Trap or boon: annuities require fiduciary analysis

Annuities became a popular refuge after the market crash of 2008. Investors, promised a guaranteed return, flocked to the annuity market as insurance companies ramped up their sales efforts. While a carefully evaluated annuity can play an important role in a well-balanced retirement plan, some annuities can work against an investor’s retirement goals and offer little of the liquidity necessary for successful active money management. We have seen some instances in which frightened investors fled to annuities and found themselves trapped by long surrender periods and guarantees they didn’t understand. Recently, a new client asked us to review the five annuities she owned. They ranged from a simple, fixed product, to indexed annuities with income guarantees. The annuities left her unable to access her money until between 2015, for the annuity with the shortest surrender period, to 2021, for the annuity with the longest. One of the more alluring qualities of annuities is the guaranteed growth, but those guarantees can be deceiving. For instance, in our new client’s case, she could never take a lump sum withdrawal from the growth account, which is the only account with the 8% guaranteed growth rate. The account values of annuities grow according to the indices into which it is allocated. Extra riders like lifetime income features cost extra money up to and exceeding 90 basis points. The only way our new client could access her 8% growth was to turn on a fixed lifetime income payment stream, which is age banded. This left her with the following options: Access it from age 60-69 and take 5% of the value annually for life Access at age 70-79 and take 6% Access from age 80 and up, and receive 7%. This feature is designed for investors with a larger portfolio who can justify putting a significant amount into something with these account limitations and can wait 10 years to get money out without penalty. We’re working hard… | Read More »

Annuity fine print can cost you money.

Recently a client of ours came to us with an indexed annuity that he had just bought and wanted us to take an independent look at.  We called the annuity company with him and asked a wide variety of questions to better understand the terms and conditions of the product.  Our clients’ main concern was how he could access his money.  What we found out was news to our client and he didn’t like what we learned. This particular product had ten-year surrender period.  This means if our client needed to pull his lump sum of money out he would have been charged between 12% and 4% depending on which contact year he did so.  He did have access to 10% of the contract value every year without penalty but not until the second contract year.  This annuity also had a lifetime income payment benefit.  The longer he waited to access this benefit the higher percentage of his benefit base value he could access.  At our clients current age he could access 5.2% a year for the rest of his life.  The major problem with this was that once he attempted to access this income rider, the payment amount was fixed for life, which would not keep up with inflation.  This benefit was costing our client .95%. After the phone call I asked our client what he told the people who sold him this product.  He said, “I want to be able to access my money when I need it.”  This statement threw up a giant red flag to me because this particular annuity had plenty of limitations on how he could access his money.  Then I looked at the start date of this contract and realized that he had purchased this product within the last month. I immediately thought of the free look period. Every insurance-based product has what is called a free look period, which varies by company… | Read More »