How Can You be Negative on Annuities, When You Know Nothing About Them?

Posted by Ray on September 27, 2006 under Main | Be the First to Comment

Recently Tracey Byrnes from TheStreet.com wrote an article on annuities. It was handled in the usual manner, badly. In her article, she cites several issues she has with annuities that simply do not exist.

For example she says; “But, of course, there’s a catch. And it’s big! There are a ton of high fees associated with annuities. (Ah, I can feel the emails coming!).” What bothered me the most about this statement was not that she made it, it is the usual statement made by the anti-annuity crowd. The problem is she was referring to a fixed Annuity, not a variable annuity.

With a fixed annuity, the insurance company makes their money from what’s called an interest rate spread. This is similar to how banks profit from CD’s, but the bank’s spread is much higher than an insurance company’s spread. How can that be, you ask? Let’s examine the difference.

A bank loans out money to consumers (in the form of loans, mortgages and credit cards) and takes in deposits from consumers (in the form of checking, savings and CD’s). When you borrow money from a bank, they charge you an interest rate, this will vary on the type of loan it is. There is usually an offsetting deposit that the bank uses to loan money from.

Example:

You take out a loan and are paying 12% interest, a reasonable rate for an unsecured loan. At the same time, you buy a 2 year CD yielding 5% interest. There is now a 7% spread between the loan and the CD yield, this is the banks profit….pretty rich right? Now, there are some other variables to this equation. I used the simplest form to explain this.

OK, here is how an insurance company makes their money on the interest rate spread. You invest money in a fixed annuity, and when the insurer receives the money, they go out and buy bonds to secure the interest rate. If the Annuity is paying you 5% interest, the bond portfolio is probably yielding 7% or so, but the insurer takes the risk of the bonds and you have no risk at all. This 2% spread is the insurer’s profit. Again, I am using the simplest form to describe this, but it is accurate.

Ms. Byrnes also goes on to say; “There are big upfront sales charges and back-end surrender charges if you withdraw the money too soon.” Now, to my knowledge there are very few companies who charge an up-front commission on an annuity purchase. The only company I know that has an “A” share Annuity (this is where the customer pays a sales charge that comes directly from the investment) is Edward Jones, and since you pay up-front for the annuity, the M&E charges are super low and this is for a variable annuity, not a fixed annuity that Ms. Byrnes is referring to.

I have never, ever seen a fixed annuity demand an up-front commission to be paid by the consumer, period. If there is an up-front charge, there sure as heck would not be any backend withdrawal penalties from the insurance company– that would be double dipping and is illegal. There may be an IRS penalty for withdrawals made prior to 59 ½ though.

Ms. Byrnes then goes on to say; “In addition, there are mortality and expense charges to cover the risk the insurance company takes on to pay you income over a lifetime. And then there are administrative and annual records-maintenance fees.” Well, we covered the interest rate spread, which is how the insurance company continues to make money after the annuitization of the contract, so nothing new there.

Of course, there will be record keeping costs for many investments, in particular IRA accounts. No matter where you invest IRA money, there will be record keeping and other expenses. That is not unusual at all and not just another insurance company charge, it is an industry charge. Plus, when you annuitize a contract, there usually is no record keeping charge at that point in time.

I do not care if you hate annuities or not, but please keep the products straight! Go ahead and bash them, it also gives me something to write about. All I ask is that you keep the facts accurate. Is that really so difficult to do?

Get Serious About Financial Advice

Posted by Ray on September 25, 2006 under Main | Be the First to Comment

As we all know annuities, variable annuities in particular, receive more than their fair share of negative press. That is no secret and should not be the case as most people who write about annuities really have no idea on how they work.

A great example is a recent article on ‘TheStreet.com’ by Tracey Byrnes where she confuses variable annuities with fixed annuities. Yes, it is totally unbelievable, but she has no idea on the actual difference between the two products, read the story here. I wrote her to explain herself, but of course I will not hear back because they never write back.

Now, what happens when someone asks about annuities in these new peer programs launched by two of the major search engines, Yahoo! and MSN? As you maybe aware both Yahoo! And MSN have launched Yahoo! Answers and QnA by MSN. Both programs are peer answer programs where you may ask a question and your peers will answer them for you. You then get to pick the best answer.

