Attached to this blog is an article written in the Star Tribune by Tom Lauricella called “Annuities-Buying a Guaranteed Income.” (see bottom right of blog)

While some of his facts are true, I would like to take this opportunity to clarify some points and dispute others. Please read the attachment first and I will cover some of the misnomers.

First thing that most authors of these articles choose to do is lump Variable and Fixed or Fixed Indexed Annuities (FIAs) into the same category, cross referencing the products to pick and choose features that are convenient to criticize annuities. Often times leaving the reader with the assumption that they product and the way they are designed are one in the same.

While guaranteed income is provided in both contracts, Variable annuities charge a fee to carry the rider. Fixed annuities and FIAs have guaranteed income benefits with NO fees and are intrinsic to the policy(99% of the time).

FIAs are not as complex a product as some will have you believe. The way interest is credited has been boiled down to a handful of methods using a handful of barometers. Any producer pitching the products should be versed enough to explain these methods to a client. A good rule of thumb: FIAs are priced to return between 2-4% over the 10 yr. treasury over the life of a contract. If the 10 yr. treasury is at 4.80% today, you can expect a return between 6.80% and 8.80% during the life of the contract. These FIA policies are actuarially priced to offer those returns.

Living benefits in a Variable annuity can carry a fee. In a Fixed or FIA annuity there are no fees for living benefits. If such fees are present in a Fixed or FIA, it is a rare event and another product should be considered.

Why an annuity? The statement that “The fees for the insurance guarantees on annuities significantly detract from returns and your investment opportunities are limited.” is a serious misnomer. FIAs and Fixed annuities carry NO upfront or maintenance fees that should detract a buyer. Variables do. When buying a Variable annuity consider whether or not you would like to be in a mutual fund. If so, buy a Variable annuity. Fixed and FIAs offer you a way to transfer the risk associated with investing from your shoulders to an insurance companies shoulders. The guarantees in the contract do not carry fees and you cannot lose money in a Fixed or FIA. The transference of risk works like this; When you are in a mutual fund, stock or Variable annuity there is a chance you can lose money. There is also a chance that your gains can be great. Of course, with those great gains can come great losses. FIAs have been designed to give a buyer the guarantee they will never lose money, but the chances that your gains will be very high, i.e. 20%, are slim. So, if you can handle a gain of 7-9% over the life of the contract and never lose a penny, FIAs may be suitable for you.

A tax benefit of annuities could work like this. In your earning years you are in the highest tax bracket you will ever be in. Why pay taxes at the highest rate? If you defer taxes till retirement, chances are you will be in a lower tax bracket and pay a lesser amount of taxes on your deferred growth dollars. There are no fees attached to Fixed or FIAs hence you are not being penalized for tax deferral.

There are very few, if any products other than Annuities that can guarantee a lifetime of income benefits when paid out.

What happens if I need to take money out? Yes, if you fully surrender a FIA or Fixed annuity policy there will be a surrender charge applied. However, most annuities offer a combination or both of the following: Cumulative interest withdrawals at anytime or 10% of the total accumulated value at least once a year or anytime through interest withdrawals. You do have access to your money, but, if you need it all back at once there will be a penalty applied. This is a fact that must be accepted by transferring the risk from yourself to an insurance carrier. Look at these surrender charges as a “back-end load” on the policy. With FIAs there are no upfront or maintenance fees. The surrender charge is a fee that is only imposed if you choose to surrender the policy completely.

Can I accomplish the same goal outside of an annuity? By saying that the guarantees aren’t free is yet another misnomer. The only fee imposed is self imposed if you surrender a Fixed or FIA policy. In retirement, guarantees are everything. If a product guarantees that you will not lose money, and this is the money you will live on through retirement, I think that guarantees are everything. While bonds can be part of your portfolio, why limit yourself to a low rate when FIAs provide guarantees with the potential of a better return.

Can you show me similar annuities so I can see how they compare? Most independent producers can sell annuities from any carrier on the market that offers FIAs or Fixed annuities. Meaning, that through their support lines, they will be able to find the product that best suits your needs and goals. Albeit, if an agent is captive to an insurance company, i.e. a full affiliation, then they will be limited to the products they can recommend. I do agree that the financial strength of a carrier is very important. Most carriers on the market today have a rating of “A-“, or better, look for those carriers.

How much are you getting paid to sell this? Producers who sell FIAs or Fixed annuities are paid once for the sale. They are paid by the insurance company and not by their customers. They will not charge maintenance fees on the policy. It is a one time commissionable sale. Before questioning the validity of an agent’s commission consider that they will be servicing you and your policy for the life of the contract and get paid one time. If an agent will not tell you what his commission is I would not just walk away from a product that may be a perfect fit for you. While some insurance companies offer non-cash incentives, so do most industries and employers for meeting or exceeding sales goals. Why should an insurance agent not be rewarded for a job well done as anyone else in any other industry be rewarded for their hard work.

Why do I need to do this right now? A few questions to ask yourself: Is the renewal rate on a current policy sub-par to current rates? Do I feel like I have too much risk in my portfolio? Do I have a need for the income that the free withdrawals can provide? Would I like to take my investment risk off of my shoulders in return for slightly lower returns? Am I tired of paying fees on investments? If you can answer yes to most of these questions a Fixed or FIA may be for you.

If you are working with a trusted agent or estate planner, are they not currently and consistently acting in your best interest? Why would an annuity sale be any different?