The Eliot Rose Blog
5 Things Your Annuity Salesperson Might Not Tell You…
Added 03/04/2017 by Jason Siperstein, CFA, CFP
Has someone ever tried to sell you a variable annuity? If they have, you are not alone! However, there are five things the annuity salesperson may not tell you…
1. Commissions are HUGE
There is a reason annuities have become so popular over the years. The commission the salesperson receives from selling you this product can be as high as 10%. On a $500,000 annuity, that’s $50,000. It may be hard to remain unbiased when that kind of money is on the line.
2. Annual Fees are (also) HUGE
Yes, it costs more than just the commission you pay…Between the mortality and expense fee, administrative fee, optional riders, and fund operating expenses, you are looking at about 3-4% on average in annual fees. That is a substantial amount that will make it very difficult to produce satisfactory long-term returns. On that $500,000 annuity, you are paying between $15,000 - $20,000 annually! Compare that to the average fiduciary advisor (i.e. Eliot Rose) charging 1% or $5,000…
3. Tax Deferral is Redundant
I hate seeing this one…One of the few “benefits” of owning an annuity is that they are a tax-deferred investment. However, sometimes clients own an annuity within an IRA, which is already a tax-deferred account! So purchasing an annuity within an IRA is simply redundant.
4. You are Locked In
Ever heard of the term “surrender period?” Essentially, whenever you buy a variable annuity you are locked in for a certain amount of time. Usually this is a seven-year window. If an emergency comes up and you need the cash before that period, you are hit with a fee that might be as high as 10% of your investment! Say goodbye to another $50,000 on your initial $500,000 investment.
5. The House Always Wins
This doesn’t only apply to casinos. The insurance company always makes money… We have a client that had a variable annuity with a “guaranteed” 6% rate of return (GMIB is the technical term). Now at first glance this may seem appealing, but don’t be fooled! The 6% guaranteed return is not an actual return on your investment. It is a hypothetical rate of return used to calculate your annuity stream. In fact, after we did the math, all she needed to beat was 0.68%/year to be better off getting out of the annuity!
If you own an annuity and want some help understanding and analyzing it, feel free to send us an email here! Hope this article was helpful!