Broker Check


Annuities - Good or Bad?

| January 04, 2016
Investment Planning

There is a lot of controversy around annuities. Some advisors use them as if they were a cookie cutter for every client and some advisors despise all of them. Then, there are the majority of advisors that either fall somewhere between these two extremes or the solution-based advisors that use them when they see fit. So, what is the real story with annuities? Why do the extreme viewpoints exist? And, what is right for you?

The real story begins with addressing the two extremes. The fact is that there is not a single investment that can be used as a cookie cutter. There may be an investment that fits in several families’ portfolios, but not everyone’s. Think about it. Think of your situation in comparison with you next door neighbor. Do you have everything in common—the same jobs, income, future and goals, family dynamics, feelings about risk? I highly doubt you do. Therefore…what fits in your investment portfolio may or may not fit in his, no matter what it is. On the flip side, an annuity is a tool for investing. Some people may never need it. For some, it may be the only solution.  The truth is annuities get a bad rap because the majority of them range from bad to horrible. But this isn’t true for every annuity.

There are tons of annuities and even more bells and whistles go along with them. When considering an annuity, you have to look at the company itself, type of annuity, the cost of the annuity, the investment options and/or restrictions OR indexing strategies OR interest rates, the cost of the investment options, the income or withdrawal riders and costs, the death benefit or enhanced death benefit riders and costs, surrender periods and costs, and any other attribute of the policy. Then, there is the fine print. Remember, the big print giveth and the little print taketh away. It is always important to look at what the carrier can take away or change from when the annuity was originally contracted. Annuities are so complicated that even when we review one that we helped a client obtain a year or more ago, we have to call the carrier again and get them to explain how the contract works and what changes have occurred since the origination of the annuity. Annuities can be a really scary investment if you don’t know what you are doing.

I guess you may be asking, Is it really worth all of the hassle then? The answer is, It can be. Let me provide you with a few real-life scenarios where annuities were the perfect fit. Imagine a family in the highest federal tax bracket. They don’t plan to use their investments until retirement when their tax bracket will be much lower. An annuity might fit to allow them to defer the taxes on the gains and income. Granted the gains and income will be taxed as ordinary income tax rates so diligent planning must be done in advance to weigh these costs. Or, imagine the family that just can’t stand the thought of seeing their account balances go down. Cash or CDs would seem to be a safe place, but there is only one problem. This strategy may cause you to go broke safely. Your money has to outpace inflation (the cost of your living expenses going up) or else you will be putting something back on the shelf at the grocery store because you can’t afford it. So, perhaps an annuity that guarantees the principle, but can participate in the upside of indexing strategies might be a good fit. Or, what about the uninsurable husband with terminal cancer? He wants to leave his wife as much money as he can and because of an annuity, he may be able to put money into a contract and it guarantees she will receive more even if he passes tomorrow?

Annuities are NOT simple and should not be a cookie cutter solution. At the same time, they should NOT be ignored as a potential solution. The key is working with a solutions-based advisor who helps you walk through your current situation, future and goals, family dynamics and feelings about risk to determine what is right for you. We have a saying around our office that fits perfectly for planning with annuities—Don’t try to do the job alone!