Understanding the “Season of Giving” Pitch
In this season of giving thanks for giving and giving for thanks, we should look at a financial product that is all about giving. I am speaking, of course, of annuities.
An annuity is often marketed as a modern miracle: you give money to an insurance company and receive a guaranteed stream of income in return. Frankly, the insurance company is embarrassed to be caught doing such a generous thing for its customers. Why, the insurance salesman will even invite you to a free lunch seminar just to spread the word about the company’s good deeds.
Pass the butter and sign me up, Ernie. Or maybe not. There are a few things you should know before you sign on the dotted line.
The Hidden Costs Behind Annuity Contracts
High Commissions and Sales Incentives
Annuity contracts are expensive and complicated. Some types of annuities pay high commissions to their agents – often as much as 10 percent. Agents are motivated to sell you an annuity, often without analyzing your finances and investment mix to determine if you actually need it.
Liquidity Limitations and Surrender Fees
Once you put your money into an annuity, you have locked it up. That means if you need sudden liquidity for medical expenses or long-term care, that money may not be readily available to you or, if it is, you may have to pay a steep surrender fee to get it.
Complex and Confusing Contract Terms
Annuities can be extremely confusing, with the contract containing terms like bonus rates, participation rates, caps, floors, spreads, riders and MVA clauses. It is difficult to understand how returns are calculated, what triggers fees, or how riders work.
Why Retirees Are Prime Targets
Long-Term Annuitization for Short Life Expectancies
Retirees are often targets for the insurance agents. Some sales agents will sell long-term annuities to people in their ‘70s or ‘80s where the surrender period may outlast that person’s life expectancy.
They show a chart with compounding values, without emphasizing how long it will take to reach those figures. They show estimated payments coming out, without focusing on risks and the opportunity costs.
Risk of Elder Financial Exploitation
Annuities offer the perfect opportunity for elder financial exploitation because they can be extremely difficult to unwind. Some agents will discourage you from consulting with your family or your attorney and pressure you to sign immediately.
They make it easy for you to miss deadlines, make a wrong payout election, or be unable to verify whether the product is performing properly.
Evaluating Real Returns
Why Many Annuities Underperform
Unfortunately, after rider fees and caps, many annuities provide conservative returns that simply do not justify the inflexibility that comes with them.
Common Types of Annuities
Immediate vs. Deferred Annuities
Immediate annuities have payments that begin within 12 months of purchase. They are typically purchased with a lump sum.
Deferred annuities have payments that start later, often years after their purchase. The money grows tax-deferred in the meantime.
Accumulation Methods
Annuities come in several accumulation methods:
- Fixed annuities
- Fixed indexed annuities
- Variable annuities
- Multi-year guaranteed annuities
Payout Structures
The payout structure can be:
- Life-only
- Joint and survivor annuity
- Life with period certain
- Period certain (fixed period)
- Lump-sum payout
They can be funded with one large upfront payment or contributions over time.
Specialized Annuities
There are also specialized annuities:
- Qualified longevity annuity contracts
- Medicaid-compliant annuities
- Charitable gift annuities
- Structured settlement annuities
What to Consider Before Buying an Annuity
Do Your Homework
If you are thinking about buying an annuity, do not rely on the agent’s sales patter. Read the agreement and make sure you understand the cost, risk, and return.
The Bottom Line
And remember: insurance companies aren’t in the business of giving.
Conclusion: Review Before You Commit
Before signing an annuity contract, review the concerns above and make sure the product truly fits your financial needs. Annuities may look simple on the surface, but their fees, restrictions, and long-term commitments can create risks that aren’t always clear during the sales process.
At Hammerle Morris Law Firm, we help clients evaluate annuity contracts, understand their obligations, and avoid costly mistakes. Whether you’re considering a new annuity or reviewing an existing one, our attorneys can provide clarity and guidance.
Schedule a consultation today to ensure your financial decisions protect your future and your assets.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
