Are annuities safe?

By Paul Cross

Annuity National Brokerage Co.

People are transferring more than $36 billion monthly into annuities and the number one reason why is safety. Funny thing about that... when the market tanks, people move to annuities for safety. When the market is vibrant, people move money into annuities for more income, more growth and less tax.

Since the days of the Roman Empire, annuities have been the prime money contract for those who wish to develop income. Gladiators traded money and property for annuities to provide family security (income) should they not return from the wars and the deadly games they so proudly played. And today, financial universities and economists around the globe have concluded that income annuities can provide an income for life for as much as 40 percent less than a stock, bond and cash mix.

In the European market, annuities date back to the 1700s, when banks offered annuities. The United States issued annuities to Native Americans in exchange for land. The early railroad employees were issued a retirement annuity -- that was until they got "railroaded" with underfunded retirement plans.

Nothing was safer than the annuity, that is, until the variable annuity reared its ugly head and struck at the hearts of those searching for safety. Some feel they have been robbed with heavy annual fees and mortality costs while suffering the risks of the market. Where is the safety of principal? The answer lies in the death benefit; problem is, your client may have to die to get his or her money back from the variable annuity.

The variable annuity gave the annuity industry a bad name because the costly, risky variable annuity was labeled an annuity. Perhaps it should have been labeled a mutual fund/life insurance combo. The life insurance guarantees the return of your original investment in the event the value is down at death.

The safe annuities. Tax-deferred annuities and fixed-equity indexed annuities come with various forms of guaranteed growth that compound tax-deferred on 100 percent of principal, including any premium bonuses that may have been credited. The only time the owner will ever have a cost is in the event that he or she chooses to cash out too much too early.

Rainy day. We all have saved hard earned money for a rainy day. The best place to stash cash for a rainy day just might be in a short term multi-year guaranteed annuity (MYGA). Short term one-, three-, four- and five-year MYGAs generally pay rates that are slightly better than bank CD and money market rates. Plus, your client would have all of the tax-deferred advantages that can provide him or her with 45 percent more growth while he or she enjoys less tax. At the end of the short contract term, the client can cash-out or renew the short-term annuity or exercise a 1035 tax-free exchange to another annuity. One big advantage: The annuity not only accumulates more money, your clients can make it probate-free to his or her family outside the will and the trust, which saves court battles and legal fees, not to mention the time delays in the courts. That's one of the top 10 reasons people are transferring billions of dollars into annuities every month.

Retirement income. We also save hard earned money for retirement income or for increases in retirement income. New premium bonus annuities with lifetime income benefit riders offer a safe avenue for accelerated growth with income guaranteed for life -- without losing control of your client's money -- and with the cash remainder available to your client's beneficiaries in a lump-sum or selectable income option, thereby converting big tax-balloon payments into streams of income.

Does this investment come with a money-back guarantee? That's my question anytime someone tells me about a great investment. Now, I'm not asking that you guarantee the performance and the double digit gains you project. Ask yourself, "If the performance is not what my client thinks it will be, is he or she guaranteed his or her money back?" If the answer is no, it may make sense to pass on the deal, or certainly limit the amount of investment to an amount that your client would be comfortable losing.

Perhaps Will Rogers said it best, "... I'm more interested in the return of my money than the return on my money."

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