With all of the negative press on variable annuities it is clear what kind of answer you will get if you ask about these products, negative. This happens because everyone who is anyone likes to beat up on these products, which have 1.6 trillion dollars invested in them, that is more than 401 (k) plans.

When someone asks about annuities in these forum groups they get instant replies that annuities are too expensive or they are horrible. What is really disturbing is that people are asking their peers about investments in general. My thoughts are if you want investment advice you talk to an investment professional. I just do not understand why that is such a difficult thing for some people to do.

Didn’t we learn in the late 1990’s that asking your peers for investment advice is a bad idea? Remember when you would talk to your friends and they said well I own Janus or Invesco and my returns are killer! So, you ran out and bought the same funds because, ‘I do not want to miss out on the killer returns’? What happened in the end? You got killed by the market, that’s what happened.

I understand the importance of these peer answer programs, I really do, but not for investment advice. If you want to know about the best phone service, restaurant or home cleaning product there is no better place than your peers to get answers from. When it comes to investments though, your peers are not the people to ask.

Dispensing investment advice requires a license, which takes a very long time to get, usually 3 to 6 months. The people dispensing advice in these self help areas probably do not have licenses. Therefore, they have no idea on the process of giving investment advice and do not know the right questions to ask to issue proper advice.

Quite simply, you usually get canned answers that have been written by hit and run financial columnists. This is dangerous stuff we are talking about, after all this is your money you are about to invest. Why would you trust this decision to someone you have never met and could be a complete wacko? It is really scary that people put so much trust in these self help groups.

Then when you add the complex question about annuities or a variable annuity the knowledge base goes way down. These products are not easy to understand, well the details at least. On the surface an annuity is simple, but to understand how the benefits work requires significant knowledge and the ability to read the prospectus. I find this lacking in the answers I have seen from these groups.

When we look at Yahoo! Answers or MSN’s QnA we have to take them for what they are, a fun way to ask a group a question, but do not solely rely on these forums for real answers. Professional financial advice can never be replaced by Joe that you work with or by some faceless person you met online. This is why we do not dispense advice or recommendations. We are, simply put, a ratings agency that help you make an informed decision based on facts.

A variable annuity is tough to understand, especially when you do not have a professional answering the questions you have. Why not use good professional advice to get answers to your questions, especially about variable annuities.

The Best Way to Buy Variable Annuities

Posted by Ray on September 18, 2006 under Main | Be the First to Comment

I just thought you would all like to see a story picked up by Financial Visor on Annuity IQ.

There is a right way and a wrong way to buy variable annuities. In this article, we will take you through the process to learn how to find the best variable annuity for your needs. (FVNEWSWIRE Aug 15, 2006)

Los Angeles, CA (FV Newswire) – There is now a new way, or we should say a new method, to buy variable annuities. Until now there was really no way to research the various options available, or find the right variable annuity for your needs. Now, there is a new, unique site on the internet that offers an unbiased view of these investment products.

This new site, AnnuityIQ.com does not sell variable annuities. Instead, they rate the contract and the living benefits attached to the contracts. In today’s competitive environment people are looking for the best possible variable annuity and living benefits. Until now, there were virtually no places on the internet where people can get completely unbiased variable annuity comparisons.

AnnuityIQ.com offers people the opportunity to explore and choose the best products for your needs. This easy to use system has taken the comparative approach even further, by instituting a rating system on variable annuity contracts and their living benefits. This rating system is an easy to understand 1 to 5 star method. AnnuityIQ.com then provides a detailed explanation as to why the contract or living benefit received the rating as well as give precise details on how the contract and benefits work.

Other variable annuity comparison sites only seem to offer a limited range of products and information. Scott DeMonte, owner of AnnuityIQ.com says, “Being able to compare a large number of variable annuities was not possible until now. We wanted people to have the opportunity, no matter what their background is, to understand and choose the best products in the market place.” AnnuityIQ.com is different, they take a holistic view of the product universe and provide you with a complete list of the best selling contracts.

Annuity IQ has decided not to sell variable annuity products and wanted to provide consumers and brokers with a one-stop shopping program. “We wanted people to be able to look around to see the different contracts and benefits that are available. Removing the sales aspect of trying to get people to buy has been received extremely well by financial advisors and consumer communities.” DeMonte said.

