take home $14,000 up front.
Another problem with annuities is what if you circumstance change. You need the money urgently. If you’re still within the surrender period, it’s going to cost you, Big!
A typical surrender period is seven years and the surrender charge starts at 7% and falls by 1% a year.
There is a saying that “Annuities are sold, not bought.” That’s because the people selling them really have to push them to get people to buy them. Most annuities are a great deal for the insurance company, the broker, but not for the investor. We are yet to come across one that we would buy for ourselves so we don’t sell them to our clients.
If you’re considering an annuity please have R.O.I. review the literature first before you sign anything. If you just got into one (last 60 days or so) quickly have R.O.I. review it it’s possible you may still be able to get out of it. We’ve seen a lot of these and saved many of our clients from getting into a bad deal. Remember, the bold print giveth, the fine print taketh away. We’re very good and reviewing and understanding the fine print.