Marc Cuniberti After multiple conversations with clients and readers regarding annuities, I think I need to clarify a few more things for my readers on these products.
For years, I was not a fan of annuities and said as much on my Money Matters media outlets. Years ago, I categorized the annuity universe as the Wild West. Past annuity contracts were complicated, even for me, a Wall Street guy. As the years past however, and the regulation and disclosure requirements got tighter, the companies that sell annuities sharpened their pencils and pressed down hard on their agents to be more diligent on what was sold to whom. They also hammered on their quants (the math guys) to formulate more win-win situations for both the companies and their clients.
Fast forward to today and many are sound products with definitive benefits for many investors.
Many companies produce booklets or videos stating bluntly things like “Don’t buy an annuity”. Usually the companies that use such scare tactics sell things other than annuities and don’t like losing their business to companies that do.
When I ask an investor what an annuity is, few can tell me. An annuity is simply a contract between you and an insurance company. The annuity contract states what you give the company and what the company will give you and when.
Annuities are often offered by household name companies and come in many shapes and colors. And like stocks, there are ones you should consider and some you should not, depending on what your particular needs are.
Many people actually already participate in annuity-like programs but just don’t realize it. Social Security is an annuity-like program. You pay money into an entity (in this case Uncle Sam) and the U.S. government pays you back over time. That’s not the only example.
Have a pension? You have an annuity. Your employer promises to pay you so much for so long for the money you put in. In a way, if you have any financial savings or even a stock account, your money is somewhere else other than in your bank account. That means a company promises to pay you for the money you gave them. Sounds kind of like an annuity contract to me.
Annuities are guaranteed by an insurance company.
You can Google up an annuity company’s financial rating any day of the week for those skeptical about insurance company guarantees.
There are income annuities that offer to pay you for life regardless of whether you run out of the money you gave them. There are fixed indexed annuities that offer you to participate in the gains of up markets but not down ones. There are guaranteed rate annuities whose only function is to pay you a fixed annual interest rate like a bank CD or T-bill. Just remember annuities are not federally insured because they are not offered by the federal government.
The length of terms for annuities can vary from a year to many years. Many annuities have no sales fees and some may even add bonus amounts to your deposited amount. There may be early or excessive withdrawal penalties however so read the fine print.
In a nutshell, these are not your father’s annuities. There are terms and conditions of course and they are there to protect both you and the insurance company but I, for one, am glad everything is carefully thought out and spelled out. This helps to insure the company can fulfill its promises to you and that you will know exactly what you are getting and when.
I find that as a market analyst, financial consultant, insurance agent, agency owner and one involved in the markets since about 1971, there are many annuities that are simple, easy to understand and appropriate for certain investors.
Often people forget that when utilizing an insurance product, you are TRANSFERRING some of your risk to the issuer of the insurance. They rightfully can be expected to ask for compensation in return for accepting this risk or why would they do it?
In essence, they attempt to structure that win-win formula I mentioned, and in my opinion, many do just that. The best way I describe my favorite annuity program is that you may not make as much money as if you were solely in the markets, as you have transferred some or all of that risk to the issuing company. But the products are structured so some of the gains may be shared with the investor all the while attempting to minimize risk for those that want to take less risk with their retirement savings.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
