A Daily Snapshot of My Life

Posted by Ray on July 2, 2006 under Main | Be the First to Comment

I wake up everyday and have the same routine. I put on my battle fatigues, face paint, Kevlar helmet and flak jacket, and head to my computer to see what new misinformation has been written about annuities.

OK, so maybe I am exaggerating a bit, but it made me sound more exciting than hearing about me pouring over prospectuses all day long. People who write these articles are not exactly reporting the truth, but offer more opinion pieces than anything else. I read annuity news every morning and everyday I lose more and more hair due to the stress of reading the next less than accurate portrait of variable annuities.

Everyday I read, everyday I write the authors, only once getting a reply back. Seriously, I have gotten one reply back in hundreds of emails I have sent. The person who wrote me back failed to make his point and actually misstated even more facts. The facts that he misstated were not even about variable annuities, it was the client’s age. Apparently if you are 56, you are a “senior” citizen. I find that offensive, and I am not even 56.

Either I have made my case so strong that they have no rebuttal, or they do not read their mail. I have a feeling it is simply human nature…not wanting to admit they are wrong or biased. If they will not write me back to support their argument or they do not like criticism, why write articles at all? It is my understanding that authors like to defend their work, yet I have found only one willing to do so, and the others…well, they ignore me.

I can and do handle criticism all the time, it goes with the territory. I must admit if their plan is to drive me crazy, it is working. My theory is that they cannot and will not defend their own statements, because they know they are wrong. Let’s examine some recent quotes.

“Withdrawals from annuities can be taxed at 40%” The Motley Fool.

“It often takes at least 15 years before the performance of your variable annuity will match the after-tax returns of investments in a taxable account. You’ll be tying up your money for a long time.” The Motley Fool

“Seniors, however, must endure tsunami-strength marketing pushes because variable annuities generate fat commissions, while immediate annuities do not.” Lynn O’Shaughnessy.

“OK, investors who bought annuities and then died within the next two months probably got their money’s worth. But currently only three out of every 1,000 variable annuities are surrendered due to death or disabilities, according to Limra International, an insurance-industry research group. And this report doesn’t even measure whether those four accounts were made whole by the death benefit!” Smart Money

“Now, if you’ve read all this and still want to buy an annuity, do yourself a favor and buy one with low costs and good investment options. These are available from mutual fund companies like Vanguard (average total expenses, 0.67%, including mortality and expense risk charges) and T. Rowe Price (0.79% average mutual fund expenses, plus an additional 0.55% mortality and expense risk charge). Investors who already own run-of-the-mill high-priced annuities should consider a tax-free transfer — called a 1035 exchange — to a better quality, low-fee Annuity. Just be sure to confirm that your surrender charges have expired before you make the switch.” Smart Money

And the list goes on and on. I did not even put in the lawyer websites who have no idea on how these products work and misstate even the basics of variable annuities, yet they promise big cash settlements.

As I review the quotes, I want to cry, not because I feel they are right, but because they are willfully misinforming the public and ignoring why people buy variable annuities to begin with.

Myth: People buy variable annuities for the death benefit.

Fact: People buy variable annuities for the tax deferral and living benefits.

Myth: Withdrawals will put you into the 40% tax bracket, stated above.

Fact: A 40% tax bracket does not exist, unless they factor in state income taxes. You would also need well over $150,000 in income to get into the 35% Federal tax bracket.

Myth: It takes 15 years for a tax deferred account, i.e. a variable annuity, to catch a taxable account, stated above.

Fact: There was no source given for this comment. It is ridiculous to say that a product that carries no up-front costs and has a 0 tax bill until you take withdrawals, will take longer to outperform than a taxable account. On mutual funds, win, lose or draw – you have a tax bill every year, period.

Myth: Immediate annuities pay a broker no commissions, as stated above.

Fact: Are you kidding me? Yes they pay commissions and they can pay as high as 4 or 5% commission. The commission can go directly to the broker and they will receive 100% of the commission. This means there is no split between the broker/dealer and the broker.

Example:

$100,000 immediate annuity pays 4% commission or it pays the broker $4,000, the whole $4,000. A variable annuity that pays 7% commission on the same $100,000 pays the broker a gross amount of $7,000. Now, minus out the broker/dealer haircut, usually about 60% and the broker only receives 40% of the $7,000 or $2,800. Who earns more from a sale?

Myth: Death benefits do not pay, unless you die in the first couple of months, stated above.

Fact: Again, are you kidding me? According to NAVA (National Association of variable annuities) from 2001 to 2003 the insurance industry paid out more than 2.8 billion dollars above account values for variable annuity beneficiaries. Plus, most people do not buy Variable annuities for their death benefits; they buy them for their living benefits.

Myth: “No-load” or low cost variable annuities are superior, stated above.

Fact: You get what you pay for. These products offer little benefits and only allow you to invest in their own funds. If you think that you are getting something for nothing, you are wrong. Would Vanguard offer a product that was not profitable for them? Yes, these products are great for tax deferral, but after that, well, read the review of Vanguard’s product that I offer for free.

All this misinformation is enough to drive the average investor nuts. The bottom line is this, people are buying these products, whether you agree or disagree. They are good products that meet the needs of the investor. What these writers fail to see is that if these products did not offer guarantees, then less people would invest their money where it is needed, in equities.

People are afraid of the market, and they should be after the 2000 to 2002 market correction, which was the worst correction we have seen in almost 70 years. The market is not for the faint of heart, and many people cannot handle a 10 or 15% drop in their account value. The question is; if your money is guaranteed could you handle a 10 or 15% drop in account value? The resounding answer is probably yes and that is the point.

The only thing that remains is which variable annuity is the best? Which variable annuity benefit fits your needs? When you buy a mutual fund, do you care about the Morningstar rating? If you answered yes to these questions, you are at the right site. These are the questions we answer and we rate these contracts and benefits. Its time to ditch the myths and get the facts, and I offer an open invitation to any of the financial writers to answer my emails or to contact me directly, contact me at scottdemonte@annuityiq.com.