About Annuities.
An annuity is a product that a lot of people don't really like to hear about. And if you don't have one, you probably won't get one. But if you do have one, um, You were probably sold one and you're wondering if it's a good product or not.
I don't offer them, as a product that I have for clients, but I do help educate people on them.
WHAT SHOULD YOU KNOW ABOUT YOUR ANNUITY?
It is a product that, if used for the wrong reason, it's a very inefficient vehicle. It's like using a Ferrari to take multiple children to school. A much better product would be a school bus, right? You want to use the right vehicle for the objective that you're trying to achieve.
An annuity salesmen like a contractor that only has a hammer as a tool. And if you only have the hammer as a tool, then every client begins to look like a nail.
Unfortunately, I've seen this to be true in the industry. Some salesmen only sell annuities. So regardless of your situation, you're going to be recommended to have one of these products. And that's the part where I think it's not good.
FEES
So the first thing to understand is the fees because the fees are what's going to impact performance. If you have a variable annuity, it's going to have fees in there. It’s going to be 1% to 2% just right off the top for the annuity and then whatever income rider or death benefit rider is included in that annuity.
If it's an income rider, there could be a benefit to having that annuity, if you use it.
Conversely, what I often see is, people will have a variable annuity with an income benefit rider, but they'll never use the rider. They'll never use the income. They'll never actually take the benefit of what they've been paying for for a long time in those scenarios, the annuity company wins.
So, you definitely want to understand what the fees are. What type of annuity do I have? Is there an income benefit rider or death benefit rider? There's much more to it than that, but that's the first step to get ahead of the game.
The second thing that people will say is, “Oh, I have an annuity and I didn't pay any fees”, and it turns out they have a fixed indexed annuity or a fixed annuity. It's not that there's no fees, it's that the fees are included in the way the product is offered.
So you don't have to write a check. There's no deduction of fees from what you receive. It's just baked in the cake. You don't really see it, but the insurance company is making some money off of offering this to you. With these index annuities, the salesman will tell you “Oh, this is a wonderful product you can earn”, and they'll spout out a percentage number. For example, they’ll tell you, “This is a great product. When the market goes up, you could earn 9% return from this product”. And in your head, you're thinking what 9% annually. But in reality, they're saying you could get 9% for the total of the four year product. 9% for four years, that's not anything special. That's 2.25% per year. That's hardly better than a savings account. Uh, and that's, that's, what's possible. That's the highest return you could possibly receive.
You could also get zero. What I don't like about indexed annuities is that they will often get misquoted, just like the example above.
Annuities are tricky. If you already have an annuity and you don't understand it, or you're considering cashing out your annuities it’s best to have a consultation with a financial advisor. I'm a fiduciary, and I'd be happy to review your accounts and talk with you about options for your annuities.
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Maranantha.
