Response: Knowing when or if you should exchange one annuity for another is an extremely important topic to understand if you own annuity contracts. Let's face it, products change over time and bigger and better things come along, however the old adage "if it ain't broke don't fix it" also applies here as well. The underlying theme here when you are faced with this decision is economic benefit, and I'm not talking about the commission being generated to the advisor to helping you with this transaction. There MUST be a clear economic advantage to the investor to even consider making an exchange of one annuity for another.
In the next couple of videos I'm going to dissect what those major economic factors look like and how you should be evaluating them, but it's safe to start by suggesting you ask the advisor who is proposing this change to you two basic questions:
1. How many companies do you represent? You certainly don't want to exchange your annuity to one that isn't the best available and if your advisor has a limited product catalogue then you are going to end up purchasing an annuity.... quite possibly not the best annuity.
2. Ask the question... What is the economic benefit to me to make this exchange? and would you be so kind as to put those items in writing for me? The Annuity Report Card that I prepare at my firm truly takes the trust factor out of the equation and allows the client to make decisions based on written facts vs. verbal promises or slick sales pitches. There must be an economic benefit to you to consider moving your money and why wouldn't you want that in black and white?
Thanks so much for the question Rolando, stay tuned for some more details on this important topic.
Response: My first response to this question is that I don't have enough information to answer the question from a financial standpoint. In order to assess whether you are suitable to purchase an annuity I would have to conduct a full financial assessment. Since liquidity is one of the concerns in making this kind of investment, we want to make sure that you have enough money to afford that type of illiquidity in his portfolio.
Assuming you are financially suitable to make this kind of move, I would suggest that you have a very small window of opportunity to do so. Every annuity has a maximum issue age and once you exceed that age the product you are considering is no longer available to you. Looking at the entire spectrum of available products, once you hit age 75 the number of consumer oriented products that perform well diminishes significantly and again at age 80. Once you hit the age of 85, I'm not aware of any annuity product that I would recommend even if it were available. So here are a few things to consider before writing that check:
1. Make sure that you understand the liquidity of the annuity product you are purchasing completely.
2. Even though I don't use variable annuities in my practice, owning or purchasing one at age 83 isn't a great idea. You just don't have enough time to recover from any sort of market correction and the fees will eat you up.
3. Make sure that the annuity you are considering has some type of health care waiver. This allows for additional liquidity if you happen to need your cash while being under some sort of medical care.
4. Make sure there is no surrender charges at death. You certainly don't want your beneficiaries to pay any fees upon your death to collect their money.
Thanks so much for the questions Leon and if there is anything else I can do for you, please don't hesitate to let me know. Stay well.
Click here to add yourself to my calendar for a phone call or meeting!
Response: Great question from Sue T. in Noblesville, IN. The very first question I'm asking any advisor that I'm meeting with to discuss annuities is "how many companies do you represent or are you contracted with?" Ask for a list to see what you will have access to. Let's face it, you can't possibly buy the most competitive product, from the best rated companies if the person you are speaking with doesn't have access to it.
Next I want to know about fees, caps and things that cost me money. Have the advisor prepare an outline of all of the contract limitations, things that will cost you money like expensive riders and go through them with you. If you are being presented with a annuity that has a rider, like an income rider or death benefit rider, ask if it's optional and why this vs. a lower cost product which will probably offer you better performance.
If the annuity has a bonus, don't jump to the conclusion that this is automatically a good thing. Ask if it's a cash bonus, if there is some sort of recapture or vesting schedule or is it paid to an "income account" accessed through exercising an income rider or annuitizing. These are critical to understand.
Last I want to learn about liquidity, how you access your money if you need it. How much can you take without incurring a fee and last but not least, what happens should you pass away while owning this contract.
I think these are some of the most critical questions you should be requesting responses to Sue and of course there are many more follow ups to them but at least this points you in the right direction.
Keep the questions coming.
Response: Thanks so much for the questions Sonja...there is plenty of dirt on the topic of annuity bonuses. It's interesting how even some of the most well read investors when you ask them why they purchased a particular annuity the first thing out of their mouth more often than not is "well I was paid a bonus". Wearing this like a badge of distinction as if they were so crafty they outwitted the insurance company and beat them like the gambler who is going to take down a Las Vegas casino. First off, there is no "getting over" on the insurance company. If you haven't notices, these are for profit companies and aren't in the business of giving money away. Having said that, I normally discourage my clients from entertaining a bonus annuity product as I do with most other annuity riders. Why?... because after the thrill of "being paid" wears off typically in the long run they end up costing YOU money. Let's take a look.
