The Truth About Annuities

I have to admit up front that I am not a fan of annuities, except in very rare situations. The sad facts are that 90% of the folks who buy an annuity have absolutely no idea what they are buying and 90% of the folks who buy an annuity really don't need this investment product.

Annuities are a very lucrative product for insurance sales reps to sell. They typically receive 3 to 8% of the deposit money. So, let's assume that you deposit $100,000 in an annuity. The sales rep can receive up to $8000 for selling you this product! Pretty outrageous commissions.

An annuity is really an insurance contract. Many times the sales rep will tell you that the investment is insured against loss because when you die, your heirs will always receive at least the original value of the annuity insurance contract. So, you are paying a steep fee for this insurance protection. However, with most conservative investments, over time, your investment should at least be worth what you started with. So, the extra cost for the insurance is expensive and not needed.

Annuities carry heavy surrender charges. If you need your money in the first 7 to 10 years after opening the annuity, you most likely will pay anywhere from 7-10% in surrender charges. On your own money!

Annuities are often sold as "safe investments". But remember that insurance companies can fail and investments can go south. Nothing is guaranteed. Especially in this economy where we have witnessed huge companies going bankrupt in the past few years. Did you ever think GM would need to be rescued?

Annuities are sold to folks for "tax savings". This is because the money inside an annuity grows tax deferred. However, once the money starts to get distributed (either to the person who bought the annuity or the heirs) the distributions are taxed at the highest rate. All distributions are treated as ordinary income. If you held this money in a taxable brokerage account, you would pay capital gains rate on the earnings and not ordinary income tax rates. Big difference.

Annuities typically have very limited investment options. Most offer high cost captive mutual funds with few good choices.

Annuities should never be purchased within an IRA account. IRAs are tax deferred already so it makes no sense to put a tax deferred annuity in an already tax deferred account. Remember...big commissions on the sales of annuities!

And finally...annuities are hardly ever "bought"...they are almost always "sold".