Busting the most enduring annuity myths
The popular television show MythBusters gets to the bottom of myths and urban legends with the sole purpose of finding out which ones are actually true and revealing the ones that aren’t.
I put a call into the show’s producers to do some annuity myth busting, but have yet to hear back. I’m not holding my breath on this one, so I decided to play annuity myth buster myself.
Myth No. 1: All annuities are the same
If you read the comments under many of my MarketWatch columns, among the most common are, “I hate annuities” or “All annuities stink.” There are even prominent money managers that run anti-annuity ads with these broad brush statements.
Depending on how you are counting, there are over 15 different types of annuities. Some provide a lifetime income. Some solve for principal protection. A few are designed for long-term care or confinement care coverage. Charitable Gift annuities provide tax benefits and lifetime income at the same time. I could keep providing unique benefit examples, but I hope you get the picture enough to not repeat these nonsense statements. All annuities are not the same.
Myth No. 2: All annuities pay the agent a high commission
This is a common myth because the majority of annuities sold in the U.S. are high commission variable and indexed annuities. That is a tragic for a lot of reasons. Even though all annuity commissions are “built in” to the policy so it appears to be a net transaction, most annuity types pay a low commission to the selling agent. Some no-load annuities pay no commission, so that pretty much destroys this premise.
Myth No. 3: Annuities are for market growth
This urban legend is propped up by variable and indexed annuity hype and a continuing unregulated too-good-to-be-true sales message. When first developed in the Roman times, and until 1952 in this country, annuities were owned for lifetime income. When variable annuities hit the scene in 1952 and indexed annuities in 1995, they still didn’t get people’s attention. The 2008 market hiccup was the start of the “you can have your cake and eat it too” annuity sales pitch. It has been an unregulated sales message nightmare ever since.
Indexed annuities were designed to compete with CD returns, and that’s exactly what they contractually do. Variable annuities typically have high annual fees that eat into any market gains as well as limited investment choices. The bottom line is that if you are buying an annuity for market type growth, you will be disappointed.
Myth No. 4: All annuities have high fees
Once again, variable annuities and indexed annuities are sucking all the oxygen out of the room because they unfortunately represent what most agents push. The average annual fee of a load variable annuity is around 3% for the life of the policy. Indexed annuities are typically sold with attached riders that also bring lifetime annual fees.
The reality is that most annuity types have no annual fees at all, and in a perfect world, should represent the majority of sales. If the compensation to the agents were the same for all annuity types (one can dream), variable and indexed annuities would be in the sales minority. As long as agent commissions drive the sales train, this myth will continue to perpetuate.
Myth No. 5: State Guaranty Funds are like FDIC coverage
In most states it’s illegal for an agent to make this comparison, but that hasn’t stopped many of them from using this misleading correlation. In the indexed annuity world, the State Guaranty safety blanket is frequently used to sell marginal or low-rated carriers.
Annuity guarantees are only as good as the company backing them. Never forget that, and always look at all ratings firms and COMDEX rankings before placing your money with any carrier. The “F” in FDIC makes the federal coverage far superior to any State Guaranty fund.
Myth No. 6: If I die, the annuity company keeps the money
This might be the one I hear the most, and I blame the annuity industry for not clarifying this ongoing false premise. What people are referring to when they think the evil annuity company always keeps the money if you die early in the contract is what’s called a “life only” structure.
Life only is just one of 15 or more choices of how you can structure the contract. If you don’t want the annuity company to keep a penny, then you can build that guarantee into the policy. That’s a contractual reality.
Somehow people have forgotten that annuities are just contracts. Everything the annuity can and cannot do is written in that policy, and any annuity transfer of risk solutions can be fully customized to solve for your specific goals. That’s not a myth. That’s a fact.
Originally published by MarketWatch 5.12.15 – http://www.marketwatch.com/story/busting-the-most-enduring-annuity-myths-2015-05-12