From Oct. 15-17 many of the major players in the annuity world gathered in Scottsdale, Ariz. at the Westin Kierland Resort & Spa for the 2014 IMO Summit. You can read more information about annuities from the event.
Prior to the 2014 IMO Summit, NAFA sent out a paper (“Answers every investor needs to know about annuities”) that can benefit advisors as well as consumers. On the following pages, NAFA answers four of the most important questions you’ll ever receive about annuities. These nuggets can be vital in helping producers educate clients and prospects on annuity products. 1. I’ve heard that annuities pay “high commissions”- is that true?
Insurance companies pay the annuity salesperson for the sale of an annuity. They are paid when your policy is issued and accepted by you. However, the payment isn’t taken out of your premium, and the commission payment isn’t taken out of the amount you pay into the annuity.
Commissions paid once on the sale of a fixed annuity are often, over time, less than the ongoing management fees charged to your investment account.
Fees paid to your investment firm are taken out of the assets they manage on your behalf. The SEC advises that “before you hire any financial professional—whether it’s a stockbroker, a financial planner, or an investment adviser—you should always find out and make sure you understand how that person gets paid when they sell securities. Investment advisers who sell securities or security products generally are paid in any of the following ways:
* A percentage of the value of the assets they manage for you; An hourly fee for the time they spend working for you;
* A fixed fee;
* A commission on the securities they sell (if the adviser is also a broker-dealer);
* or Some combination of the above.”
Depending on your needs and preferences, insurance commissions or any of the above compensation methods have potential positive and negative benefits, all of which should be considered when choosing financial products and the professionals who sell them. 2. I’ve heard that FINRA and the SEC have reported that there are a lot of consumer complaints with annuities and that the insurance companies reserve the right to change the terms of the contract?
The SEC report you may be referring to was issued in 2004—over a decade ago—and the complaints were related to variable annuities. Since then, complaints have plummeted to such an extent that neither insurance nor annuity products are mentioned as a concern in the 2014 FINRA Regulatory and Examination Priorities.
Instead, FINRA warns investors to be wary of advisors pushing interest-rate-sensitive securities, such as mortgage backed securities and long duration bonds, bond funds and ETFs. In 2013, there was one annuity complaint for every $200 million of paid fixed annuity premium.
Fixed indexed annuities, the product most fixed annuity detractors “hate,” recorded approximately 6.5 billion new policies issued since they were first introduced and less than ½ of 1% have filed complaints.
Also, FINRA regulates securities products, so referencing FINRA when talking about fixed annuity products is problematic and misleading. Insurance law requires that any limitations on future premiums or change in terms must be clearly described in the annuity contract. Insures don’t “reserve the right” to change anything. Any non-guaranteed feature must be clearly identified in the advertisement, disclosure, sales material and contract. Consumers who are considering any financial product or insurance contract should read what they are purchasing. Whether it’s a prospectus for a security or a contract for insurance, the consumer should fully read it before they sign.
In addition, the annuity purchaser should be aware of all the annuity contract’s benefits and limitations and read the contract, ask the professional selling you the annuity, and/or call the company that issues the annuity you are considering. 3. Do I pay extra for tax-deferred status of an annuity, and what happens when I die?
The tax deferral of a fixed annuity is granted by the United States government and is imbedded in the IRS Code. The “cost” of deferring the tax is not borne by the insurance company issuing the annuity or the annuity owner.
Tax deferral for annuities can provide a powerful boost to annuity earnings over other financial products that don’t receive tax-deferred status.
After all, the tax-deferred money that is not paid every year in taxes stays in the annuity, and it earns interest as well as does the premium you paid. The power of tax deferral is clear, and, with higher interest rates, higher tax brackets, and longer maturities, the power of tax deferral becomes even more powerful!
If you own an annuity in an IRA or employer-sponsored retirement plan (called qualified plans), the annuity’stax deferral provides no more tax advantage than what you receive using other products in your qualified plan, but it provides no less either. All annuities purchased using after-tax dollars (called non-qualified annuities) enjoy the same tax-deferred advantage. Tax deferral for annuities can provide a powerful boost to annuity earnings over other financial products that don’t receive tax-deferred status. After all, the tax-deferred money that is not paid every year in taxes stays in the annuity, and it earns interest as well as does the premium you paid.
The power of tax deferral is clear, and, with higher interest rates, higher tax brackets, and longer maturities, the power of tax deferral becomes even more powerful! If you own an annuity in an IRA or employer-sponsored retirement plan (called qualified plans), the annuity’s tax deferral provides no more tax advantage than what you receive using other products in your qualified plan, but it provides no less either. All annuities purchased using after-tax dollars (called non-qualified annuities) enjoy the same tax-deferred advantage. It is important to understand that your annuity will transfer to your survivors free from probate, saving time and legal fees. Your survivors will have to pay taxes and will need to consider tax issues.
NAFA advises consulting with a tax professional to help manage the tax impact of an annuity inheritance. Any inheritance, whether it is an annuity’s death benefit or investment returns, have income, capital gains and inheritance tax considerations, so be careful when someone suggests annuities are unique in this consideration. 4. How does inflation impact my annuity income and are there ways I can address it?
Inflation is a risk on any fixed income recipient, and if you believe inflation will be high during your retirement, NAFA encourages you to address this with your annuity professional or investment advisor.
It is good to know, too, that there are many “inflation adjusted” annuities available on the market today. If you are concerned about inflation risk, ask your annuity professional about an inflation-adjusted annuity.
Also, in a deferred annuity, where you defer your payout until sometime in the future, you may select products with competitive and inflation-adjusted payouts at the time you begin your income payments. Ask your insurance professional for more information.