7 reasons not to buy an annuity
If someone hasn’t tried to sell you an annuity yet, consider yourself one of the chosen lucky few. Odds are that you will eventually be pitched “the best annuity ever,” so it’s important to know the main reasons why you might not need to buy an annuity.
I think it’s important to point out that I only sell annuities, and burned the boat many years ago by changing my name to Stan The Annuity Man®. With that being said, I am the first one to scream from the rooftops that annuities aren’t for everyone.
Annuities aren’t one size fits all panacea solutions, and they are not too good to be true, even though too many are sold that way. They do work well when placed properly in a portfolio, and fully understood for the contractual realities of the policy. So let’s take a closer look at the reasons you might want to stay away from the annuity dream slingers.
You don’t need an annuity if …
1. If you can professionally manage the money yourself
Annuities should only be owned for their contractual guarantees, so if you are adept at managing your own money and feel comfortable performing that task, then you should not deviate from that plan. If you have an adviser who has proven themselves to be really good at managing your money, then consider yourself fortunate and stay the course with that professional.
2. If you want real market type growth
Annuities aren’t growth products, period. Even the best no-load variable annuities have limited investment choices and restrictions on moving the money between separate accounts (i.e. mutual funds). Indexed annuities were designed to compete with CDs, and their historical returns reflect those realistic return percentages. Load variable annuities have limitations and restrictions from an investment standpoint, and their typical high fees severely eat into any annual returns. Facts are facts, regardless of the hypothetical growth dreams that are overly promoted.
3. If you are thinking about replacing your LTC policy
The best long-term care coverage that you can buy is a traditional long-term care policy. Annuity type coverage should only be looked at as a supplement to a traditional policy, or a last resort choice if you cannot pass the underwriting requirements of real LTC solutions. Confinement care riders or “doublers” that can be attached to some deferred annuities should not be considered as legitimate term care type coverage.
4. If you want everything packed into one product
Riders are attached benefits that you can add (with an annual fee for the life of the contract) to some annuity policies to try to solve for solutions like lifetime income, legacy, or long term care. Carriers and agents love to promote these one size fits all product scenarios, but you are best served by solving for one solution at a time with any annuity strategy. In most cases, the contractual guarantees are higher when you implement a single focus solution. The more isn’t the merrier with annuities.
5. If you are only being shown one product from one insurance carrier
Because annuities should be owned for their contractual guarantees, you should always shop numerous carriers for the solution you are looking to solve for. My apologies to the captive agent, but it just makes sense to shop around just like you would for any product. It is also important to remember that annuity guarantees are only as good as the company backing them up, so do your homework on the safety of the carrier.
6. If you don’t need additional lifetime income
Annuities were created in the Roman times for a pension type lifetime income guarantee. Even though variable and indexed annuities can be unbelievable complex and unfortunately represent the vast majority of annuities sold each year, the primary reason that most people should own an annuity is to solve for longevity risk (i.e. outliving your money). Whether you need income to start immediately or sometime in the future, annuities are the only product on the planet that will pay you regardless of how long you live. If you don’t see yourself needing additional income guarantees for the rest of your life and you are pretty good at managing your own money, then you probably have no need for an annuity.
7. If you see no need to transfer risk
Annuities in their purest form are transfer of risk strategies that can solve for specific things like principal protection, income for life, legacy, or long-term care. That easy to remember acronym that I’ve developed is P.I.L.L. If you don’t need to transfer risk to solve for these four items, then you probably shouldn’t own an annuity. If you are comfortable shouldering the risk yourself, then there is nothing wrong with that.
Another good tip when considering any annuity strategy is to always go with your gut instincts when making a decision. You need to trust that internal compass, because it is typically very accurate. If you are getting pressured into buying or a red flag is raised for any reason, then it’s probably best to move on.
If the sales pitch sounds too good to be true, then write down in detail exactly how you think the annuity being proposed is going to work according to what the agent said. Then sign and date that list, and have the agent sign and date it as well so you can have them fully endorse their recommendation. This is just an effective and simple idea to fully flush out the contractual realities of the policy.
Annuities can be fantastic strategies if placed and used properly. Use your common sense and experience in combination with these seven reasons to make sure you do the right thing when considering the purchase of an annuity.
Originally published 1.7.2014 by MarketWatch.com – http://www.marketwatch.com/story/7-reasons-not-to-buy-an-annuity-2014-01-07