Wednesday, July 17, 2013

What! Annuities Are Not Guaranteed?

I want to be upfront about my biases. I don’t like annuities and I tend not to trust the people who sell them. This is based on the personal experience of my mother-in-law. After the death of her husband, she sought the counsel of a “financial advisor,” a member of her church. Since he sells annuities for a living, it should surprise no one that his solution to my mother-in-law’s problem was an annuity. While the product that he sold her met the current test of law, suitability, he enjoyed a very large payday at the expense of a frightened old lady. She would have been much much better off just buying 10 year treasuries.

The term ethical commission salesman is not an oxymoron. I personally know a few salesmen I trust. The problem is their commission structure and your interests are diametrically opposed.

I have explored different kinds of annuities in “I Don’t Understand Annuities.”

I Don’t Understand Annuities

The main reason I don’t like annuities is that they violate the prime directive of investments, “Never buy anything that you don’t understand.” Variable annuities that allow the customer the option of selecting their own mix of stock and bond funds from a menu are particularly complex and difficult to understand. Some of these contracts, especially those written prior to the melt down of 2008 contained rather generous optional riders that allowed guaranteed income to increase in good times, but would not result in a decrease of guaranteed income when the market tanked. Honoring those commitments is no longer in the interest of the insurance company so they are changing the terms of their contracts.

Yep! They can do that. It is buried in the fine print. The Hartford Insurance Company has warned its variable annuity investors they must hold a minimum investment of 40% in bonds or they will unilaterally revoke the guaranteed income clause in their contract. From Annuity Guarantees “WILL BE REVOKED” by E.J. Smith. The words in all caps were printed in all caps in the insurance company’s letter.

In a Wall Street Journal article entitled They’re Changing Our Annuity! By Kelly Greene and Leslie Scism, I learned that there are services that will read your annuity contract and tell you what you bought. One financial advisor, Mark Cortazzo, has started a website offering this service. The charge for providing you with a ten page report that explains the terms and conditions of your annuity contract? $199.00 Just think about that for a minute. You need to pay an expert to provide a ten page report explaining what it is your annuity contract!

The article suggests that if you receive a letter from your insurance company, read it. If you don’t understand the implications of its content, pay an expert to explain what is happening to you. The first person that comes to my mind in such situations is my wonderful CPA, may she be blessed for holding my hand throughout all the tax problems with my mother-in-law’s estate.

If your insurance company is playing Three Card Monte with your annuity contract, be very careful. You may need to make some tricky decisions. The Wall Street Journal notes that sometimes the insurer will offer the annuity holder the option of paying a larger fee to keep the guaranteed minimum income clause in effect at a specified minimum rate that can be superseded by a higher rate if the market does well. Determining whether or not the increase in the fee is worth while can be a pretty tricky decision.

Finally, insurance companies are offering holders of these particular contracts buyout offers. Again determining the present value of a buyout as compared to potential future value of your annuity contract is a question best handled by experts. Unless you really need that money right now, you might be inclined to believe that the insurance company is not making you that offer because they are an altruistic organization.

Now just for grins, how the card trick is done.

The Three Card Monte Street Hustle Explained

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