There are many types of annuities with many contract variations to consider. But not all annuities are equal in the benefits they can deliver. After all, no one has the same retirement needs, goals, and objectives. So why would they require the same retirement planning strategy?
Unfortunately, the annuity marketplace can present misleading sales messages to consumers. This information smoke-screen may make it difficult to discern what’s in your best interests. Here are some helpful trends to consider when you’re evaluating the merits of any sales pitches, claims, or assertions.
Potential Annuity Scams
Misleading guarantees – One of the most important attributes to an annuity is the contractual guarantees associated with it. Generally speaking, contractual guarantees cover three primary areas:
- Growth potential
In today’s interest rate environment, consumers are sometimes led to believe the insurer’s contractual guarantees are stronger than they actually are. Say you see an advertisement for “8% guaranteed income for life.” On its face, it may seem like there’s more to the story.
There is! More likely than not, it’s actually an income rider which is costing you money – money which is being taken from your principal to pay for the rider.
Where interest is actually credited to – Then there’s the issue of how the interest is being credited. It’s not your money which is being credited 8%, but rather a separate value. So you’re not really getting 8% growth on your money per year.
Rather, this number value is used by the insurance carrier to calculate your income amount based on your age at the time you elect to take a lifetime income. It’s called the “income value” or the “income account value.” So it’s related to an annuity income rider. That’s where the 8% rate is being applied to. It’s important to understand these details.
Exaggerated growth potential – Say another advertisement says something to the effect of “17.2% guaranteed!” In reality, this rate is likely a bonus you may or may not receive plus an interest rate you may or may not receive, over the duration of the contract. To put this in perspective, say your contract is for 20 years. What that basically means is with a 20-year contract, you’d be receiving .86% credited yearly.
Undisclosed fees or costs – Annuities differ in terms of costs and fee schedules. Most annuities have sales-related or service-related costs at point-of-sale. They may be subtracted from the contract value; ask your agent or insurance company to describe these charges, if any.
Sometimes an agent may not fully disclose fees within an annuity contract. For instance, a fixed deferred annuity may include fees like:
- Surrender charges
- Withdrawal fees (for exceeding the limited free withdrawal feature or the threshold for permitted withdrawals)
- Premium tax (a state tax levied on annuities, which may be subtracted when premiums are paid, when the contract value is withdrawn, when income payments start, or when a death benefit is paid)
- Contract fees (a flat dollar amount charged either once or yearly)
- Transaction fees (a charge per premium payment or per other transaction)
- Percentage of premium paid (a charge based upon each premium paid, it may be lower once the contract has been in force for a certain amount of years or if total premium payments reach a certain amount)
Be sure to ask an independent retirement advisor or insurance company the right questions to determine any potential fees. Otherwise purchasing the wrong annuity can turn into a nightmare of disappointment. Be wary of “safe money” reviews and other pitches that seem too good to be true, both on the Internet and offline.
Annuity Alert Solutions
These trends are just a few ways consumers may be misled. Information is an essential, and careful education is paramount before making any investment purchase.
This doesn’t mean annuities are bad. In fact, annuities can be very beneficial to your retirement portfolio – if you buy the right one, from the right financial professional, for the right reason. They are not and should never be your entire portfolio.
We encourage you to use this website as an educational tool and utilize all of our knowledge about insurance products. When you’re ready to make a decision, SafeMoney.com can help you. Request a no-obligation consultation with an independent financial professional and get started on the road to finding what annuity strategy may be right for your financial picture.
Ready for a no-obligation consultation or have questions? Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.