Categorized | Finance and taxes

Busting the fixed annuities myth

By Hal Rogers    

For the last several years the journalistic community has painted a pretty ugly picture of annuities and peopleQuestion Theme who sell them. . From financial journalist Jane Bryant Quinn to the local beat reporter, writers have found annuity bashing to be a good bet to fill an empty page and satisfy their sensationalistic tendencies. 

 Some of these articles have stated things that simply weren’t true, blew up isolated incidents to make them sound epidemic, or generalized information to infer that something that was true about one type of annuity was true of all annuities.    

Annuities are good when they are appropriate—if they are part of a financial strategy. Let’s see how that works.

Annuities are investment vehicles offered by insurance companies.  However, the term “annuity” is so generic as to be virtually meaningless.  It is like saying “vehicle”—which could be a tricycle or a space shuttle, a skateboard or a BMW.  The word annuity itself only tells you that earnings are tax deferred until withdrawal and withdrawal of earnings before age 59½ are taxed like IRA withdrawals before age 59½—that is, they are subject to ordinary income taxes and a 10% penalty tax. 

Beyond that, the differences among types of annuities are legion.  There are fixed annuities, indexed annuities, and variable annuities.  There are immediate annuities and deferred annuities.  All annuities transfer some type of risk to the issuing company.

The perceived downside to annuities generally relates to their lack of liquidity and their cost.  There is no initial sales charge on an annuity purchase; there is a contingent deferred surrender penalty during the early years of a contract.  The surrender period can range from three to 20 years, the longer periods often on products that pay higher commissions to the selling agent.

An annuity isn’t the right product for every financial situation.  However, if an annuity is the right answer for you, you must realize that any annuity has a cost.  Everything of value has a cost.  In every purchase decision, consumers elect whether or not that value is worth the additional cost.  Annuities provide guaranteed benefits you don’t get with other investment vehicles. 

Sometimes the cost isn’t a dollar amount deducted from an account.  Sometimes that cost is an opportunity cost.  A given annuity may limit upside potential, but the trade-off is that it minimizes downside risk.  Along with tax advantage, risk mitigation is one of the primary advantages of annuities.  Annuities aren’t for everyone and aren’t the answer for every situation, but when risk transference is an objective, annuities are worth considering.

Much of the negative press surrounding annuities has stemmed from abusive sales practices, failure to consider client suitability, and the marketing of “bells and whistles.”  Agents recommend a particular product based on its selling points, but fail to integrate the use of the product and its particular characteristics with the rest of the client’s investment vehicles.  Sometimes this actually results in the client’s failure to be able to utilize the specific benefits of the contract, even though they must pay for those benefits for as long as they hold the contract. 

The key to the proper use of annuities lies in understanding their different characteristics and strategically integrating them with other annuity and non-annuity financial vehicles.  Doing so can result in investment performance, risk transference, guaranteed income streams, years of virtually tax-free income, and larger tax-free distributions to heirs. 

History shows that the strategic use of annuities works. The guarantees provided in the annuity contracts have accomplished what they are designed to do, even in economic downturns. As a result of the recent severe downturn the financial media has started looking at the valuable benefits enjoyed by many annuity owners.  Take a look at the Wall Street Journal article, July 24, 2009 (

The bottom line is that annuities are tax-advantaged risk-transference vehicles.  Strategically integrated into a comprehensive asset allocation model, they can provide significant advantages over non-insured investment alternatives.  As an annuity’s insured benefits are subject to the claims paying ability of the carrier, it is important to choose an offering company that has not only strong financials, but one which hedges against the risks inherent in the contracts.  Glitzy product brochures and agent promises won’t do you any good if the company can’t honor its guarantees.

Harold J. Rogers, CFP, CSA, President of Retirement Services, is a Registered Representative with ProEquities, Inc., and an Investment  Advisor Representative of Investment Advisors, a division of ProEquities, Inc.  Securities offered through ProEquities, Inc., a Registered Broker/Dealer, Member FINRA & SIPC.  ProEquities, Inc., Branch Office, 8596 Arlington Expressway, Jacksonville, FL 32211.  (888) 720-0556.  Retirement Services is a sole proprietorship owned by Harold J. Rogers and is independent of ProEquities, Inc.  Information is for informational purposes and should not be construed to be specific tax, legal, or investment advice. 

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