What Are The Disadvantages of Annuities
The Honest Truth
What are the disadvantages of annuities? You're saying to yourself, wait a minute, Stan, The Annuity Man, Americas Annuity Agent®. You sell annuities, you're right, and you're talking about the disadvantages of annuities. Yes, there are disadvantages to annuities. We're going to go over some of the main disadvantages, so you don't make a mistake. If an annuity sounds too good to be true, it is every single time in every single annuity type.
There are annuity types, and you already own the best annuity on the planet called Social Security. It's the best inflation annuity for lifetime income, but when people say, well, I hate all annuities, which type do you hate? I mean, there's a bunch of types of annuities. Are all annuities perfect? None are perfect. Every annuity type has limitations and benefits, has good and bad. I tell people this because you need to know you're going to get a contract. You're going to own a contract between you and a life insurance company that issues that annuity, so don't you need to know the good and the bad, the benefits and the limitations and the disadvantages. Nod your head.
The first disadvantage of buying an annuity is the sales pitch. Instead of the contractual reality, you’re buying the dream you're getting ready to own. Like I said previously, if it sounds too good to be true, it is every single time, without exception; there’s no exception. If it sounds too good to be true in the sales pitch, if you went to the bad chicken dinner seminar and it sounded too good, steak, whatever, and it sounded too good to be true, it is. Every single time annuities are contracts, so if someone says that you get all of this and a bag of chips, no. If you get one of the pitches with index annuities is market upside with no downside, no.
Index annuities were put on the planet to compete with CD or MYGA type returns. It's not a market-type product; it’s not a security; it’s a life insurance product. You need to understand that if you attach an increase to the payment, the annuity company will just simply lower that initial payment to make up for that increase. Just understand that if it sounds too good to be true, it is every single time, and don't buy the dream because you're going to own the contractual reality.
Another disadvantage of annuities, in general, is when people talk about market growth. I have an acronym that I've come up with called PILL. P stands for principal protection. I stand for income for life, L stands for legacy, and L stands for long-term care. If you do not need to solve for one or more of those items in the pill, you do not need an annuity. Notice that there's no G for growth M for market or market growth S for stocks. It's just not in there.
You should never buy an annuity for market growth, and I know that the Index Annuity people out there are yelling at the screen, and they're completely wrong; they just need to shut up. That's a CD product, but the Variable Annuity people are yelling at me. Still, these are mutual funds and separate accounts, and I understand that, but there are limitations to the choices. There should be no limitations to the choices when you're looking for market growth. If you are looking for market growth, never buy an annuity.
Fear of Missing Out
The other thing is it's FOMO, or fear of missing out. When you buy an annuity, it's a contract you're transferring the risk to solve for that principle protection income for life legacy and long-term care. When you buy it, you need to allocate the money properly to so there's no buyer's remorse. Well, I didn't get the last Tesla or Apple or GameStop or Bitcoin or whatever you're into, and you're not going to get all this money. You're not going to get those returns.
But, what you will get with annuities and most annuity types is lifetime income insurance; retirement income insurance is what I call it. Do you have that? You've got car insurance; you got homeowner's insurance. Do you have lifetime income insurance, or you might want principal protection or an annuity for long-term care? Fear of missing out, it's a big one. So when you buy an annuity, regardless of type, it's a contract you're transferring the risk to solve for a specific item. You’re not going to get market growth. You don't need to be all in with your portfolio as you know; you need to have a portion that's principal protection. You’d probably need to have a portion for income for life, and then the rest play the markets.
Another disadvantage of annuities is the limited liquidity that some provide. For instance, Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts are called annuitization products. I'll give you an example. In the South, we had spickets in the back of the house. Just think about ripping the knob off the spicket, a water spicket. Water's coming; you can't stop it the same thing with annuitized products. Those are lifetime income products. Once you turn it on, that income is coming, period, so there's a limited list.
There's no liquidity now with other products like Multi-Year Guaranteed Annuities, Fixed Indexed Annuities, and Variable Annuities that I don't sell. Those have limited liquidity. Most of those allow you to take a specific percentage out annually without penalty. Still, it’s limited, like for instance, Multi-Year Guaranteed Annuity, some don't allow you to take any money out some allow you to take just the interest, some allow you to take five percent or 10 percent out with most index annuities you can take out 10 percent annually from the policy from that accumulation value without penalty, but that's not a benefit.
Someone called me the other day and said, wow, you said I could take 10 percent out. I'm like, I mean, you're taking money out. It's your money. If you have any guarantees inside of it's affecting that guarantee. That's just a liquidity provision, but a disadvantage of annuities is either no liquidity or limited liquidity. Another disadvantage of annuities is the loss of control of the asset. In other words, you put $100 thousand in a specific type of annuity, and there are three that you lose control of the asset. Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, are annuitization products, and lifetime income products, but once you put the money in, it's an irrevocable contract. You're going to get the money back in the payment form.
You can structure yourself so that whatever's left in the account goes to the beneficiaries, and the annuity company doesn't keep a penny if you die early. Still, you lose control over the asset with all three of those product types. You have to understand that, and that's why you and I need to talk one-on-one. You need to make sure that you allocate properly and it's in proportion so that you have liquidity available in other instruments, and you do not need to access money from this PD because you can't.
Another disadvantage of annuities is what I call the 59 1/2 rule. Understand that annuities are put on the planet for retirement, and the government understands that and looks upon it from that standpoint. If you take money out of an annuity pre 59 1/2, there's an IRS penalty of 10 percent. Now we can go down the rabbit hole and get into the details, but I'm going to tell you this as a broad statement. If you're less than 50 years old, you shouldn't be looking at annuities; in my opinion, instead, you should keep your money in the markets. I mean, that's the bottom line, so the 59.5 rule is a big one.
The final disadvantage, in my opinion, with annuities, is what I call timing and people always trying to time the purchase. Now, this goes back to when I was a stockbroker. They used to be called Dean Witter, Paine Webber, Morgan Stanley, and UBS. In the markets, you can time things, there were the timing of mutual funds, and I'm sure there's the timing of stocks and bonds now, I don't do that anymore. But the point is in the annuity world; there is no timing. Everyone always asks me, what's the best time to buy an annuity? The answer is when you need the contractual guarantee, there's no way to time, but you cannot beat the annuity companies.
I know what you're saying. Stan is pretty smart. I can beat the annuity. No, you can't, especially with like lifetime income. Lifetime income is primarily based on your life expectancy when you make the payments, so if you're trying to play and time interest rates, you have to factor in all of those payments you miss while trying to time it. You just can't time it. I mean, and I know for you market mavens out there that, you know, trade futures are right, call options and all fancy stuff that you're doing out there. You say, well, I can time things in the market. You're right. You can time things on the market, but you cannot time anything with annuities because these are contracts.
You can't time contracts, and there's never any urgency to buy an annuity. It is the urgencies for you to understand what's in the annuity. Annuities are not too good to be true, but they're pretty darn good. There are many types depending on what you're trying to solve. Just ask yourself these two questions. What do you want the money to do contractually, and when do you want those contractual guarantees to start.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.