No all-in-one annuity cures; take a ‘PILL’
A lot of annuities are sold as one size fits all solutions, and many carriers are scrambling to offer as many benefits that can be attached to a policy as possible.
Is there such as thing as an annuity swiss army knife where you can cover all the bases with one contract? Let’s look at the realities of what is currently being promoted in the annuity world, and how you should approach these strategies from the buyer’s perspective.
Simpler is always better
In my opinion, annuities can contractually solve for four specific situations. I use the acronym “PILL” to describe these problems, and as an easy way to see if these products might work for you. “P” stands for principal protection. “I” is for income for life. “L” stands for legacy. And the other “L” is for long-term care. If you don’t need to solve for these things, then you probably don’t need an annuity. It’s really that simple.
When considering an annuity solution, it’s important to always look for the lowest fee and shortest surrender charge period possible in order to transfer that specific risk to the carrier. My view of annuities is pretty controversial within the industry because I don’t view annuities as growth products. If you compare any variable annuity or indexed annuity to real non-annuity growth strategies, there is no comparison from the standpoint of upside opportunity. I advise my clients to place annuities within their portfolio for the contractual guarantees only, to solve for a specific problem, and to view the annuity as a non-correlated allocation.
Solve one solution at a time
Carriers love to create deferred products like variable and indexed annuities that offer a smorgasbord of benefits that can be attached to a policy. Annuity benefits are called “riders” and each rider that you attach to a contract comes with an annual fee for as long as you hold the policy. Some “fully loaded benefit” annuities can have annual fees of over 3%, and up to 4% depending on how many riders you add.
The typical riders that can be attached are income riders, death benefit riders, and confinement care riders. The more the merrier, right? Wrong! Each rider comes with its own annual cost, and you would be better served to stay away from this one-size-fits-all mentality in my opinion.
Always pinpoint the one problem you are trying to solve for, and see if the top contractually guaranteed annuity solution fills that need and transfer of risk gap you are planning to solve for. If you need income now, solve for only that. The same goes for income later, death benefit, or any other specific goal. A carrier that specializes in income now, might not be the best solution for confinement care, etc.
The ‘hybrid’ hoax
A hybrid is a type of car. A hybrid can also be a type of plant. A hybrid isn’t an annuity. The word “hybrid” is the latest in a long line of hot sales words that really don’t mean anything, but allows the consumer to fill in their own blank on what it means to them. Internet annuity sales are ripe with the hybrid annuity hype, so be careful when viewing those too good to be true “educational” videos. My running industry joke is that if annuities are going to be called hybrids, why not call them unicorns instead. It would make as much sense, and most people love unicorns!
When hybrid is used in conjunction with annuities, the story is that the supposed “hybrid annuity” offers numerous benefits within one policy which supposedly makes it better. In most cases, it doesn’t, even though it sounds pretty good in theory.
My recommendation is to focus on one solution, and find the highest contractual guarantee available. From there, if you choose to add additional benefits to your policy, then that is icing on the cake. However, in most cases I see with annuity contracts, adding numerous riders typically waters down the specific guarantee that you are trying to solve for.
Annuity toothpicks, scissors, and nail files
Most of us owned a Swiss army knife at one time, and I personally got a kick out of the myriad “stuff” within that tiny unfolding package. Who knows if there has ever been a study on what parts are used the most, but I’m pretty sure that the steak knife industry never felt threatened by not offering a toothpick or nail file attached to their product.
A Swiss Army “toothpick” of the annuity world is the often hyped upfront bonus that is sometimes offered when you purchase a deferred annuity. A bonus should only be a part of the overall contractually guaranteed calculation, and should never stand-alone as a reason to buy an annuity or transfer an annuity to cover surrender charges. The same type of analysis applies to confinement care riders. This type of added coverage should never replace traditional long term care policies, and only should be used as potential additional coverage.
The Swiss army knife comparison to multi-benefit annuities makes sense because all of these choices are usually more of a novelty than a complete solution. It’s always best to strip down annuities to their contractual guarantees, and pinpoint the one solution that you need to solve for.
Originally published by MarketWatch.com 8.20.13 – http://www.marketwatch.com/story/no-all-in-one-annuity-cures-take-a-pill-2013-08-20