When you are paid a bonus it's either paid to you in cash, added to your deposit or if you have an income rider, it's added to your income account. The difference between the two is extreme. Funds in an "income account" or "income rider account" not only are costing you in fees which have a negative affect on the earnings of your actual cash value, but you typically either need to exercise that income rider or annuitize the contract to realize that value. I've seen cases where bonuses were used to offset surrender fees coming out of another annuity contract and the bonus was paid to the income rider account, not the cash value... this should never happen. Rule number one, don't own a rider that you aren't prepared to use at some point otherwise you are just tossing money away.
The alternative to being paid into an income rider account is when that bonus is added directly to your cash value.. a much better situation since that is real spendable money, but there are downsides here as well. Normally when you are paid a bonus is cash there is something called a "bonus recapture" schedule. It's a vesting schedule much like the surrender charge schedule on your annuity but it applies to your bonus. If you leave early, you give it back, it's that simple.
The questions that must be asked when you are being enticed with a bonus are:
Response: Let's face it... Annuity investing has always had a negative connotation. Ralph from Coral Springs wants to know why. Well Ralph in my opinion that negative cloud exists for a few reasons. Obviously the media portrays this asset class as a whole as a bad choice. Whether or not there are thousands of success stories out there, let's face it, negative news sells. It's much more interesting to read an article about the 82 year old widow who got burned than the 82 year old happy annuity investor. The other issue is that when the media portrays these products, it's done in mass. For example, high fees are normally discussed. Well, I would agree that high fees exist in the variable annuity market place... but that's one of 4 types of annuities that are available to the public. The problem is the public can't differentiate and suddenly ALL annuities have high fees and are bad investment options.
Secondly, I would agree that there are plenty of people who have purchased annuities and have had bad experiences. I would say that's true of any product a consumer could purchase. One investors experience does not make for the demise of an entire asset classification. As I said above, there are plenty of great products out there and plenty of fantastic planners and advisors using them in their practices, you just aren't going to read about them or see them on the news. Thanks so much for your question Ralph .
The more annuity bells and whistles you buy... the worse your performance will be.
Response: Thanks so much for the question Sam and here's the straight scoop. First of all the underlying fuel for a disgruntled owner of anything including an annuity is their expectations. When you sit in front of someone who is talking to you about market like returns with protection and bonuses and guaranteed income etc. people tend to get excited. What I have found in my 25 years of experience is that when it comes to annuities in general, consumers are sucked in by the flashy enticements like bonuses, income riders, roll up rates that they typically think is a guaranteed return and Death Benefit Riders. Consumers love the features and things that make these products sound fantastic... the downside is that they rarely if ever understand the affect of having these features included in their contract on the underlying performance of their investment. Investors don't typically complain about the 10% bonus a year or two later... what they complain about is the fact they learned some new terminology like what a cap is or that there was a fee for those riders and a vesting schedule for that bonus.
When I sit down with someone to discuss an annuity that they own or we are talking about putting funds into a new contract the very first thing that we talk about is the use of those funds. Are we buying an annuity for appreciation and growth or to produce income. Often those two varieties will lead us down two very different paths. I see so many annuity contract owners who come to me for an Annuity Report Card® who are unhappy because of their returns, but don't understand the very things that excited them about making the purchase is the same items that are causing their funds to perform poorly.
The lesson of the day is when it comes to annuities as well as so many other things in life... "you can't have your cake and eat it too". If you are buying annuities laced with additional costly features, don't expect your investment return to knock your socks off. Most often you can have one or the other but not both.
Thanks again for the question Sam.
Response: Thanks so much for asking your question Hussaim... and a great question it is. The toughest part of our job as financial coaches is managing the expectations of our clients. Wouldn't the world be wonderful if you could buy a product that offered you principal protection, 100% liquidity, no fees and a 12% guaranteed return. In the real world that product doesn't exist, but having had conversations with investors who have sat through some indexed annuity sales pitches, you would think it did.
