We bet you didn’t know that June is annuity awareness month. In fact, we didn’t realize it until yesterday. And since we did an episode in May to honor Disability Awareness month, we figured we should give equal time to Annuity Awareness month.
Of course we assume that you are all aware that annuities exist and probably have some basic framework of understanding, so we're not going to get into that sort of thing. What we've decided to do in episode 118 of the Financial Procast to bring the discussion of annuities into a more truthful light.
We are well aware that annuities have received a fair amount of bad press in recent years. Perhaps you remember when NBC's, Chris Hansen, caught some unscrupulous annuity agents in the act back in 2008. When something like that happens, the unfortunate and unintended consequence is that way too many people are now conditioned to have negative thoughts when they hear the word annuity.
To be quite honest, we don't talk about annuities all that much. And we talk about the fact (with each other) that we don't talk about them all that much. It's probably because most of the people we work with in our practice, aren't really all that interested in annuities, thus our practice tends to be much more focused on life insurance.
But we think we should talk about annuities today because there is so much bad information out there.
Truthfully, we think that the reason that annuities have been put in such a bad light is that there are way too many overzealous annuity sales agents out there that think annuities are the answer to every financial problem.
When All You've Got is a Hammer
You've heard the old addage, “When all you've got's a hammer, everything looks like a nail“.
Traditionally, most annuity marketing has been done through direct mail that drives people to attend a seminar where a salesperson will deliver a presentation that agitates all sorts of problems that an annuity can solve.
Often times the seminar will have a name like:
“Retirement Planning Workshop” or “What You Need to Know About Your Social Security” etc.
Then they (or their staff) will work diligently to have you schedule a consultation with the “expert”.
At that meeting/consultation, you will then be pitched an annuity with some pretty aggressive sales tactics. Remember, that person spent a small fortune to get you to the seminar, they need to sell you something so they can recoup their costs.
This sort of marketing isn't near as effective as it once was, but it still happens regularly.
What's the Purpose of an Annuity?
Annuities should be looked at when there is a need to guarantee an income for some specific need or situation. At the end of the day, products should be used to focus on what they (the product) do best. Annuities are not exceoption.
What an annuity does best is to guarantee an income that a person cannot outlive.
In our opinion, you shouldn't put more money in an annuity than you need to create ‘x' amount of income at some point in the future. We think that you should work backward with an annuity. Determine how much guaranteed income you will need at what particular time and put whatever amount of money it will take to accomplish that in some sort of annuity that will give you that guaranteed income stream.
Now, of course there are several different types of annuity that could work to accomplish that goal. You could use a single premium immediate annuity (SPIA), a deferred income annuity (DIA) or a fixed indexed annuity (FIA with some sort of guaranteed withdrawal benefit.
Any of those types of annuities can work, which one is right for you is solely dependent upon what you're trying to accomplish.