Annuities: The Good, The Bad and the Ugly

Annuities: The Good, The Bad and the Ugly

By Joe Delaney Too often, we’ve seen this all-too familiar story. A client brings in an annuity policy to review, either for themselves or a family member. They bought it to create a steady annual flow of income on later life, insurance against unexpected longevity. But what we see is a jaw-dropping set of numbers that reveal poor performance, high commissions paid to brokers, misleading benefits and ridiculously high expenses. How do so many fall into the trap of buying into an expensive annuity? There are a few key reasons. Great for the Seller: Commissions The first thing you need to be wary of as an investor is the possibility that a broker, or agent, is pointing you in the direction of a product more in their own interests than yours. Exhibit A is the annuity. An insurance product rather than a securities package, annuities are sold by insurance agents rather than brokers. It is sometimes the best option an insurance-only agent (not securities licensed) can offer. There is nothing wrong with selling annuities in and of themselves, nor is there anything wrong with insurance agents earning commissions. However, when a product has particularly high commissions it is all the more important to ask the agent point blank whether annuities are in your best interests. Strictly speaking, agents don’t have to act in your best interests because they are not subject to federal fiduciary rules that govern financial advisors. They also pay out among the highest commissions in the financial service industry. The highest rates are paid for longer surrender periods, years during which policy holders are charged for...