ADAGIO / Annuity Investors Guide
MARKET CRASH SURVIVAL GUIDE FOR ANNUITY INVESTORS
THE SHADOW BANKER'S MARKET CRASH SURVIVAL GUIDE FOR ANNUITY INVESTORS
If you’re unfamiliar with annuities, they work like this: you give an insurance company your money and in return they pay you an income stream… usually for the rest of your life.
But the cost of such guaranteed income is high… very high.
With some annuities, if you die before you’ve received all of your money back, that could be too bad… the insurance company may keep the remainder of your money.
Ever wonder why financial salesmen push annuities so hard? Annuities pay extremely high commissions… often 7% of the total amount you invest, or higher. So, if you were to buy a $200,000 annuity, the salesperson may take home around $14,000 up front.
To add insult to injury, let’s say you take out an annuity and your circumstances change… you need the money urgently. If you’re still within the surrender period, it’s going to cost you… a lot.
A typical surrender period is seven years with the surrender charge starting at 7% and falling by 1% per year.
So, why do people even consider annuities?
Well, they provide downside protection… if the market takes a hit, your principal is guaranteed against losses… but the cost of that protection far outweighs the benefit.
It’s true that if the market falls 20%, you won’t lose any principal with an indexed or fixed annuity, but if the market soars 20%, you may make as little as 4%… and that’s only if the insurance company remains solvent, which is not guaranteed… remember AIG in 2008? If you don't, they had to be bailed out with TARP.
Of course, there are countless different types of annuities with an endless combination of features, but for every bad feature you eliminate with one type, you'll pick up a different bad feature with another.
All these problems were highlighted in 2016 when new fiduciary rules were passed by the Department of Labor stating that brokers have to put their clients’ best interest ahead of their own. As soon as the fiduciary rule was passed, the sales of annuities fell 8%… they fell an additional 18% in the first quarter of 2017.
While it is true that annuities might be appropriate for some people in some circumstances, there are probably better options to consider.
As the industry saying goes, "Annuities are sold, not bought.”
Don’t be sold.
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