retirement

Avoid the Annuity Hard Sales Pitch

Get answers to some basic questions to make sure the investment is really right for you.

When a financial adviser or insurance agent suggests you buy an annuity, is he looking to serve your best interests -- or to collect an iPad and a trip to Aruba?

That's the question raised by a recent investigation of annuity sales incentives. The study, by Senator Elizabeth Warren (D-Mass.) and released in October, examined 15 major annuity providers and found that all but two offer perks to reward agents for selling their products. The perks include cruises, luxury car leases, theater tickets and golf outings. None of the companies clearly disclosed the sales incentives to annuity purchasers, the study found.

Although such sales rewards are legal, they may drive an adviser to recommend an annuity because he can pocket a nice vacation, not because it's the best product for his customer, the study says. "Annuities are the Wild, Wild West of sales," says Stan Haithcock, an annuity agent in Ponte Vedra Beach, Fla. "You really have to protect yourself," he says, by understanding how the product works and why you're buying it.

Industry groups say that regulations effectively prevent inappropriate annuity sales. "The current regulatory framework requires these products to benefit the consumer and meet his or her needs," the Insured Retirement Institute said in a statement responding to Warren's report. The institute's members include major annuity providers.

Annuities can offer significant benefits to retirees -- including guaranteed lifetime income for those who fear outliving their money. And investors should note that an adviser who discourages an annuity purchase may have his own conflicts of interest. If you keep all your money invested in traditional stocks and bonds, an adviser earning an asset-based fee stands to benefit.

The more complex the annuity, the more likely the consumer will simply throw up his hands and put his trust in the adviser's recommendation, says Scott Witt, a fee-only insurance adviser in New Berlin, Wis. "In a trust situation, you're at the mercy of the person selling the product," he says.

Ask the Agent the Tough Questions

While you can just ask an agent what he stands to gain from selling an annuity, the compensation arrangements aren't always straightforward. A better way to protect yourself, advisers say, is to consider some basic questions before getting mired in an annuity sales pitch.

Ask yourself, "What am I trying to accomplish? And is an annuity the best way to accomplish that?" Witt says. If you're looking for guaranteed income for life, for example, an annuity may well be the solution. If you're considering a variable annuity purchase mainly because of the tax deferral, however, you might consider whether traditional buy-and-hold stock-and-bond investing is a better bet. In a variable annuity, withdrawals of earnings will be taxed at ordinary income rates rather than lower capital-gains rates.

If you've determined that you do need an annuity, Haithcock suggests focusing on two basic questions: What do you want the annuity to guarantee? And when do you want that guarantee to start? That way, you'll avoid being distracted by hypothetical return illustrations or costly bells and whistles -- such as stepped-up death benefits -- that you may not really need.

Ask your agent to show you annuities from multiple companies offering similar guarantees. If he's only offering products from a single company, or if you're having trouble making comparisons among products, "you could work with multiple agents and pit them against each other," Witt says.

As you narrow your options, ask for a "specimen policy," Haithcock says. This is a copy of the actual contract you'd receive after purchasing the annuity, so it can help ensure that you understand all the guarantees, fees and legalese before diving in.

After purchasing an annuity, you typically have a "free look" period of about 10 to 30 days, depending on your state. You can review all details of the contract -- and if you decide you've made a mistake, you can terminate it and get a full refund.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
Want More Tax-Free Retirement Income? One Man’s Whole Life Decision
life insurance

Want More Tax-Free Retirement Income? One Man’s Whole Life Decision

Whole life insurance might not be something that’s on your retirement planning radar, but for this client, here’s how it served his need to control ta…
February 23, 2021
The Current Plan for $1,400 Checks
Coronavirus and Your Money

The Current Plan for $1,400 Checks

Here's what you need to know about the stimulus check plan currently being considered in Congress for President Biden's COVID-relief package.
February 18, 2021

Recommended

How Savers Can Earn More on Their Money, and Do It Safely
annuities

How Savers Can Earn More on Their Money, and Do It Safely

With interest rates perpetually doing the limbo (how low can they go?), here are three different types of fixed annuities that can be good alternative…
February 24, 2021
How Annuities Are Taxed
annuities

How Annuities Are Taxed

Annuities offer powerful tax advantages, and a few (avoidable) pitfalls. How to cut your taxes and avoid surprises.
February 12, 2021
How 10 Types of Retirement Income Get Taxed
retirement

How 10 Types of Retirement Income Get Taxed

When you're planning for retirement, it's fun to contemplate all the travel and rounds of golf ahead of you, but don’t forget about taxes.
February 9, 2021
Annuities Just May Be the Broccoli of Retirement Planning
annuities

Annuities Just May Be the Broccoli of Retirement Planning

Deferred income annuities are good for your long-term retirement health, but most people still don’t seem to crave them. But if you want to quit worry…
February 4, 2021