Bring your common sense to the annuity game

There are many types of annuities. Single premium immediate, deferred income, multi-year guarantee, qualified longevity, variable, fixed index, and many other types make up the diverse and customized world of annuities. But one thing is true about these controversial products, and that is all annuities are contracts. That is a fact that can’t be disputed, but is too often forgotten.

So why are so many people falling for the annuity dreams pitched by too many agents that say whatever it takes to get the sale? Why do people with supposed high IQs call me every day with the hope that the sales pitch they heard is true? It’s probably the same reason people buy lottery tickets or diet pills. They want to believe the dream actually exists.

It’s important to be aware of the most popular annuity sales pitch assaults on your common sense, and what you really need to know.

An up-front bonus is not ‘free money’

If a variable or indexed annuity offers an up-front bonus for placing your money with the carrier, it comes with a price. It’s part of the contract, and should never be the basis of a buying decision. I wish the annuity industry would get rid if this “shiny thing” offering, but this sales practice does unfortunately work.

As I say every time an up-front bonus is mentioned, buying an annuity for the up-front bonus is like buying a car for the stereo system. It makes no common sense.

Increasing annuity income comes at a price

Current indexed annuity TV and radio ads talk about supposed proprietary annuities that can increase your income by double-digit percentages. Forget eight-minute abs. How about five-minute abs? Makes as much sense.

Any time an annuity company offers the potential for your income stream to increase, they are lowering the initial payout when compared to the same annuity without that potential increase. Annuity companies have the big buildings for a reason. They don’t give anything away. There is a “break even” point that you need to be mathematically aware of in order to make an informed common sense decision.

The 10-Year Treasury rate is annuity reality

Jimmy Carter interest rates will probably not be seen again during most of our lifetimes. So when an annuity agent mentions high interest-rate levels of 5%, 6%, or 7%, your common sense has to tell you that there is a catch. When the current US 10-Year Treasury rate is less than 2%, there is not some genius at an annuity company that can double or triple that yield.

The high rates agents are so eager to tell you about are called “income riders,” and are monopoly money and a phantom account unless used to calculate an income stream.

‘Market upside with no downside’ does not exist

This is a typical pitch of indexed annuity gunslingers that want you to believe that Janet Yellen’s dream product is available. It does not. Indexed annuities were introduced in 1995 to compete with CD returns, and that’s exactly what they do regardless of the agent dream sold.

Variable-annuity panaceas are sold as full market upside with attached guarantees. Once again, the common-sense devil is in the contractual details. In other words, if you want to buy mutual funds (aka: separate accounts), you might just want to go buy mutual funds without the insurance wrapper.

Most annuity ads are misleading

Cable TV and local radio ads pitching annuities are too often misleading, and go largely unregulated by state insurance associations. Hopefully the new Department of Labor “FiduciaryCare” law will stop these harmful advertisements immediately. One can hope.

A lot of these shady ads will talk about their clients never losing money, ‘participating’ in the market, but never mentioning the word “annuity.” If you fall for those bait-and-switch tactics, then I guess you deserve what you end up getting.

Common sense buys the contract, not the pitch

Annuities are contractually guaranteed transfer of risk products. Not all are good, and not all are bad. Annuities (all types) are certainly not for everyone, but do have their place in specific situations where contractual guarantees are needed. It’s that basic, and common sense will tell you if an annuity solution is right for your specific situation.

So when shopping for an annuity, common sense is always king. Don’t forget to use it the next time you think that annuity pitch sounds too good to be true.

Originally published 5/12/16 by –