The Issues With Annuities Part 2

In the previous post we discussed Fixed Indexed Annuities (FIA's) and how they work. The basic concept behind them is that you give the insurance company a lump sum of money and after a set number of years, usually 5, 7 or 10, the annuity will start giving you an income stream, typically 5% of the accrued value. Sounds good until you crunch the numbers as we did.

In this low interest rate environment, the caps (the most your annuity can earn) are very low as well. As I mentioned, there are people that this plan can still work for, but at this point I rarely make that recommendation to clients.

Why do so many other agents like selling annuities then? In a word, commissions. I'm not trying to throw any agents under the bus, but for example, if an agent moves $100k from a CD in a bank to an annuity, they can make anywhere from $5000 to $8000 in commissions. Not bad for basically doing some paperwork. And there are no health underwriting questions like life insurance.

Locally we have an agent who loves to sell annuities, mostly to seniors. I've seen his presentation and he weighs heavily on doom and gloom, telling his audience that the world is falling apart (which at the time of this post very well could be) and selling the "safety" of his annuities. At one point he brings out a miniature toilet and says something like, "Here's the sound of the economy!" while flushing it. In case you're wondering, he did this when the economy was booming as well.

And how does he get his audience? He invites them to a nice steak dinner, that's how. And while he's talking and scaring the crowd with his gloomy forecast his assistant walks around the room setting appointments for him. The prospects are told to bring any investment statements with them to the appointment and that's where the real fun begins.

A friend of mine worked down the hall from the agent's office and could overhear the conversations. My friend said that the clients, mostly retired, were told that their current investments were bad and that someone had "ripped them off". Of course the only cure for their problem was an annuity.

Among my peers and colleagues this kind of sales is frowned upon to say the least. High pressure of any sort, and especially to our seniors, makes our industry look bad. Luckily, the vast majority of agents know the difference between working for a client and sticking it to them. But a few bad apples...

In general terms, when should you NOT buy an annuity. Here are a few examples:

• If you are under 50. The IRS will assess a 10% penalty if you access the funds before 59 1/2. 
• If you are over 70. Given that the contracts can take anywhere between 5 and 12 years, do you want to tie your money up when you may need it?
• If you are going to need that money soon. Again, these products are illiquid and have a lot of surrender charges.
• If you are a risk taker or an aggressive investor. Annuities are for very conservative clients.

As I say, there is a place for all insurance products, but not every product is for everyone. If you have questions, please leave them in the comments section. Stay healthy and remember at Surf Financial Brokers, we only do #nopressureinsurance.

Chris Castanes is the president of Surf Financial Brokers, as well as a professional speaker helping sales people be more productive and efficient.