AnnuityIQ.com boasts the largest independent and unbiased variable annuity database on the Internet that is readily available to both consumers and brokers. “We want to help people and save them time. Until now, when shopping for a variable annuity you had two choices; you can go and search website to website wasting hours of your time trying to piece together information or you could take someone’s word that you are getting the best product available. That simply was not good enough for us.” DeMonte said.

What Annuity IQ offers is a way that both consumers and financial advisors can have a complete, unbiased third party evaluation of these annuity contracts. DeMonte adds, “Morningstar offers an evaluation of mutual funds, but who is evaluating variable annuities? No one, until we launched our site.”

AnnuityIQ.com has become a very popular site with both consumers and financial professionals. They boast over 30 pages of free content and over 200 pages in the member’s area. You may visit them at http://www.annuityiq.com.

It seems we are making headlines now. By the way, NBC never did write me back.

Annuities and Income, Going Hand in Hand

Posted by Ray on September 8, 2006 under Main | Be the First to Comment

When many people hear the term annuity they automatically think, among other thoughts, annual income. That is not always the case though, people need to understand that there are two phases to annuities, unless you buy an immediate Annuity. The two phases are accumulation, also called the deferred stage, and the payout phase, or annuitization.

During the accumulation phase or deferred stage you are receiving interest or your money is invested in sub-accounts. You are trying to build the asset up so you can enjoy the payout phase of the product. But, most individuals never use the payout phase and, instead, opt to take systematic withdrawals. Only about 2% of all annuity contracts are ever annuitized (this is the term to refer to the payout phase).

This leads many people, especially the anti-annuity crowd, to question why people buy annuities to begin with. Annuities are bought because they offer unique benefits that no other investment can offer, this is no secret, and largely ignored by the anti-Annuity crowd. The anti- annuity crowd then says it is pointless to buy a product which you will never fully use. What they fail to realize is people opt for the more flexible withdrawal out of their annuities than the less flexible annuitization of the annuity.

Quite frankly, the annuitization of the annuity locks up your money and you cannot change your mind after the fact. This deters people from annuitizing and that is why only 2% of all deferred annuities are ever annuitized. Instead people prefer to take systematic withdrawals from their annuities to create the income on their own.

The myth is that people opt to not annuitize their contract because their current insurance company “locks” them up and gives them poor annuitization factors. This is not true. Actually, insurance companies know that they have to be competitive with their annuitization factor because you can exchange your deferred annuity to another company and buy an immediate Annuity. Therefore, the company will loose assets and earnings and no insurance company wants to do that.

You can skip the accumulation phase altogether and simply buy an immediate annuity. An immediate Annuity is the exchange of a lump sum of money for a guaranteed income stream. Immediate annuities have grown in popularity over the last few years as more baby boomers retire.

These are good products, if used right. You just have to make sure you have chosen the right option to meet your needs, not just for today but for the future as well. Immediate annuities are, usually, irrevocable once you make the investment.

Immediate annuities, generally, provide you with the highest payout and you are guaranteed your income for whichever time period you choose. This can help build a more reliable and stable retirement income for your needs. You should never put 100% of your assets into one of these contracts.

Today’s world is different and you can get different products that can help you meet your needs. These newer products often times have more flexibility that their older counter parts. We happen to like variable annuities more than other annuity products. The choices and options with Variable annuities are great and exciting and will help you meet your needs if used properly.

What we like is that you can now invest in a variable annuity that can provide you with income forever. You can do this through living benefits on variable annuity contracts. Although the payouts may not be as high as a traditional immediate Annuity, in some cases, it offers more flexibility and potential.

With a guaranteed withdrawal benefit for-life you can withdraw money right away and it is guaranteed for as long as you live. What makes this so special is the fact that you can invest your money into sub-accounts, which are similar to mutual funds, and you have the upside potential of the market. This can allow your income to increase as the market performs and it will allow your income to remain the same if the market does not perform.

These types of benefits can step-up over time, sometimes every year or every 5 years depending on the company you use and the state you live in. This allows for greater flexibility and income potential and you do not have to sacrifice control of your money. This type of benefit comes at an additional fee, but it can be worth it especially if you have not saved enough for retirement.

What is great about these benefits is the fact that if the investments do work out you can cash in the contract or exchange it into something else. This is unlike a traditional immediate annuity where you are in the product forever. Also, with a variable annuity you may still have a death benefit for your heirs, if you choose. This type of investment allows for greater upside potential and no risk on the downside because your income is guaranteed by the insurance company.

