When Annuities Might Be A Great Idea For You … And When They Would Be A Really, Really Dumb Idea

Annuities are not for everyone. They can be a very effective planning tool to help you realize your retirement objectives. Potentially very attractive credited interest rates without market risk sounds very appealing (and it is for many seniors), but you need to be careful that what you are looking for your money to do is what Fixed Index Annuities are actually designed to do.

A Fixed Index Annuity might be a great idea for you, if …

1.     You are a “safe-money”, financially conservative person.

2.     Your financial objectives are long term. An annuity is not like a liquid cash account. You are committing your money to an annuity for a period of time, and although there are liquidity provisions during that time period, there can be penalties if your liquidity needs exceed what the annuity allows for. Examine the product disclosure form very closely regarding this issue before deciding to purchase.

3.     You don’t put all of your eggs in an annuity basket, but keep sufficient funds elsewhere to deal with emergencies.

4.     The tax deferral status of an annuity would help lower your taxable income.

5.     You might want additional income either now or in the future.

A Fixed Index Annuity might be a really dumb idea, if …

1.     You want to pursue more aggressive rates of return than an annuity is designed to give. Once again, a Fixed Index Annuity is not a stock market investment.

2.     Your financial objectives are more short term in nature. Once again, an annuity is a long term financial product.

3.     All of your financial objectives are currently being met (“if it ain’t broke, don’t fix it”).

What Critics Are Saying About Fixed Index Annuities

(And Why They Are Mostly Right)

Fixed Index Annuities have grown dramatically in recent years, with billions of dollars flowing into them. With that popularity has come some criticism, some of it well founded and deserved, from the securities industry. Much of the deserved criticism has come about as a result of unscrupulous sales tactics of some in the annuity industry who have falsely portrayed Fixed Index Annuities as stock market investments (they most certainly are not), or who have used misleading and aggressive sales approaches to manipulate people into buying their product. Every industry has their share of knuckleheads … we have all read stories of unscrupulous stock brokers, bankers and insurance agents. The annuity industry has not been immune to this, but unfortunately the few people who do things the wrong way get a lot more attention than the vast majority who do things right.

There are essentially four major criticisms of Fixed Index Annuities from the securities industry. And in each case they make some very good points.

One: “Fixed Index Annuities can be too complicated.” I completely agree. Like all financial products today (have you tried to actually read a mutual fund prospectus lately?), they can be fairly complex, with different companies using different methods to calculate how they credit interest. The value of working with an advisor who is both competent and courteous, is that the product you are considering can be explained to you in a way that makes sense, so that you can make a thoughtful and informed decision about whether it is right for you. I pride myself on my clients clearly understanding the upside and the downside of any recommendation I make. You deserve no less.

Two: “They won’t keep up with the stock market.” I completely agree. As has been stated over and over again on this website, Fixed Index Annuities are not stock market investments and are not designed to match or beat the returns of the market. You interest is linked to a percentage of a market index like the S&P 500, but you will not receive all of the upside when the index goes up. There is no such thing as a free lunch. You give up some of your upside in return for a guarantee against market loss.

Three: “You Will Be Tying Up Your Money.” There is some truth here in that Fixed Index Annuities are not money market accounts that you can jump in and out of without consequence. You are committing your money to a period of time. Fixed Index Annuities that I work with have terms that range from as little as one year to as much as ten, with the longer terms providing more value such as increased upside potential and even upfront bonuses on your money of typically around 5%. The key point is that during that term you do have access to significant amounts of your money without penalty every year. Some Fixed Index Annuities even come with checkbooks, with which you can withdraw without penalty from 10% to 20% of your funds in a given year. Additionally, I highly recommend to my clients that they establish a cash emergency account outside of the annuity to handle (along with free withdrawals from the annuity) any foreseeable emergency. Also, most annuities have a provision that will make your funds liquid in the event of you needing nursing home care.  At the end of the term the annuity is completely liquid, and in the event of your death it becomes immediately liquid.

Four: “Annuities Are Sold Too Aggressively.” I completely agree. There are some in the annuity industry (just like there are some in every industry) who use aggressive and inappropriate tactics to solicit sales. I serve on the Advisory Board for the Better Business Bureau in part because of my desire to give some leadership to protecting seniors from these kinds of tactics. For our part, Westport Insurance Group hurries no one. Most of those who become clients of mine first attend a senior workshop that I conduct. If they want to talk further with me, they schedule a time to come to my office and meet with me. If they become clients of mine, we will have three meetings. The first meeting is for me to find out what their concerns and objectives are. The second meeting is when I present and explain to them my written recommendations. The third meeting we get together to answer any additional questions they may have and (if they are ready) move forward to implement any changes they have decided to make. No one who has ever worked with me would ever suggest that they were hurried in the process of making a decision. You deserve no less. If a financial person you are dealing with ever tries to hurry you to make a decision, don’t just walk away. Run.

Notice:  Annuities are long term financial products that are not suitable for everyone. Study all product disclosures and consult with all appropriate tax, legal and financial advisors before making a decision to purchase. The NAIC “Buyer’s Guide to Fixed Annuities” (which Westport Insurance Group, LLC gives to all prospective purchasers of annuities) is an excellent tool in helping you to evaluate the possible suitability of an annuity for you. Contact us and we will happily forward you a copy at no charge.