When it comes to guaranteed lifetime income, retirement savers are increasingly turning to annuities. It gives them peace of mind knowing they will get a fixed payment monthly and that they won’t run out of money in retirement.
Plus, depending on the annuity they purchase, they don’t have to worry about it tanking in the markets like stocks have been doing lately. It’s a big concern for millions of Americans, which is partly why annuity sales topped $100 billion in the first quarter, according to LIMRA, the insurance trade association. It's the sixth quarter in a row in which annuity sales were over $100 billion.
“Our latest Consumer Sentiment Survey shows Americans’ concern about the economy has risen sharply since January. This growing economic anxiety drove March sales results to be the second highest in history,” said Bryan Hodgens, senior vice president and head of LIMRA research.
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But not all annuities are created equal. With over 1,500 products to choose from, there is certainly a risk of deception.
“The insurance companies aren’t scamming people, but annuities are complicated products,” says Ingrid Evans, an attorney at Evans Law Firm. “People don’t understand (annuities)...they are so hard to decipher that a normal person can’t figure out what’s going on with their money.”
Without a doubt, annuities are complicated and some less than scrupulous annuity brokers are using that to their advantage. From high pressure sales tactics to churning, here’s what should raise red flags when shopping for an annuity.
1. High-pressure sales tactics
Annuities tend to be sold to consumers via agents, who represent one insurance company or are licensed to sell annuities from a variety of providers. Most work off commissions, and the unscrupulous ones will resort to high pressure sales tactics to get people to buy an annuity, even if it's not the best product for them.
Red flag: If an agent uses phrases like “act now” or “limited-time offer,” that should raise red flags. When you purchase an annuity, you lock in your money for an extended period. You should not feel pressured to act.
2. Churning to get a fatter commission
Churning occurs when an agent or broker gets an investor to switch their annuity for another one, which could be more expensive or is not in the best interest of the client. The motivation is a bigger commission for the agent.
Red flag: “If you have an agent who sells you an annuity and two, three or four years later they want to sell you another annuity,” that should raise a red flag, says Evans. “You have to pay a surrender charge to go into another product that may or may not be inferior.”
The surrender charge is the penalty an insurance company charges when an annuity owner withdraws or transfers money before the contract ends. Typically the surrender fee is the most in the first year and declines each year after that.
The surrender charge can vary based on the insurance company, the age of the annuity and amount withdrawn.
3. Oversimplifying the product
Annuities are complicated, but some agents won’t present them that way. They tend to oversimplify the product, focus on the benefits, and gloss over potential negatives.
That’s particularly common in advertisements and at seminars designed to get people to purchase annuities, says Shawn Plummer, founder of The Annuity Expert, the national annuity brokerage and insurance agency. He says some of these unscrupulous brokers will hire new agents, teach them the basics of how annuities work, equip them with a script, and send them out to seminars.
Red flag: “All of my staff have to know the cons better than the pros,” says Plummer. “We want the person buying it to know exactly what they are getting.”
Plummer says that anybody buying an annuity should ask the broker what’s wrong with it, and if the broker can’t answer right off the bat and be brutally honest, it behooves the potential customer to walk away.
4. The broker asks you to send money directly to them
An annuity is a contract between the investor and the insurance company. A broker acts as the middleman, recommending and selling annuities. He or she gets a commission from the insurance company, not from the investor purchasing the annuity.
Red flag: If the broker asks you to send money to them directly, that should be a warning sign that something is amiss.
“There’s no reason” for the broker to ask you to send money directly," says Plummer. “We are an annuity expert. We don’t touch any money. It’s always between the financial institution," he says.
5. Misrepresenting annuity bonuses
Bonus annuities offer an immediate boost to the annuity balance, as either a percentage of the initial premium payments or as a first-year interest rate bonus.
This kind of annuity is designed to lure investors in; while it's not a scam, the way it is marketed to potential customers can be misleading. After all, that bonus may come with long surrender periods, high surrender charges if you withdraw the money early, more fees, lower interest rates over the life of the annuity, or a non-tangible bonus.
“Some annuity companies offer an ‘income bonus’ that is used towards the calculation of a lifetime income payment in the future," says Plummer. "It is not a value that a consumer can walk away with in a lump sum,” says Plummer.
Red flag: If you hear an advertisement on the radio or receive a flyer in the mail promising a 50% bonus with an annuity without any explanation of the strings attached, that should give you pause. That lofty bonus may be too good to be true.
Do your homework
The best way to protect yourself when shopping for an annutiy is to do your homework and learn as much as you can about this financial product before making a purchase.
If you have a financial adviser, tap that person for advice. If you work with a broker, find one that is reputable and sells annuities from a variety of firms instead of one insurance provider.
Make sure whichever insurance company you do decide to purchase an annuity from has a solid track record, sound financials, has been in the business for several years, and has a good rating from the three rating agencies: AM Best, Moody’s, and Standard & Poor’s.
“Stay away from B-rated companies,” says Plummer. “Since there are so many products to select from, there is zero reason to choose a B-rated company.”
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