10 questions to ask before signing on the dotted line
If you’re considering the purchase of an annuity, it’s important to know the questions to ask before signing the application.
Below are the top 10 questions that you need to have sufficiently answered by the agent or financial adviser to make an informed decision:
1) What are the worst case scenario contractual guarantees?
You should always own an annuity for what it will do, not what it might do. That means making your decision only on the worst case scenario or contractually guaranteed minimums. Don’t be distracted by the dream of projected, hypothetical, back-tested, or theoretical returns. Any agent can make proposal numbers look good, so don’t let them get away with selling the dream instead of the contractual realities.
2) How long and what are the surrender charges?
Deferred annuities like indexed, variable, and fixed-rate all have specific surrender charges that you need to be aware of. Most policies allow a fee-free 10% annual withdrawal amount, but that needs to be clarified because some contracts have a waiting period or other liquidity rules in place. Surrender charges are high with annuities, and typically decline over time, but you need to know exactly what they are and how they work with the product you are considering.
3) Is there a shorter surrender charge version of the same product?
Always remember that the longer the surrender charges, the higher the commissions to the agent. With that being said, there is a good chance that the long term product you are being recommended has a shorter term version of the same strategy. Have the agent show you all versions of that product, and try to keep the surrender charge period as short as possible while still achieving your desired transfer of risk goal.
4) What are the total fees?
In addition to surrender charges, it is very important to know all the annual fees for the policy. Most attached benefit riders, and some upfront bonuses have annual fees for the life of the policy. Have the agent list all the fees, and have them sign and date beside that total.
5) What is the safety of the issuing annuity company?
Common sense should tell you that annuity guarantees are only as good as the company backing them up. Do your own due diligence, and look at ratings services like A.M. Best, Moody’s, Fitch, and Standard & Poor’s along with the all inclusive COMDEX Ranking as well. Don’t allow annuity agents to use state guaranty funds as part of the selling process, because any FDIC correlation is misleading and untrue.
6) What is my free look period?
One of the few regulatory things that the annuity industry has done right is the free look period that allows you to get your money back without question. Every state has different rules, but after the policy is delivered and the delivery receipt is signed, you have a period to review the contract and get your money back if desired. Go to your state insurance department website to see your specific state guidelines.
7) Can I see similar strategies from different carriers?
Regardless of what type of annuity you are being sold, there are numerous carriers that offer the same strategy. Make the agent show you two or more choices from different carriers with the same exact product strategy so you can do a proper comparison. If you are working with a captive agent, then have another agent show you a comparison product. If the agent is independent, they should already be providing numerous carrier choices.
8) Is there an incentive trip for selling this annuity?
Incentive trips were eliminated from the securities industry a while back, but the annuity industry still remains one big grotesque travel agency. Make sure that your agent isn’t sacrificing your hard earned retirement money in exchange for an “atta’ boy” trip for them to party in Bora Bora. Too many recommendations are motivated (partially or in full) by this unneeded and archaic sales reward system.
9) What is the background of the agent?
Especially with the overhyped indexed-annuity world, it’s important to know how long the agent has been in the financial advice business. For fixed-indexed annuities, only a life license is required and takes typically less than two weeks (from start to finish) to qualify to sell them. Tenure doesn’t always equate competence, but you need to know who is providing the retirement planning advice.
10) Will the agent sign off on their promises and answers?
Too many annuity sales pitches sound so good when touted by the agent that you can’t figure out why you wouldn’t buy such a perfectly pitched product. If your common sense radar starts going off during the selling process, a good practice is to write down everything the agent said and how you translated their sales bullet points. After listing how you understand the product will work, simply sign and date the paper and have the agent do the same. If they sign it, they own what they said and promised. By the way, that pen get’s pretty heavy if the agent has oversold the product and the fact that you are now asking them to endorse their own recommendation. Annuity food for thought, and a very effective consumer trick of the trade.
There is never an urgent reason to buy an annuity. There is no quote, benefit, upfront bonus, or product expiration that warrants you to speed up your buying resolution. Take your time, and make your decision on your own time frame (not the agent’s) — and after you have had all of your questions sufficiently answered.
Originally published 5.6.14 by MarketWatch.com – http://www.marketwatch.com/story/10-questions-to-ask-before-signing-on-the-dotted-line-2014-05-06