Top 10 mistakes by annuity shoppers
It seems like everyone is trying to sell you an annuity.
Your banker, your broker, and your life insurance agent are all on the annuity sales train. In addition, you are continually bombarded with TV and radio ads, which now features ridiculous celebrity endorsements. It’s important to tune out all of that “sales noise” and focus on not making an annuity buying mistake.
Here are the top 10 in my opinion:
1. Trying to buy a one size fits all annuity
Indexed and variable annuity sales pitches too often over hype the dream of one product solving for all of your needs. Sounds good at “bad chicken dinner seminar,” but that product does not contractually exist. Always solve for one solution with one annuity product at a time.
2. Not shopping multiple carriers
Apologies to the captive agents, but you should always look at five or more highly-rated carriers that solve for the contractual goal you are trying to achieve. If you are only being shown one product with one carrier, that agent is probably trying to earn an “atta’ boy” trip to some exotic location.
3. Believing that you can have your cake and eat it too
If it sounds too good to be true with an annuity, it always is. No exceptions. All annuity types have their own value propositions, and limitations. Don’t buy the dream, and only own the contractual realities. You are smarter than that!
4. Not making your decision solely on the contractual guarantees
Annuities are transfer of risk products that solve for four things only. The acronym is P.I.L.L. P is for principal protection. I is for income for life. L is for legacy. And the other L is for long-term care. If you don’t need to solve for one or more of those issues, you don’t need an annuity. It’s just that simple.
5. Buying annuities for market growth
Never buy an annuity for potential, hypothetical, back-tested, theoretical, or hopeful agent growth projections. Even though agents love to pitch indexed and variable annuities for market growth, don’t believe the hype. If you want real market growth, don’t buy an annuity. Annuities should only be used as noncorrelated assets in your portfolio.
6. Not starting at the finish line with your analysis
When making a decision to buy an annuity, figure out exactly what you want the money to contractually do, and when you want that guarantee to happen. By starting at the finish line, you can then find the products to contractually guarantee those specific goals.
7. Being distracted by upfront bonuses and riders
Buying an annuity for the upfront bonus is like buying a car for the stereo system. In addition, high percentage income riders make you falsely believe you have stumbled upon Jimmy Carter CD rates again. There’s always a catch, and insurance companies have the big buildings for a reason — they don’t give anything away. Never forget that.
8. Buying a low rated carrier
Annuity contractual guarantees are only as good as the issuing carrier backing them up. Don’t let an agent sell you a substandard company with the false narrative of the annuity state guaranty fund as justification to bottom fish. It’s important to point out that many times a low-rated carrier pays a higher commission to the agent. Surprise!
9. Being high pressured into signing the application
There is NEVER an urgency to buy an annuity. Always do your homework, and fully understand the product type before signing. Remember, it’s your time frame that matters, not the agent’s. Take your time and fully understand what the contractual guarantees are, because that is what you are buying.
10. Locking up money in long surrender charge periods
With the 10-year Treasury at historically low levels, you need to keep your lock in periods as short as possible. Remember that the longer the surrender charge period, the higher the agent commission. Ask to see shorter term versions of the product being pitched, because they might be available.
Annuity solutions should always be customized to fit your specific situation. Proportion and allocation is key so that you don’t put too much money into annuities. With over 15 different types, they do have their place in some portfolios as an efficient way to transfer risk.
Originally published 2.24.15 by MarketWatch.com – http://www.marketwatch.com/story/top-10-mistakes-by-annuity-shoppers-2015-02-24