The only two annuity questions that matter

Everywhere you turn, someone is trying to pitch you a “too good to be true” sounding annuity. Turn on your favorite cable TV station, talk radio show or Internet news site, and you will be inundated with annuity hype and sizzle.

Since it seems that there are no limits or regulations on annuity advertisements and promotions, it’s important to know how to tune out all the sales noise and focus on the only two questions that matter when considering an annuity purchase. The key word in both questions is “contractual.” Never forget that.

1. What do I want the money to contractually do?

Annuities are contracts between you and the issuing annuity company. That policy explains exactly what is going to happen, and what is guaranteed. There’s no magic here, so read the contract and don’t hesitate to ask that eager agent to provide you a specimen policy to review before signing any paperwork. All agents have the ability to send that to you.

When asking this first important question of what you want the money to contractually do, acceptable and rational “wants” would be things like guaranteed income starting immediately or sometime in the future. Another legitimate goal would be principal protection. There are specific annuity types that contractually solve for these detailed goals.

If your hope is market growth, then never buy an annuity. That includes indexed annuities, which historically provide CD-level returns, and is a “non-security” life-insurance product. As for variable annuities, if you want to own mutual funds, then go buy mutual funds. In my opinion, you don’t need a variable annuity as a high fee conduit.

2. When do I want those contractual guarantees to start?

Annuities are not “one size fits all,” and can be customized to contractually fit your specific situation. If you need income to start immediately, then you can solve for that with a Single Premium Immediate Annuity (SPIA). If you need income starting at a future date, then you can contractually guarantee those numbers with Deferred Income Annuities (DIAs/Longevity Annuities) or Income Riders. If principal protection is the goal, then short-term Fixed Rate Annuities (Multi-Year Guarantee Annuities, or MYGAs) could fit the contractual bill. This is how easy it is to find the right annuity solution for your specific situation.

Annuities and other UFO sightings

Most annuity sales pitches sound like vague UFO sightings. I think I saw it. I’m sure I’ve seen it. I have no factual proof, but the story is so intriguing. People want to believe what they want to believe, and too many agents will tell you what you need to hear to get the annuity sale.

Annuities are contracts, not investments. Without exception, annuities can never be “too good to be true” and should never be purchased for pure market growth. And let me be the first one to say that annuities are not for everyone, but do have their place in some portfolios.

Annuity czar for a day

If the annuity industry were smart enough to put me in charge of the annuity sales message, it would be very simple and easy to remember. Got guarantees?

Yes, it would look just like the milk ad that is burned into all of our brains and would frame the primary benefit proposition that annuities provide. Contractual Guarantees. In my opinion, and in the very near future, you will be able to buy annuities direct and without some pesky agent at your kitchen table. It will happen eventually, and the annuity consumer will be the winner.

In the meantime, remember the two contractually driven questions when considering the purchase of an annuity. For now, it’s the best annuity buyer’s protection that you have.

Originally published 10.20.2015 by MarketWatch.com