Nine annuity misapprehensions

Annuities have caught a lot of flak from the consumer press, and while they may not be for everyone, some of your clients could be passing up valuable opportunities out of fear. The Journal of Financial Planning, the official publication of the Financial Planning Association, analyzed some of the most prevalent misconceptions regarding annuities. Here are nine rumors swirling about annuities that could be behind your clients’ reluctance to look at the product.

1. Every annuity is a variable annuity. Overcoming this type of misinformation may be difficult, as clients have been inundated with the horrors of investing in annuities. As the Journal writes, “the risk properties of the variable annuity are incorrectly referenced on behalf of all types of annuities, undermining consumer knowledge and confidence in non-security-based investments such as fixed and immediate annuities.
2. Your insurance agent isn’t qualified to offer financial planning. Another myth that could be detrimental to your practice. Some investment managers will diminish the value of annuities, the Journal writes, because insurance representatives don’t need a securities license to provide investment advice — yet. Rule 151A could change all that. A securities license is only needed, however, when selling speculative investments where the potential for loss exists. The Journal encourages continuous training and professional courses year-round to combat this myth.
3. Fixed annuities will never outperform inflation. For investors who cannot afford to lose any of their life savings, the Journal writes, risk should never be a substitute for long-term planning and new income generation.
4. Annuities are all about penalties and surrender charges. While it’s true, annuities can come with stiff surrender charges making them unfit for some clients, they are designed to provide long-term security. Remind clients who are afraid of unreasonable penalties of the benefits of higher interest rates, guaranteed security and tax-deferred accumulation.
5. Commission-based planners must be biased. Fee-based planning was created by financial firms to ease client fears of non-objectivity, according to the Journal, and to maximize medium-term earnings and residual income, all the while providing more control over client investments. “Ironically, many within that field do not even actively represent or sell fixed, indexed or immediate annuities for retirement purposes, even when safety and risk tolerances determine that any level of risk is not appropriate.”
6. Never invest your IRA money in an annuity. As the Journal points out, the exception to this rule is when “safety is paramount and loss to principal is not an option, and the annuity offers a higher rate of return than other forms of investment.”
7. Only deal with big names you are familiar with. Ever hear of Lehman Brothers? AIG? A big name doesn’t guarantee a big return. “Restrictive affiliations and objective advice do not normally go hand-in-hand,” the Journal writes, as it may represent a conflict of interest.
8. Only deal with registered investment advisers. Some of the criticism of annuities comes from within the industry, from professional asset managers who are paid based on how much money they manage and keep in higher-risk investments. “There is a significant difference between the professional investor who wants to aggressively grow their million-dollar portfolio, and the retiree with $150,000 that will likely need every dollar and more to get through their retirement without outliving their savings,” the Journal points out.
9. Indexed annuities are often sold inappropriately. As we’ve mentioned before, annuities are not for everyone. Unless your 70-year-old clients are in remarkably good health, an annuity could very well be inappropriate. “The indexed annuity was purposely created, though, as a hybrid investment that combines the growth potential of the stock market with the safety features of a fixed annuity.” The Journal cites data from the National Association of Insurance Commissioners which shows that of $23.3 billion in sales in 2004, equity indexed annuities had only 38 closed complaints nationally, or $614 million of sales for each complaint received.