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: Today's question came in from Daniel from Westin Florida. The quick response to your question Daniel is to say absolutely not. This is a classic example of an advisor selling the features of an annuity trying to entice a sale and setting an expectation of safety when one doesn't exist. I'm quite certain based on the question that the discussion of fees for these "guarantees" was not part of the conversation either. I want to be perfectly clear to state that NO variable annuity offers its owner principal protection or any sort of guaranteed return. To take that a step further, many sales presentations include a discussion about either an income rider or death benefit rider which many consumers misunderstand. Both of these riders are costly additions to your expense schedule and in short an income death benefit rider guarantees your beneficiary's that they will not inherit less than your original deposit plus a nominal rate of return. Please note that this IS NOT spendable cash by you while you are alive. An income rider is a feature that provides for a "roll up" in value and a guaranteed payout for life from that "income account" NOT your cash value. There is a huge difference here. You should also be aware that if you add these riders, there are fees involved. You should know what the total cost of your annuity is before considering the purchase. I would also be asking to see the track history of the performance on contracts that include the riders to show you the net affect of those expenses.
Thanks so much for the question Daniel.
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.
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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: 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 .
Response: Thanks so much for the question Donna and income riders are probably the most misunderstood, oversold and least explained feature that can be added to an annuity. I can't tell you how many annuity owners I meet with that are so proud of the fact that they own an annuity that they were bonused 10% when they made the purchase, their money is growing at a guaranteed 6% rate and life couldn't be better... Then I do the Annuity Report Card on their contract and they find out that their real spendable cash is not growing at 6%, that's either the roll up rate that their "income account" is appreciating at. The learn that they are paying a fee for that income rider which is sapping the growth of their actual cash and that the bonus that they were paid was added to their "income account" and not their cash value. Typically the red flag that brings them to me is they see that their cash value is not growing nearly enough or as much as they anticipated.
A few things to understand about income riders:
Response: Thanks so much for the question Patricia. I am not a huge fan of broad stroking remarks like that and you should be careful of the source. Fear is a popular sales tactic and is used in all industries including the financial services industry, most often by competing asset classes. I think you'll find that equity managers who do not employ annuities put this type of information out to scare people out of buying them and into seeking their counsel to buy their widget. Having said that, there are SOME annuities that are very burdened by fees, but the impression is often given that ALL annuities share this trait.
There are four different types of annuities available today, and I will cover each of them as they relate to fees.
Immediate Annuities: Where you are basically trading a lump of your money for an income stream similar to a lotter payment has NO FEES. You aren't going to earn much money here.. but no fees non the less.
Simple Fixed Annuities: These are principal protected annuities that are very safe and pay a simple interest rate... also NO FEES. You know where interest rates are right now, so this variety doesn't get a whole lot of looks right now, but if rates should continue to rise will probably gain popularity once again.
Indexed Annuities: This also falls into the principal protected variety and the majority... but not all of these products have NO FEES. There are some exceptions to the rule here as some of them do charge a fee and if you start taking on income riders and/or death benefit riders those will always cost you a fee. It's worth noting that the best performing indexed products available today are the least exciting for they have no bonus enticements, flashy riders and all the other widgets that are easily sold but somehow mathematically don't look so good after a year or two. I'll save the rest of that story for another time.
Variable Annuities: Last but not least comes the infamous variable annuity. Gained popularity during the mid and late 80's when the markets where screaming along and know one cared about fees... until the bottom dropped out. The market corrected, people lost money which they didn't think they could ever lose, people wanted to get out because they were losing and didn't like that they had to pay a fee to do it and then the discussion of costs became important. People filed complaints left and right and since then ALL annuities took on a bad flavor. I don't use variable annuities with my clients because of the fees and my opinion is that there are much more efficient ways to expose yourself to the market than using this type of vehicle. You'll pay on average between 2.5% and 5% in fees especially again if you start tacking on income riders and death benefit riders... remember as a general rule if you are buying guarantees you are going to pay for them and will most definitely play against the total return of your investment.
Summary: All annuities to not have fees. Some do and some additional benefits that you add to your contract will certainly cost you as well. My advice is to go lean and mean and try not to make what is supposed to be an investment vehicle into something that it's not... like a long term care policy or life insurance policy. Everyone has their own opinion though, and now you have mine. I hope you learned something Patricia and I thank you for your question.
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.