Portland, Ore. – An Oregon Financial Adviser says he’s seeing a trend in his office and in his industry. He says baby boomers are buying annuities in record numbers and that sometimes people don’t fully understand the purchase. He says it’s important that consumers shop carefully for annuities.
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Here are his extensive remarks:
By Andrew Murdoch
Baby Boomers are buying a record number of annuities – insurance products that offer guaranteed lifetime income – and in so doing are taking a wise step toward mitigating the fear of running out of money in retirement. Most are not careful buyers, however, and that means they are not purchasing annuities that best fit their needs even though many are making one of the biggest investments of their lives.
Most annuities are sold, not bought. And they are most commonly sold at sales presentations at which a broker promotes only one or two annuities. These one-size-fits-all products are only right for a very small percentage of the audience. And annuities not sold at sales presentations are usually proffered by financial advisors with whom the customer already has a relationship. Similarly, advisors in these situations typically offer only one or two choices.
Appreciate the necessity of being a savvy annuity shopper? Here are eight tips to weigh before consummating a purchase:
Know why you are buying an annuity in the first place. Annuities are meant to be a safety net to supplement your traditional portfolio. If the stock market tanks while you are in your golden years, you’ll be glad you own an annuity. The tradeoff is that annuities do not have the liquidity of stocks and bonds.
Make sure the benefits of the annuity fit your needs. If you are married, for example, you probably want a joint annuity, which means if one spouse dies, the other still receives lifetime income. Many couples, however, are sold single annuities, which means if one spouse dies, the survivor gets only the residual cash value of the annuity as the lifetime income generally ceases. Single annuities are often sold to couples without discussion because the payments are higher and seemingly more attractive.
Shop for annuities with at least three financial planning firms and make sure one of them is independent. That means they are not “captive” to an insurance company and the limited selection of products that the insurance company or the broker/dealer sells. Captive players simply don’t offer as many choices to investors.
To determine if an advisor is an independent, full service advisor, ask if he sells securities – specifically, stocks and bonds, mutual funds and variable annuities. If he does, he is associated with a broker/dealer or is a registered investment advisor. Make sure any advisor you deal with has at least 10 years of experience. The least experienced annuity salesmen may just have a life and health insurance license, which can be obtained with only 40 hours of work and means he can’t offer the full spectrum of products.
Compare all the major types of annuities – variable annuities, index annuities, fixed annuities and immediate annuities – and once you decide which one you want, compare several choices in that sub-category. Make sure the salesman fully understands the annuity and backs up what he says with illustrations showing how the product works, as well as written documents. If the salesman is dismissive, that is a noticeable red flag.
Make sure you thoroughly understand the annuity fees. On a variable annuity, for example, a salesman will probably show you mortality and expense and so-called rider fees covering your fees for death benefits and income benefit – but not mention the fees you pay for the management of your sub accounts (mutual funds) within the annuity.
Know the surrender fees you would face if you had to liquidate your annuity prematurely. Surrender fees range from 1 to 20 percent. (Some annuities offer zero surrender fees, but they charge higher fees for that.).
When you zero in on an annuity, check the credit rating of the insurance company selling it. At minimum, go with an investment grade rating. At A.M. Best, the biggest rater of annuities, that is B+. The other annuity rating agencies and their minimum investment grade rating is Standard & Poor’s (BBB-), Fitch Ratings (BBB-) and Moody’s Investor Service (Baa).
Andrew Murdoch is president of Portland-based Somerset Wealth Strategies and a Certified Financial Planner. He holds several security and insurance licenses.