The 10 Commandments of annuity buying

These are what I consider to be the 10 most important rules when considering the purchase of an annuity, the 10 Commandments of annuity buying, if you will.

Let’s take a look these commandments in ascending order of importance. For the record, the annuity stone tablets are in my office for safe keeping to use as a client reference tool and tourist attraction.

10. Don’t covet your friends annuity

Too many annuities are bought because your golfing buddy or neighbor brags about the benefits of his annuity that sounds so fantastic that envy and greed sets in. Unbelievable and untrue phrases like “I own a 7% annuity” or “I get all the upside and no downside” make you covet what actually doesn’t exist contractually. Then you make the mistake of calling the agent and saying that you want that same annuity that your fried has, and in reality doesn’t exist. That’s a layup you can’t give most annuity agents, because they will eagerly sell you that dream.

9. Don’t let your agent bear false witness

If the person trying to sell you the annuity is painting a “too good to be true” picture, then write down the specifics of what you believe you heard, and have the agent sign off on those bullet points. Actually have them sign and date it as validation of the annuity sales pitch, and what you heard them say. Typically, this clarifying request makes that pen very heavy and will most likely evoke a few more need to know truths about the product.

8. Don’t steal from solid investments to fund an annuity

Annuities contractually solve for a specific goals such as lifetime income, legacy, or long term care. These transfer of risk strategies should be an allocation percentage within your portfolio just like your bonds or stocks are. The “if it ain’t broke, don’t fix it” approach applies to the “hybrid and variable annuity dreams” that are currently being pushed by agents.

7. Don’t commit contractual adultery

Contractual adultery happens when you cheat your family out of your annuity benefits by not properly structuring the policy. Annuity benefits pass outside of probate, and beneficiary status is flexible and revocable. You can set up lifetime income streams with your spouse (even with your IRA), and put in place contractually guaranteed legacy plans for your policy beneficiaries. The key is to correctly structure your specific goals at the time of application by consulting with your CPA and lawyer in addition to the writing agent to contractually fulfill your wishes.

6. Don’t murder your current portfolio to buy an annuity

Annuities should be owned for their contractual guarantees, and most investors still need real market growth potential and opportunity within their portfolio. I am one of the few agents that believe that annuities aren’t growth products, and back tested facts seem to back me up on this. Variable and indexed annuities aren’t a substitute for real market upside opportunity and investment flexibility.

5. Honor your contractual guarantees

Just like you should honor your father and mother, you should honor and base all of your annuity buying and ownership decisions on the contractual guarantees. Annuities should be looked at as a non-correlated asset within your portfolio, and as a pure transfer of risk strategy.

4. Own an annuity for what it will do, not what it might do

Always remember to keep the contractual guarantees at the center of your decision. Agents love to push potential, hypothetical, theoretical, and projected returns. Sizzle sells….right? Most annuity proposal software allow agents to “juice” the numbers to make the future performance look almost irresistible. We all know that market returns don’t work like that, so have the agent run all annuity proposals at “0” or at the contractually guaranteed level.

3. Annuities aren’t one size fits all solutions

Don’t take the annuity name in vain by letting agents use ridiculously generic words like “hybrid” to sell you some hypothetical unknown dream. Annuities aren’t designed to cover everything, so don’t be convinced otherwise.

2. If it sounds too good to be true … it is. No exceptions.

Don’t build the “too good to be true” false idol in your mind when buying an annuity. All annuities have good features, but each type of annuity also has its limitations. Common sense should tell you this, so don’t fall for the slick sales pitches from annuity Internet promoters or your local bad chicken dinner seminar speaker. Swallow the food, not the pitch.

1. Annuity guarantees are only as good as the issuing carrier backing them up

Don’t be distracted by over hyped promises by carriers with low ratings or Comdex scores. This is currently happening in the indexed annuity world, and has the industry concerned enough that some states and regulatory bodies have started investigating the stability of these carriers and their ability to back up their contractual promises. With that being said, some variable annuity carriers are unfortunately trying to buy back or limit recently issued policy guarantees. It’s also important to know that annuities are regulated and backed at the state level, with policies guaranteed to specific limitations that vary from state to state. Don’t let an agent compare annuity coverage to FDIC coverage, because it is not. Even though this state backing is in place, my advice is to always make your decision solely on the safety and stability of the annuity carrier.

Be careful out there in the wild, wild west of annuity sales. There is no urgency to pull the trigger on any annuity product, so do your homework and your own due diligence before allocating any money to these transfer of risk strategies, and use these 10 Annuity Commandments as a simple guide in your decision making process.

Originally published by 7/9/2013 –