There are caveats to these annuity benefits, generally, they are all decent to a certain degree, but you really need to know how these benefits work. For that information you should sign up for annuityiq.com, the only unbiased variable annuity comparison site available. No sales pressure, just the facts on how annuities work.

annuity products and income do go hand in hand. These products can help you build and plan for a better retirement. It is just trying to find the best Annuity for your needs that is the issue and Annuity IQ can help.

Mad as Hell at NBC

Posted by Ray on August 31, 2006 under Main | Be the First to Comment

If you saw the nightly news on NBC last night you saw the story on annuities. I cannot believe they actually aired that story. Now, I am not justifying the broker who sold that person the annuity at all I think that broker should be imprisoned. But, NBC failed on being specific on the Annuity contract sold to the investor.

They did not mention that the contract sold was an equity index annuity, not a variable annuity or a fixed Annuity. There is a huge difference in these products, but NBC made blanket statements that are inaccurate and untrue about annuities as a whole. What they did was generalize all of the products and the sales people selling these products. I am no fan of equity index annuities, but even I think this story was over the top!

Stories like these, which I have direct knowledge of the industry and the product, raises my suspicions about the information I receive from the mainstream media. I know this story was inaccurate and full of generalizations; do they do this with all stories? Your guess is as good as mine.

The product sold to this investor was clearly the wrong product. Given the fact that this person was 87 and had dementia he should not have been sold any investment product. That was the real story, not just the annuity product. This misinformation is the reason annuityiq.com exists to begin with.

NBC needed to do real research, apparently they did little to none at all. They interviewed Consumer Reports for an annuity story, I mean come on! This is not a TV or a car this is an investment product and they should have consulted experts on this issue.

I do not like equity index annuities. I think they are extremely confusing and dangerous products. With that being said, there are some good equity index products out there that can help and not hurt people. The first rule of thumb is, if it sounds too good to be true, it probably is.

This was clearly a bad story and I sent off a very strongly worded letter to NBC, let’s see if they respond back.

Here is the letter I sent:

Dear NBC News,

I just watched your piece about annuities and I am concerned. Not at the agent who sold it to the gentleman, but at you (although I am angry at the agent too). I feel that the broker who sold this product to a person with dementia was the real story, not just the product. As a former financial advisor, I would never sell any product to anyone with dementia or any other mental illness, and that should have been the key component of the story. How in the world can you generalize that all annuities are like the one sold to that gentleman? You cannot. Did you even know what product he was sold? I do and it was an equity index annuity. You needed to make that CLEAR to your viewers.

What you said that was wrong or inaccurate:

You said “You have to plunk down a huge amount of cash”. That is not always true and most investments involve big lump sum investment.

You said; “annuities take years to mature”. That is not true at all, annuities do not mature. CD’s mature, annuities have surrender schedules that end after a certain number of years. You can, however, access up to 10% or more of your purchase premium every year. That means you have some liquidity.

You said; “many agents selling annuities do not understand how they work, but they can make big money”. Yes, the investment world is commission driven; almost every job is based on sales, including journalism. You depend on selling ad space. No ad space sold, no paycheck. Your point was not accurate. Most annuities pay 7% or less in commission and the product sold to the gentlemen you interviewed was a high paying and bad annuity product.

I cannot believe you did not bring in an expert to talk about this. Instead you used consumer reports, why? I would use consumer reports to talk about cars or TV’s, but annuities, I do not think so. A simple Google or Yahoo! Search would have brought you several experts who could have given you a fair and balanced view of these products and given you the problems with the product sold.

You just caused panic for every person in America who owns an annuity contract, and why did you do that? Because one broker sold one bad product? You need to run a revision on this story and explain yourself. You need to explain that this was a specific Annuity, an equity index annuity (which are bad products for the most part), not a regular fixed annuity or a variable annuity.

annuities are tricky investments and that is why AnnuityIQ.com exists. To state annuities are bad or to use this one case to show annuities are evil is irresponsible journalism. Although this is not an isolated case, it is, however, a serious problem with equity index annuities, not of all annuities. I do not sell annuities I show people how they work. You should have consulted us first and you could have gotten a balanced fair answer. This would have included condemning the broker who did this and the product, but making it clear on what type of product it is and a fair warning to seniors. Instead you opted to generate fear and even more ignorance.

Here is the link to the story: http://www.msnbc.msn.com/id/14607656