Controversies & Annuities
Let’s not pretend that a web search of the word “annuity” doesn’t come with at least a few articles pointing out controversies associated with the concept. Nor that there aren’t plenty of horror stories out there about people who put money into them, with insurance companies going bankrupt or bad-actors who manage to siphon someone else’s hard earned money out through a legal loophole.
I believe you have the right to know about these criticisms and controversies, because it is your hard-earned money at stake and that you are smart enough to know what is best for yourself. I will not be another broker who pretends that these things don’t happen.
In this article I am going to go over the main criticisms that have been directed at annuities over the years. As well as how to protect yourself against such bad events.
Given this information, other articles available on this website, and conversations with professionals, I hope you will be properly equipped to make the best possible decision for your financial life.
Why am I spending money, to not access my money?
This criticism against annuities focuses on the high surrender charges and fees associated with annuities. Compared to investing normally in say, a low-fee mutual fund, where you also get the benefits of being able to pull out your money within a reasonable amount of time, without losing a significant portion of what it is actually worth.
Many argue that annuities are overall less profitable than simply cutting out the insurance company and investing in funds directly, and you get to actually access all of your money without having to wait. Why on Earth would someone instead put those same funds into an annuity?
Mutual Funds Don’t Have Guarantees
While a valid criticism, it is one that rests on a misunderstanding of what annuities are meant to do. Yes, variable or index annuities have a relationship to investing and the idea of having gains or growth in favor of the owner.
However, the main purpose of the annuity as a financial tool is to ensure that you, the owner of the contract, will have a stream of income in your later years as desired. It is not intended for you to experience the highest amount of gain possible, there are other tools better suited to that purpose.
Markets go down in volatile times, and while it is historically true that the stock market has more often than not increased over the decades, history is not a predictor of future performance. Nor does it help to say “well the market is usually in an uptrend” when you are the person who needs to sell at a loss.
Money which is not needed today, but will be needed to pay for essential items in the future, is typically the “right” kind of money to put into an annuity. Rent and food money should never go into a financial instrument that requires it be locked up for years before you see a return. Nor should “risky” or speculative money that you hope will have explosive returns, there are more efficient tools for that.
Annuities are a retirement instrument for when you do not, or cannot, work anymore. And the benefits from your 401(k), IRA, Social Security, and other such tools may not be enough to cover the medical and living costs you expect to see in the future. The higher costs of annuities are intended to cover these certainties on behalf of the insurance company, so that you don’t have to worry about your future.
An analysis as to how much you would need to put away, and into what type of instrument, is a conversation best had with a professional advisor.
Crooked Salespeople and Companies
Although, that leads us into the next, and more dastardly controversy of annuities. What can you do when companies and salespeople hide behind alien legalese, mismanage your money, or simply go bankrupt and cannot pay you back? There are many horror stories of people who lose money to careless or malicious agents in the industry.
Unfortunately, one does not have to look far in any part of the financial world to uncover corruption. The “buy it and forget it” nature of annuities particularly lends itself to bad practices, as it may be long too late to fix any wrong-doing by the time the owners of the annuity find out.
How to Protect Against Human Behavior?
It can be difficult to predict or even tell when someone, who is in a position of power and knowledge, may use that position against you. Much less how to protect yourself when it is already happening, as it is difficult to summon a legal case when the bad-actor has already taken a good deal of wealth.
Thankfully in the internet age, old “gut instinct” can be supported by reviews of the agents or company in question, how long they have been in the business for and what their overall track record has been like. Searching a legal or corporate name can uncover a wealth of data on that person, revealing whether or not they have a history of malpractice to begin with.
Typically, those entities who have been in the business for decades, if not longer, and lack any notable offenses are ideal ones to consider doing business with. Had they structured their contracts poorly, they would have already been bankrupted in trying to fulfill the payouts of earlier waves of annuity owners. It is also unlikely that they would continue to receive business if the public perceived them as being untrustworthy or corrupt.
Of course, the more cynical reader may point out an earlier quote from this very article. “History is not a predictor of future performance”, the irony does not escape me. Some good people and companies do still manage to go bad, it is always a terrible thing.
Although, it makes more sense to work with a person who is known for good behavior, than one who is known for nothing at all, or known for something even worse.
Life is always risky, good investing is about managing and minimizing that risk.
When in doubt, ask questions, and hold people accountable for the job you are paying them to do. You are your own greatest protector, and I believe you have a right to know what is going on with your money and investments.
If you are curious to know what your options are and if there is more you can do to protect your investments, contact me at 203-956-0289 and I will bring to helm my 30 years of experience to your situation. You can also send me an e-mail to wward@1stallied.com.
Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts. The prospectus contains this and other information about the variable annuity.