When considering whether to buy an annuity, you will likely read glowing praises from sales materials and dire warnings from some in the media. How can you evaluate this “boogeyman” of a product?

 

First off, “annuity” is a broad term encompassing a wide range of products. Fixed annuities are conservative products often used in place of CDs (certificates of deposit); variable annuities allow for the accumulation of money in a tax-advantaged manner, and immediate annuities exchange a lump sum of money for a guaranteed income stream over a specific timeframe. Each can serve as a useful component of your retirement plan, and a less scrupulous adviser can use each in unsuitable situations as well.

So what should you do when you receive a recommendation to purchase an annuity?

  • Educate yourself about the product. It may seem like punishment to read an annuity prospectus, but if the amount of money you are considering investing is important to you, taking the time to read it (especially sections on expenses and the rules for accessing your money) could raise additional questions or alleviate concerns you might have. Industry regulators also provide unbiased information like the SEC’s Intro to Variable Annuities and FINRA’s Investor Alerts on annuities.
  • Consider an unbiased second opinion. Advisers who sell annuities are entitled to receive fair compensation for their time, expertise, and ongoing service. The challenge you face is that the adviser must sell the product to receive that commission, thus creating a conflict of interest. A fee-only adviser who does not sell products could be a valuable second opinion. Be aware that some advisers use annuities a lot, some believe they should never be used, and some (like me) simply consider them a tool that can be useful in certain situations, so consider your trust in the source of information.
  • Look at the value received versus the costs. In general, annuities are more expensive than some alternatives (though exceptions do exist). Often, the product design provides additional benefits for that extra cost – guarantees, death benefits, and often many more. It is up to you to determine if the value provided by the annuity is worth the expenses you pay for it.

Never hesitate to ask questions! When I sold annuities as part of my practice, I considered any question as a signal that the investor had a genuine interest in their own future, not as a threat or insult. I also loved teaching and explaining the reasoning behind my recommendations. The best question I ever received was “if this product did not exist, how could I accomplish the same thing, or what could we not do?” (feel free to use that one!)

Like other investments and insurance, the key to buying the right thing for your situation is to be educated on what you are getting, and for you to trust who is giving you the advice!

 
 

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