Annuities. Just mentioning the name of this controversial insurance product can raise the temperature in any room. Everyone—financial advisors, financial columnists, and anyone planning for retirement—seems to either love them or hate them, often with a passion. The fact that there seems to be no middle ground in this sentiment just adds to the confusion for anyone trying to wade through the pros and cons. It’s a quandary that leaves many investors scratching their heads and wondering: should I invest in an annuity—or not?
At Leisure Capital Management, we do not sell insurance products of any kind, including annuities. However, we do recognize that annuities, when used appropriately, can play a role in a well-designed financial portfolio. To determine why, how, and when an annuity may be right for you, here’s a quick overview of the basics:
The menu of annuities is vast. There are three main categories of annuities: fixed income annuities that guarantee a specific, unchanging payment; indexed annuities that base payouts on the performance of an external index; and variable annuities that base payouts on the performance of investments owned in your account. An annuity contract may also include options for minimum guaranteed returns, guaranteed lifetime income, and principal protection. Some newer annuities offer other additional layers of benefits through riders for long-term care, terminal illness, and nursing home confinement.
If you’re confused, you’re not alone. Choosing the ‘right’ annuity to address your needs can feel like an impossible task thanks to a sales process which includes enough disclosures, illustrations, indexing methodologies, and regulatory forms to make your head spin. Whether it’s by nature or by design (there are certainly some less-than-scrupulous, commission-hungry salespeople who use this complexity to their advantage when pitching their products!), understanding the nuances of annuities requires serious study and, ideally, first-hand experience applying them in the real world.
All that said, we aren’t big fans of annuities in most situations. In general, they aren’t the most effective way for individuals and families with higher asset levels to protect and preserve assets. (Read more about our commitment to asset protection here.) Annuities also come with restrictive surrender periods (how long you have to wait to access the funds without paying a penalty), so they are rarely a wise choice if there’s even a small chance you may need to withdraw funds before the waiting period, which is typically a decade or longer. Then there are the embedded fees, hidden costs, and potential for poor mutual fund performance which can negatively impact your actual payments. As always in the world of investing, lower risk comes with a cost, and in our experience, there are wiser approaches to accomplishing long-term financial goals.
That doesn’t mean, however, that annuities have no place in a portfolio. Many of our clients either have existing annuity contracts (not acquired through us) or are interested in exploring them as an option to help address a variety of challenges, such as:
To help you make sense of the chaos, we have partnered with a third-party firm that is especially skilled at evaluating existing insurance and annuity contracts. Working together, we can determine if an existing contract fits your financial profile—or not. Our partner offers the deep knowledge required to analyze the pros and cons of a given contract, determine if it is a good fit and if a similar annuity is available at a lower cost, and recommend the best course of action to help protect your assets over the long term.
If an existing annuity is determined to be suitable, no change is needed, and there is no cost to you for the review. If we find that an existing annuity is not appropriate, our partner can recommend a more suitable option. Though we don’t sell annuities or receive any compensation for such a sale, as your advisor, we can facilitate a tax-wise transfer of your annuity (using a 1035 exchange) and instruct the annuity company on the choice of investment selections. In cases when all that’s needed is a new contract, you simply sign the contract and benefit from the resulting savings.
Over the years, we’ve seen annuities that were purchased and used for all the right reasons, and others that were sold to our clients by the ‘nicest’ of salespeople who clearly pushed a product without regard to the client’s needs. As your advisors, our goal is to help you gain the freedom to live the life you choose with the confidence of financial security. By working in partnership with an experienced firm that provides valuable guidance to help navigate the confusing sea of annuities, we are able to do just that—better than ever.
Want to request a review of an existing annuity or explore if an annuity is right for you? Contact us today to schedule a time to chat.