The 7 costly mistakes your clients make with their money, Pt. 7: Buying into the anti-annuity hypeArticle added by Tony Walker on July 25, 2014
Bowling Green, KY
Joined: March 11, 2010
Ranked: #96 (720 pts)
With pension plans going the way of the cattle prod, a retirement plan that includes a predictable stream of income for the rest of our lives is a no-brainer. And there is only one financial tool that can accomplish this: the annuity.
While annuities have been around for a long time, there is nevertheless a ton of misinformation about them. Here are misconceptions one through five. Misconceptions six through 10 will be covered in part two of this article.
Misconception No. 1: Annuities come with huge surrender penalties.
Surrender penalties are nothing more than a penalty for early withdrawal. They are there to not only protect the annuitant (the title given to the person placing their money (premium) with an insurance company annuity), but also to protect the insurance company. Let’s face it: The last thing your clients need to worry about is the insurance company going belly up. The more the insurance company is willing to promise (interest rate, income, etc.), the longer your clients are going to have to leave the money
with them to avoid surrender charges. Surrender penalties within the annuity allow the insurance company to protect themselves from people making a run on the company, thus guaranteeing that your client’s annuity is safe and secure, and the insurance company can continue to meet the contractual obligations made to their annuitants.
A penalty for early withdrawal is nothing new; banks do it all the time. Just take a look at CD rates: The longer the maturity, the higher the interest they pay for your client’s money. However, with these higher rates comes the possibility of higher surrender penalties to your clients if they get out early.
Misconception No. 2: All annuities charge high fees.
Nothing could be further from the truth, unless you are referring to variable annuities. Variable annuities, which are sold mainly by Wall Street, are mutual funds in an annuity wrapper. The reason variable annuities charge higher fees (as opposed to fixed annuities) is due to the risk of the stock market within them. While a variable annuity can make huge returns (based on the success of the market), it requires the insurance company issuing them to charge fees in case things don’t pan out (the market crashes and your clients want to guarantee either a lifetime income and/or something for their families when they die).
Fixed annuities, on the other hand, are not invested in the stock market, but instead invest in portfolios of safer instruments like corporate and government bonds. The insurance company issuing fixed annuities makes their money (profit) on the spread between their overall bond portfolio and what they can pay your clients on the balance after deducting their expenses.
Misconception No. 3: Annuities are difficult to understand.
There are various articles filled with misinformation regarding annuities (obviously written by people who have little understanding of annuities and/or are too lazy to take the time to read the contracts) as they go on and on about the complexities of annuities.
Just because someone has limited knowledge of how a TV works, doesn’t mean that they shouldn’t watch their favorite programs.
Regardless of whether your clients are 25 or 75, if they are looking for an investment that will give them guaranteed mailbox money in retirement, they should strongly consider an annuity. For retirement-minded folks who are more concerned about the return of their money and a guaranteed return on it, it is the way to go.
Misconception No. 4: With an annuity, my client’s money is tied up.
While the vast majority of annuities come with surrender penalties, most still offer flexible ways to “untie” your client’s money so he/she can use it. Here’s a few:
1. Beginning after the first month of the contract, your client can request the insurance company send them the interest earned.
So, as we can see, the right type of annuity is very flexible and accessible at any time as long as your clients use it appropriately.
2. After the first full contract year, your client can request 10 percent of the entire contract value without penalty, each and every year. In some annuities, if your client skips taking the 10 percent one year, he/she can take 20 percent the following year.
3. If your client is diagnosed with a terminal illness or goes into a nursing home, most will allow your client to take out more than 10 percent penalty-free each year.
4. Upon your client’s death, the full value of the annuity will be paid to anyone your client chooses, with no penalty whatsoever.
5. At the end of the surrender term (usually 5 to 16 years), your client can cash out the entire annuity value at no penalty whatsoever.
6. Your client can annuitize (usually at any time) and begin receiving a lifetime monthly income without penalty.
7. If your client’s annuity contract has a guaranteed lifetime income rider, your client can begin monthly income payments when he/she chooses and even change his/her mind later and take the remaining annuity value in a lump-sum cash payment (a newer feature which differs from annuitization).
8. And finally, your client can “cash out” his/her annuity at any time if he/she is willing to deal with the surrender penalty. Of course, if your client cashes out the annuity after the surrender penalty expires, there will be no problem getting all your client’s money back (unless your clients are in a variable annuity and then their account value could be less than they put in based on the market
Misconception No. 5: Nothing is left for your clients’ families when they die.
This is only true if your clients annuitize their annuities and elect the “life only” option. Sometimes, people select the “life only” option, as opposed to other options with annuities that offer a survivor option upon death, because they need the highest income payout possible. (The “life only” option is the same option given to retirees who have had the luxury of an employer-sponsored pension plan.) Your clients can do the same thing with most annuities, and only an annuity — not a stock, bond, mutual fund or other non-annuity investment — has this feature.
So, if your clients do not annuitize, their family is assured of getting what remains of the annuity at their death (unless of course, they simply take withdrawals during their lifetime or surrender the annuity and do something else with it, which they can certainly
These are just some of the common misconceptions about annuities that are out there. More will be covered in part two of this article, which will be published next month.
Be sure to talk to your clients about their retirement options, especially annuities. You’ll be glad you did… and your clients will most likely worry less about their retirement as a result.
This excerpt was taken from the book "Don't Follow the Herd" by Tony Walker.
The views expressed here are those of the author and not necessarily those of ProducersWEB.
Reprinting or reposting this article without prior consent of Producersweb.com is strictly prohibited.
If you have questions, please visit our terms and conditions