The One Annuity You Should Never Own

Posted: 11 Feb 2008 | Categories: Investing

You hear a lot of horror stories about fixed and index-linked annuities - mostly coming from sources that are biased, have a vested interest in trashing annuities or are just plain uninformed. Ironically, most of the stories (sometimes referred to as case studies) feature payout two-tier annuities and discuss these dogs as if all fixed annuities are two-tier.

A two-tier annuity is one that requires you to take your money out in installment payments over a period of time in order to get the full account value. Unfortunately, you are not guaranteed by the insurance company (very few insurance companies even offer payout two-tier annuities) a market rate of return during the installment payout period; therefore, you’re trusting the insurance company to pay you a market rate and you can bet your next Social Security check that an insurance company that would issue a payout two-tier annuity can’t be trusted to pay you a fair interest rate during the installment payout phase. On the other hand, if you withdraw your money lump sum you’re in for a shocker because you’ll lose any previous bonus paid and get only the minimum guaranteed earnings rather than the more attractive returns shown on your last annual statement. In other words, lump sum withdrawal means the rate you’ll earn will never keep you even with inflation - you’ll lose purchasing power with every passing day.

The sad truth is that most of the horror stories involved elderly people that should never have owned an annuity - any annuity - in the first place. Unfortunately, they were sold a two-tier annuity which is, in my opinion, the worst of the worst and then found out they were locked into a long-term contract with no escape clause. Their complaints fell on deaf ears at the two-tier insurance company and the financial advisor who sold them the two-tier. Their complaints were picked up by the press, regulators and brokerage community which then painted all fixed annuities with the two-tier paint brush. The facts are: annuities, like all saving and investment vehicles, are not good for everyone nor are they universally bad for everyone. So, before you nix all annuities, take the time to learn the real truth about annuities in general and two-tiers in particular. I think you’ll be surprised to learn that the “no loss” provision of most fixed annuities along with avoiding income taxes on earnings until you actually withdraw them, are two major pluses that you can’t find in other safe places where you keep your retirement money.

The first link below is to a recent article I wrote which appeared in a trade journal for financial advisers. Read it critically and with an open mind. I think you’ll see that fixed annuities, with the exception of the payout two-tier outcast, have merit for many retirement-minded folks that are interested in low risk, good returns and paying fewer taxes.

http://www.agentssalesjournal.com/index.php?option=com_content&task=view&id=797

If you’d like to read more about the lawsuits filed against two-tier annuity issuers and see what other say about tw0-tier annuities, go to any of the following links:

http://www.anapolschwartz.com/practices/NASD/allianz-annuity.asp

http://www.ag.state.mn.us/Consumer/PressRelease/AllianzSnnuities.asp

Article Author :Shelby_Smith