I really don’t hate all annuities, but that statement “I hate annuities” is used by people to get your attention and divert you to what they are selling. Most people that I meet with regarding their portfolios have an opinion regarding annuities. But it is a common mistake to think that all annuities are the same, because they’re not.
It was common some time ago to receive a pension upon retirement from their employer, whereas the retiree had to make choices about the distribution of their retirement. That retirement choice was in fact an annuity. Today that style of annuity is called a “single premium immediate annuity.” The problem with these annuities, that are still offered, is that the insurance company has control of the money and you must make choices for the distribution if you want to include spouse or beneficiary in return for a lower amount paid to the annuitant. The only reason I can see to use the style annuity today is in the person receiving the annuity payments had no beneficiaries or heirs.
Then you have an annuity that is really the subject of most people’s disdain for annuities known as the “variable annuity.” These are typically mutual funds wrapped with an insurance product that does not protect the principal from market losses and potentially carries high fees. They are complicated, and many times not fully explained by the broker selling the product. The broker typically points out the guarantees but does not explain that the guarantee is not towards the principal amount, but only to the income feature or benefit base. They are called “variable” for a reason.
Then there is the “fixed annuity” that likely has an attractive first year rate, but all too often reverts to the minimum rate of return.
There is a “multi-year guaranteed annuity” that typically has a fixed rate guaranteed for a period that are attractive to savers. These are often alternative to CDs.
The “fixed indexed annuity” is structured totally different than a variable annuity. The fixed indexed annuity does not put your money at market risk and is typically guaranteeing your principal. When I use the term “guarantee” speaking about insurance product understand that the guarantee is provided by the insurance carrier and backed by their creditworthiness, so it is important to make sure that it is a very solid insurance company.
The fixed indexed annuity can be a useful tool for those who want “market like” gains and principal protection. The gains are muted, but that trade-off for principal protection is often worth it, especially as they near retirement. The fixed indexed annuity is usually easier to understand than a variable annuity because it has less moving parts and the fees, if any, and in my opinion are more transparent.
As an asset manager that works for their client, I see potential value with fixed indexed annuities and the multi-year guaranteed annuity for a portion of a client’s money that fits the criteria for these annuities to be used as a good tool to meet the client’s objectives. The fixed indexed annuity has also had controversy around it but not because the product is not good, but the agent selling the product may have not placed the clients interest first or maybe used the wrong product for the client’s objectives.
I’m not suggesting that you buy or hate annuities. I’m just suggesting that annuities are not all bad if used in the correct amounts and for the right reasons. And that anyone making a broad statement about hating annuities is likely attempting to divert your attention to what they are selling.
As I have said in previous writings, if you don’t understand a products benefits, cost and fees, don’t buy it! These are my opinions, and yes, I am biased.
Mark Patterson is Chief investment officer with MHP Asset Management and can be reached at (603) 447-1979 or mark@mhp-asset.com.