Having said that, Is it possible to experience double digit returns in an indexed annuity?... yes you can. However, it really comes down to whether you own a capped annuity or an uncapped annuity and it obviously depends on the underlying index and it's performance as well. Let's face it, if you own a contract that has a 4% earnings cap, then you should never expect to earn a dime more than that. Just like any other investment vehicle where investment performance is unknown and unpredictable... indexed annuities are no different. There is no way to know or predict what your contract will do, but if you own a capped annuity... you will certainly know what it will not do and that's a pretty important bit of information you should have in your pocket BEFORE you purchase one of these things. So how do you give yourself the best shot at success? Without mentioning specific products.. try looking for:
Thanks so much for the question Hussaim and best of luck in your search.
Response: Thanks so much for the question Pam. I know there is a lot of frustration in owning an investment vehicle that you think you understand or that you buy because of the "the pitch" and then you learn something about it later that wasn't quite clear to you. Riders of any kind, whether they are income riders, long term care riders or death benefit riders are without a doubt the most misunderstood and least explained "add-ons" to an annuity and they can also be the most costly.
A death benefit rider is like owning a small insurance policy inside your annuity contract that guarantees your beneficiaries a certain return on your investment regardless of how your actual investment performs. These are very popular with the sale of variable annuities and the pitch is "protecting your heirs and their inheritance in case you happen to pass away during a down market... they aren't penalized." Some call it a "peace of mind" feature... however the catch is the fee especially with the already expensive variable annuity. I'll give you an example. I prepared an Annuity Report Card this past week for someone who owned a variable annuity for the previous seven years. Her complaint to me was that she was unhappy with the performance and she wanted to better understand why. After dissecting her contract I'm going to show her when we meet this week to review this report that she not only had a Death Benefit Rider attached to her contract but also an Income Rider as well. She was paying 1.50% in M&E charges, .75% in asset management fees .15% in admin charges and a whopping 2.5% in rider fees for both riders. Total fees for her ownership of this annuity is 4.90%. Her total return on investment net of those fees 4.17%. My opinion is that if you are purchasing a variable annuity on the integrity of the underlying performance of the managers that you are already paying... why do you need this extra expensive insurance policy. I get the untimely death thing and I'm sure there have been cases where it has paid off for the consumer, however, how about the fact that these are being sold, or should be sold as long term investment vehicles. If you are paying 1.00% in fees to guarantee a 4% return on a vehicle that long term should do a multiple of that... where's the attraction? Are you betting that your portfolio managers will not return to your heirs 3% or better performance?
"I purchased a product that does not mature. I can never withdraw the full amount from my account... EVER. I can however annuitize or withdraw the money over a 10 year period. I complained about the sales pitch and misrepresentation of the product because I would never buy anything that I could not take my money out of after so many years. The Rep informed me I was given and signed a Contract. Be careful - when an Advisor tries to sell you something - make them show the points in writing they use as product benefits. Always ask what happens when you die - make them show you that info in writing as well".
Response: All I can say about this is I'm sorry. As an industry we typically chase after the advisor and blame only the sales practices involved in this type of scenario. My opinion is that that is only the tip of the iceberg here. The root of the problem is the fact that this type of contract, when presented to the states for approval to be sold should be denied immediately and without question. A product with an never ending surrender charge and forced annuitization should never make it to the kitchen table as an option for anyone.
I have run across this product before and interestingly enough I had a perspective client ask me about this company and a similar product just this past week saying "It looks like a pretty good deal... what are your thoughts" This is a classic example of how individuals don't get past the sales pitch and dig a bit. This is exactly the reason why I employ my Annuity Report Card®. I actually take it a step further and not only prepare the Annuity Report Card® but also show the breakdown of the annuity that I am comparing it to. Please feel free to check out the Annuity Report Card® I did for this case.
As far as what you can do at this point if you find yourself in this situation.
Response: Thanks so much for writing in Robert.. I truly appreciate you taking the time to ask your question. As you know from reading or listening to anything I have ever published I am not a fan at all of rules of thumb. Everyone that walks through my door and interviews with me has a completely different set up circumstances. As a starting point for discussion, before I meet with a new perspective client I have them complete the Color of Money Survey. This is a simple test to give me an indication of their risk tolerance as well as other things that should be considered in determining asset allocation. As with any asset class, owning too much of one particular type of investment has it's risks. Individuals who were heavily invested in real estate over the last 10 years felt the affects of being heavily weighted there. Having too much of your money invested in annuities may not cause you risk of loss but instead you have liquidity concerns.
The two biggest gripes about annuities are fees and liquidity and if you are too heavily invested in annuities a number of things have gone wrong. Here are a few things to pay attention to:
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.