The 7 deadly sins of annuity buyers
The history of the original “seven deadly sins” dates back to early Christian times when this list was used to educate and teach people to avoid the temptations of sin.
Annuity consumers can use an altered form of this ancient list to avoid landing in “annuity purgatory.” Let’s take a unique look at the 7 deadly annuity buying sins of greed, envy, gluttony, lust, sloth, pride, and wrath.
Annuity Greed can sometimes be encouraged by overreaching agents, but can also be embraced by a person that hopes the annuity that sounds too good to be true, actually is. Annuities should never represent all of a person’s portfolio, and every annuity strategy should be customized to fit each specific situation. These transfer of risk strategies should always have a suitable and appropriate allocation percentage just like any other asset class within your portfolio.
Too many annuity sales come from the Annuity Envy of perceived product benefits. A typical example of this happens when one of your friends tells you about a “7% annuity” they just bought which, on the surface, sounds pretty good. Not to be outdone or outsmarted by your friends, a common mistake is to buy the same annuity from your friend’s agent without finding out the specifics of the contract. Eventually, you will realize that the high interest rate that attracted you is really an income rider (an attached benefit used only for future income), and is not actual yield.
The worst case of Annuity Gluttony I’ve seen involved a baby boomer that was sold nine different indexed annuities in less than a year that unfortunately represented over 85% of his portfolio. This gluttonous annuity buying spree happened after the 2008 market hiccup, with the agent obviously “selling fear” to validate too many policies. Annuities are customized strategies that should solve for specific problems, and more is never better. Most of the time, Annuity Gluttony happens when too much of your portfolio is put into one annuity with one carrier.
Annuity Lust is typically evoked when agents blur the lines between actual yield and high-percent income riders. This is a common advertising gimmick with online display ads and Internet annuity videos. With the 10-Year Treasury hovering at the 2% level, it is impossible for annuity carriers to offer 6% or 7% in CD type yield. People lust for the high interest rate days of Jimmy Carter, and are unfortunately duped too many times into believing that an annuity income rider is just like that CD they bought in the late 1970s. That lust for high interest rates is not solved by an attached benefit income rider. The reality of an income rider is that if that high-percent calculation is not used for income, then it’s nothing more than monopoly money.
Annuities are contracts, so everything that annuity will and can do is within those pages of the policy that the agent delivers to you after purchase. A major problem that I see is that most annuity buyers do not do the needed research on the product they purchased or are considering to purchase. You can always request a specimen policy from the agent before buying in order to see the exact contract you will eventually receive. With “free look” periods in place with all annuity purchases, you have enough time to ask additional questions or get third party verification on the annuity you have just bought. This product due diligence takes effort, but is worth the time spent to make sure your specific annuity transfer of risk strategy solves your specific need. Don’t be an Annuity Sloth — do your product homework.
Too many times a person buys an annuity that they didn’t understand or weren’t explained the details properly by the selling agent. As a prime example of Annuity Pride , they stubbornly hang on to a sometimes bad annuity investment because surrender charges would apply if they cashed out. Overcoming this type of Annuity Pride might involve implementing an annuity “stop loss” strategy to get your money out of a possible annuity mistake.
Annuity Wrath normally comes in two forms. Either it’s your spouse or beneficiaries in disagreement with your annuity purchase or it’s your anger toward the person that sold the annuity to you. Annuity Wrath can also be represented by having buyer’s remorse and being mad at yourself, which is truly avoidable with the free look period allowed with every annuity purchase.
Avoiding annuity purgatory
Annuity Hell can be avoided by being aware of these seven common annuity buying sins, and keeping a realistic and common sense understanding of how annuities work. Make your decision to own an annuity on the contractual guarantees, not the sizzle points that are so easy to latch on to during the sales process. Never forget that if it sounds too good to be true, then it is with no exceptions. Never take the agent’s word for it and always go with your gut instincts on any annuity that you are considering or that is trying to be sold to you.
Originally published by MarketWatch.com 6.11.2013 – http://www.marketwatch.com/story/the-7-deadly-sins-of-annuity-buyers-2013-06-11