Don’t ‘supersize’ your annuity
You can learn a lot about buying annuities from ordering those burgers and fries at your favorite fast food restaurant. Those extra fries and additional soft drink you are enticed into buying seem eerily similar to the additional benefits that some agents encourage you to add to your annuity policy.
In 2004, independent filmmaker Morgan Spurlock made a fascinating documentary called ” Super Size Me ,” where he ate all of his meals at a renowned fast food chain and kept tabs on his ongoing health status. To make things even more interesting, every time he ordered and was asked if he wanted to “supersize it” (i.e. make the order larger for a small up charge), he was required to say yes and then eat that huge mound of food in its entirety. To cut to the end of the film that I would definitely recommend seeing, Spurlock almost died from this experiment and scared his doctors and family into making him quit this food test case.
What Spurlock didn’t know at the time was that he laid the groundwork for how potential annuity buyers should approach the purchase of an annuity policy. Let’s take a look at these unique annuity/food correlations.
Rider fries with that policy shake?
Steve Jobs was all about simplicity, and the intuitive and instinctive nature of how a product should work and be easily understood by the consumer. As such, I have to believe that if he were still alive, he’d despise all the add-on “benefits” that are attached to most deferred variable and indexed annuity policies. Those additional benefits in the annuity world are called riders, and each one that is attached to a policy will increase the annual fee of the contract.
In Jobs’s utopian world, annuities would always be looked at in their most simplistic form and most minimal contractual structure. Most in the annuity industry definitely disagree with this overly simplified viewpoint.
More is never better
Just like you don’t need a bucket of fries and a half gallon soft drink with your triple-decker burger, the same correlation can be used when deciding to buy an annuity. Adding more riders (i.e. attached benefits) to a policy doesn’t make the annuity better. In most cases, all you’re doing is lessening each of those overall contractual rider benefits while raising the annual fees that you will pay for the life of the policy.
Always remember that life insurance and annuity companies have the big buildings for a reason. A basic example of this “big building” strategy is that if your annual fee on your loaded-with-riders variable annuity is 3% annually, and you have $500,000 in the policy, you will pay $15,000 a year for the life of the policy. Multiply that number against your life expectancy!
No calorie tax deferred upside … please
There is a way to actually strip an annuity policy down to its barest contractual bones. No-load variable annuities can provide the potential for some tax-deferred growth with full liquidity while keeping fees and expenses to a bare minimum. Also, indexed annuities that have no riders attached are also a way to possibly achieve a little better than CD returns with no annual fees. Unfortunately, the majority of variable and indexed annuities are sold with too many unneeded riders that are never used or accessed by the policyholder. Those ongoing rider fees deduct from any upside growth, and is like having one hand tied behind your back in an investment fist fight.
There are other types of annuities that have no annual fees, and can be purchased in their most simplistic form. Single Premium Immediate Annuities, Longevity Annuities (Deferred Income Annuities), Fixed-Rate Annuities, and Traditional Fixed Annuities are some examples of stripped down efficient strategies that are pro customer in my opinion.
One solution at a time
Annuities aren’t one size fits all products, even though that’s a typical sales pitch with these strategies. It’s always best to solve for one solution at a time when using annuities in your portfolio. For example, if lifetime income is the goal, then solve only for income now or later. If legacy is the primary issue, then only solve for that one item, and so on. Don’t try to solve for every goal within one policy because this typically lowers these specific rider benefits when compared with using the one at a time strategy.
This is my newest created phrase to describe rider-heavy annuity policies. People love eating at buffets because of all the choices and the fact they can have it all and eat it all. If given lack of moderation choices, most people overindulge. The same can be said for annuity buyers, and having too many rider choices.
Annuity obesity is too often promoted by agents wanting you to think you can have it all by just adding as many riders (i.e. attached benefits) as desired. Always ask the agent to show you the best contractual guarantees available to solve solely for each specific goal. My advice is to step away from the annuity buffet my friend, and only buy the exact benefit that you need to solve for.
The good news for the fast food industry is that Spurlock’s film did initiate the burger/fry corporate leadership to stop the annoying practice of asking people to “supersize” their order. Unfortunately, the annuity industry has picked up where they left off, and are encouraging you to increase your annuity order.
My advice: Make sure you don’t pile your annuity plate with more than you need, because it’s never wise to “supersize.”
Orignially published by MarketWatch.com 1.21.14 – http://www.marketwatch.com/story/dont-supersize-your-annuity-2014-01-21