Don’t get caught in an annuity paradox
A paradox is a statement that seems to contradict itself, and yet might be true.
George Bernard Shaw has one of the most quoted paradox declarations: “What a pity that youth must be wasted on the young.” How true that is.
The annuity world is full of these types of statements. Let’s take a look at the five most common ones, and get to the factual bottom line of each annuity paradox.
1. I hate all annuities, but love my Social Security payments
For all of you annuity haters out there, this is the one statement that makes me laugh out loud every time I hear it. You can’t hate annuities, and love Social Security guarantees. You can’t hate annuities, but love your pension. Social Security and pension payments are, in essence, annuities. Annuities were first used in the Roman times to guarantee a lifetime-income stream for the Roman soldier and their family. The annuity structure used then is today’s single premium immediate annuity (SPIA).
Annuities, love them or hate them, are the only product on the planet that will guarantee a lifetime income stream regardless of how long you live. Whether you need that contractual transfer of risk guarantee is your call.
2. Annuities with no annual fees are very expensive
This statement is commonly attached to annuities that guarantee a lifetime-income stream like single premium immediate annuities (SPIAs) or deferred income annuities (DIAs, also called longevity annuities). Once you lock in the guaranteed payment, then you do lose out on any future market growth type opportunities, which is what most annuity haters point to.
However, there are fixed-rate annuities (aka: MYGAs) that offer a guaranteed annual yield for a specific period like a CD. MYGAs have no annual fees, and pretty much debunk this paradox.
3. My annuity gets all of the market upside with no downside
Maybe this is more of a misleading agent statement than a pure paradox, but welcome to the unregulated world of indexed-annuity sales pitches. Of course there is no annuity that gives you all of the market upside with full principal protection, but that doesn’t prevent the “hybrid” hucksters from trying to convince you that their indexed annuity is too good to be true. Indexed annuities were introduced in 1995 to compete with CD returns, and that is exactly what they do.
4. I need rates to rise before I buy a lifetime income annuity
I understand this sentiment, but most people are missing the larger point when it comes to annuity lifetime-income guarantees. The primary pricing component is your life expectancy at the time you take the payment. Rates do play a role, and the payment would be higher if rates were moving north. However, rates would have to significantly rise before it would make sense to hold off on an immediate annuity purchase in lieu of taking payments now.
5. Even the simple annuities are complex
I blame most agents on this one because they’re making their annuity pitches too complex for some reason. Annuities are contractually guaranteed transfer-of-risk products. Period. They’re not market growth products and should only be used in a portfolio as noncorrelated assets. You should only look at the contractual guarantees of the policy when making any annuity buying decision. If you do that, then annuities are pretty basic — as they should be.
In the world of annuities, the continuing broad-brush statements and incorrect beliefs still seem to be framing the annuity message. I blame the annuity industry hierarchy for not creating and controlling one consistent message and theme. Getting these annuity elites to go in one branded direction is like “herding cats.”
Should I be crowned the “Annuity King,” I will borrow from an advertising theme that we are all familiar with and that will correctly frame the annuity consumer message with two words: “Got guarantees?”
Originally published 3.17.2015 by MarketWatch.com – http://www.marketwatch.com/story/dont-get-caught-in-an-annuity-paradox-2015-03-17