Top 5 annuity questions for 2013
I get hundreds of calls every month, and keep a record of the top 5 questions I receive from consumers across the country. Let’s take a look at those questions, and the answers you need to know about today’s world of annuities.
What is a hybrid annuity?
I now use the phrase “hype-brid” because too many annuity agents cavalierly use the word “hybrid” to convince someone to buy. The blame for this overly used generic description falls squarely on the Internet annuity promoters and video hypesters.
Whenever I get the caller who asks, “What’s your best hybrid?”, I always answer without hesitation…. Toyota. After the silence on the other end of the phone, I always explain that every annuity on the planet has multiple benefits so, in essence, every one could be categorized as a hybrid.
Just remember not to fall for the hybrid hype. It’s nothing more than agent sales-speak.
What’s the catch to the upfront bonus?
Some annuity carriers offer an upfront bonus when your money is applied to the annuity policy. Free money sounds great, right? The reality is that there are only 100 pennies in a dollar, so if an insurance company is offering an upfront bonus, then they are most likely taking away from somewhere else in the contract. That’s just common sense, but too often forgotten and glossed over during the sales process.
In addition, most upfront bonuses come with an annual fee for the life of the contract. I always tell people that buying an annuity for the bonus is like buying a car for the stereo system. It makes no sense. I look at an upfront bonus as just one part of the contractually guaranteed calculation, but not as a stand-alone reason to own the annuity. Sometimes it’s a positive, and sometimes it’s a negative, and it is too often used as the “shiny thing” from a sales standpoint.
What is an income rider?
In a world of low interest rates, too many annuity sales pitches lead with income rider rates that sound really high and too good to be true. Internet ads and videos claim annuity rates as high as 6% to 8%, and I get calls all the time where the person says, “I just bought an 8% annuity.”
No, you didn’t.
What you have is an 8% income rider. An income rider is an attached benefit that guarantees a growth percentage that can be used only for income. You cannot access it in a lump sum or peel off the interest. You can only use it for income, and when you turn on the income stream, that guaranteed growth percentage goes away. In addition, income riders come with an annual fee for the life of the policy.
Income riders do work well for target-date income planning, and as a transfer-of-risk future-pension strategy, but the deferred growth percentage cannot be considered as true yield.
What is a longevity annuity?
A longevity annuity is, in essence, a deferred immediate annuity. Because the words “deferred” and “immediate” go together like oil and water, I assume that the annuity industry decided to go with the word “longevity” because this strategy does solve for longevity risk (i.e. outliving your money).
Longevity annuities are simple, transparent, and easy to understand from a consumer standpoint. There’s no market-growth type attachment and there are no annual fees. In addition, you can contractually add cost-of-living annual increases and defer the lifetime income payment for as long as 45 years.
For target-date income planning, longevity annuities are starting to eat into the income-rider market share because of their pro-customer design, and more carriers are starting to offer this strategy. Agents typically get paid more commission to sell deferred annuities with income riders than they would if they offered longevity annuities. That fact alone should make you look closer at this future pension solution.
Should I buy an annuity when interest rates are low?
There’s no good answer to this question, and it’s cavalier to say that interest rates have to go up in the near future. Japan can tell you that rates can remain stagnant for decades, so it’s important to prepare the possibility of a flat rate environment for the foreseeable future. There is no back-testing on the current Federal Reserve easing strategy, so all bets are off.
The 10-year Treasury is somewhat of a benchmark rate for the annuity industry, so that’s what you need to keep an eye on from an annuity pricing standpoint.
If you are convinced that rates are going to move north, then I would consider annuity laddering strategies. Just like you can ladder bonds or certificates of deposit, annuities can be laddered from a fixed-rate standpoint and from a lifetime-income standpoint as well.
Annuity questions are good
Because most annuities sold today are products that involve complex strategies, like variable and indexed annuities, it’s important to fully understand what is being presented to you. Don’t be sold “bullet points” or let the agent focus on an upfront bonus or high-percentage income rider as the main reasons to buy an annuity.
Ask yourself what you want the money you are thinking about putting in an annuity to contractually do. Never base your decision on hypothetical, theoretical, projected or back-tested return scenarios. If an annuity policy will contractually accomplish the specific number goal that you have in mind, then it is worth considering as a possible transfer-of-risk solution. The bottom line is to always own an annuity for what it will do, and not what it might do. If an annuity purchase is based on that premise, you will be very happy with the policy you own.
Originally published 11.5.2013 at MarketWatch.com – http://www.marketwatch.com/story/top-5-annuity-questions-for-2013-2013-11-05