You can’t turn on Saturday Radio without getting hit over the head with an annuity marketing show disguised as a financial radio show. There are endless numbers of shows marketing annuities as the “go to” investment. The marketing is sensational. The guarantees in some cases appear to be larger than average and guaranteed for life. However, that is not actually the truth. It is the “you can off your cake and eat it to strategy.” You don’t have to take the risk and you are going to get handsomely rewarded. Then there are the misunderstandings on the guaranteed returns and income riders. They are the financial salespersons product of choice especially in an environment where the markets are volatile.
Are they an appropriate?
Don’t get me wrong! I think that annuities have their place. However, there are a few things you need to know. They aren’t the overall answer to risk protection. Here are some questions that you need to ask:
Which account value can I cash out and take the money and run? This is important because often times there are two different values on the statement when an income rider is chosen. Often time the annuity buyer thinks that they can cash out the account guaranteed at 6 or 7%. That is farthest from the truth.
Am I switching to an annuity out of fear of the market or because I don’t have the right strategy for risk? I believe that annuities make a good choice for the investor who wants to take zero risk and not for the investor who is considering one simply because of fear. Fear is easily controlled once you have confidence you are taking the right approach for your risk level. Often times, investors make this mistake and live to regret it.
Do I have the luxury of not taking risk? This is a key question. Said another way, can I stand to live off of a 2 to 4% potential return on my money? Often times people don’t do the math and invest into something that simply won’t help them with their goals. This is why we take risk!
What is the downside? Most salespeople will gloss over this question or tell you that there is no downside. There is a con with every pro. If you are working with a true consultant/advisor they will go over all of the fine print and what you are giving up for the guarantee. If not, I would look for someone else. Either they are to focused on selling product or they don’t understand what they are recommending.
What happens to my benefits when I withdraw money? This is something that is not always discussed. You want to know what happens to your guarantees if you withdraw money. Once again, you have to be able to live with the worst case scenario.
Finally, how realistic are those returns that you are being shown? Often times advisors will show illustrations that have great average returns while the annuity is retaining the guarantees. Most of the time, the returns are unrealistic because of the assumptions that are being used. It is often the best case scenario. Remember, life insurance companies put these programs together to make money not to give you maximum reward and guarantees at the same time. This is why they control the variables of the contract for the life of the contract. Insurance companies can change the formulas of fixed indexed annuity contracts each year. They are always going to protect themselves first.
If all of this confuses you and you still have an interest in annuities, at least do yourself a favor to take along someone else who can put a second set of eyes on it. A decision into any annuity contract is a long-term commitment.