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July 01, 2005

Annuities: Committing Annuicide

When I was speaking last Saturday at Rich Dad’s Investor Workshop I mentioned that I am opposed to picking stocks, buying mutual funds and annuities. An adviser came up to me during the show and questioned me on why I didn't like annuities. Just yesterday, I received an e-mail from one of my students asking the same question.

 

I spoke with you after the session when I attended April 2004. I mentioned I was just beginning to sell life insurance after being laid off from telecom.

 

Recently I have become quite enamored with the Amerimark Equity Indexed Annuity. In your newsletter today, you referred people’s safe money to ING’s money market at 2%. I also have a friend who said you are opposed to all annuities. Is this true?

 

My first observation is that everyone who sells annuities seems to be enamored with them. Imagine that! They pay a 6% commission. My question is why are the only people enamored with them the people who sell them?

 

But hang on a minute. I'm getting ahead of myself. Harold Evensky says the word annuity is like the word cancer. It is so broad and so widely used but can mean so many very different things. Let's just be clear what we are talking about.

 

We can broadly divide annuities up into two categories: immediate and deferred. The category I have such a problem with are the deferred annuities. Immediate or fixed annuities may very well have a place in a retirement portfolio to guarantee a minimum income level, especially for the person who is retiring on a very small amount of money.

 

But deferred annuities are a different deal altogether. And yes, it's true. While I would “never say never”, the percentage of people that a variable or equity indexed annuity are appropriate for is absolutely minuscule and yet the problem I have is they are being sold left and right to everyone. I think that's egregious.

 

I have written numerous articles and spoken to this topic on the radio show countless times. I've also done interviews with other experts on the subject. You can find all of them in the variable annuity category to the left.

 

But to summarize, here are my beefs with deferred annuities, whether of the variable or equity indexed variety:

 

• Expenses and commissions are too high thereby creating a conflict of interest for both the broker selling them and the insurance company managing them.
• They are tax disadvantaged in about three very meaningful ways in spite of the fact that they are sold as being tax advantaged. For more on this, see a very good recent article by Scott  Burns.
• The performance sucks and the subaccounts are mutual funds. Enough said.
• You can't get your money without penalty for anywhere from seven to 10 years.
• The sales practices are abusive. Generally, the only person the deferred annuity is appropriate for is someone who is very young, has a long enough time horizon to actually get some benefit from the structure, has a very high income level and is maxing out all other tax-deferred accounts. Yet, these are sold day in and day out to the very opposite sort of person - mostly to older people near, or very near to retirement. That's just wrong.
• Many of these deferred annuities are being put inside IRAs. That's also just wrong. A tax-deferred account inside a tax-deferred account makes no sense except to the person receiving the 6% commission.

 

To summarize, for 99.99% of people, I think buying a variable or equity indexed annuity is basically committing “anuicide.” Many don't agree with me. Many do.

 

The subject of annuities is one of intense debate. Executives from almost all of the large insurance companies were in attendance at the Managing Retirement Income Conference I recently attended in Boston. On at least five different occasions, one of them posed the question the group, "Why are people so against annuities?" I'm sure they didn't like the answers.

 

Every article I write or radio show I do on this topic elicits heated responses on both sides of the issue. That's good! That's what blogging is all about - to encourage constructive airing of ideas so that everyone can make up their own minds. So in that spirit, feel free to leave your comments below. Please note however that any pitches for a specific product will be removed!

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Posted by Kim Snider on July 01, 2005 | Permalink

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