Annuities: Buyer MUST be Aware

This is the first of several articles we'll be sharing from time to time about annuity products.  This one is from Margaret Wittkopp, Investment Advisor Representative and President of Veritas Financial Services.


When financial markets head downward, many investors become fearful and look for “guarantees.” Every day I am bombarded with offers from insurance companies that promise me, “easy sales and BIG commissions” for selling indexed annuities and other “stuff.”

Annuities are retirement savings tools backed by life insurance companies. Annuities can sound great, but there are many reasons for caution when purchasing annuities. These include: loss of control (once you annuitize, your decision is final), sometimes unfavorable tax consequences, and hidden costs and fees. These include either “back end” surrender charges (called Contingent Deferred Sales Charges), which can last as long as 20 years and be as high as 13%, or “front end” charges (commissions). You will pay an “add on” charge for each benefit rider. Hidden mutual fund fees are also charged in sub accounts. These charges are buried into the cost of your annuity contract and take away from your returns. Make sure you can calculate your total fees and that they are not excessive.

Annuities offer “guaranteed income.” To receive just $12,000 yearly ($1,000 a month), you would need to invest $264,000 in an immediate annuity at age 60. If you die before age 82, the insurance company keeps the remainder of your investment—not your intended beneficiaries. Consider inflation and longevity--what will $1,000 buy in 20 years? How long will you live?

Here’s something to think about, using data from 1973-1994. Twelve thousand dollars is about 4.5% of $264,000. Invested in a moderate, balanced Free Market Fund, you could receive 4.5% (that same $1,000 a month), and by age 82 your yearly income would have grown from $12,000 to $64,000. Your portfolio value would be $1,486,000.

Complex insurance products and nice-sounding terms like “indexed annuities," “living benefit riders,” and “guaranteed withdrawal benefits” are the trendy thing today. These products make it seem as if you cannot lose. Unfortunately, you may not really win either.

Remember, insurance companies are in business to make a profit. They calculate the risks to assure they do not lose. Annuities can be a useful investment tool if you've exhausted all other tax-deferred retirement plan options, but the buyer must be aware. Companies are collecting outrageous (and needless) charges, and most commission-based financial advisors are highly motivated to sell these products to you. Want to know more? Have questions about your financial future? Call us at 893-5262.