Annuities are not market growth products!

market_growth_noneMy apologies to all of you dreamers and “cake eaters” out there in annuity sales pitch land, but annuities were not designed for market growth.  Got it?  Good!

Even though my previous statement is annuity fact, below are some of the predictable responses that always roll in.

“But Stan…..my agent/advisor said that I could get market upside with no downside.”

“But Stan…..my broker said I could kill it with the mutual funds inside my variable annuity and have yummy guarantees with the policy as well.”

“Stan……why would they tell me that if it isn’t true?”

You have got to be kidding me!  You aren’t that gullible are you?  Please tell me that you are not the rube at the Vegas poker table!  Let me take each of these statements and factually destroy them one at a time.

“Market upside with no downside”

This is the common idiot agent indexed annuity sales pitch.  If there was such a product that could give you real market upside with no downside, then our vertically challenged Fed chairman (i.e. short) would have all of her problems solved.  She would have found the perfect product.  Indexed annuities were designed and introduced in 1995 to compete with CD returns.  Let me repeat that, CD RETURNS!  That is a fact that most people that sell the product aren’t aware of.

The majority of indexed annuities currently available allow you to lock in supposed limited gains 1 day per year (typically the contract anniversary date).  The other 364 days you are an investment eunuch (Google the word “eunuch” for clarification!).  In addition to that ridiculous upside limitation, most indexed annuity policies allow the carrier to change the rules and limitations (i.e. caps/spreads) on how that dream scenario upside is calculated without consulting with you.  Sounds great so far…huh!

So to synopsize this market upside dream pitch, you get to lock in gains one time per year…….and the annuity company can change the rules every year at their discretion on the index call option rules.  Did you say growth?  Don’t even utter the word my friend.

And one more thing for all of you masters of the annuity universe out there, currently there are over 40 indices (most made up out of thin air by the carriers) and over 700 index option choices.  Talk about throwing darts.  What a colossal waste of time for CD returns, because in most cases you are better off buying a MYGA (i.e. fixed rate annuity) because that annual % yield is guaranteed.

Predictably, most indexed agent gunslingers will pound the sales table with back tested, hypothetical, theoretical, hopeful return scenarios and proposals showing fantastic returns if you would have owned it “back then” or if the indices perform in a certain way.  Please tell me that you didn’t eat paint chips as a child, or that some family member didn’t drop you on your head as an infant because you can’t fall for this NON-GUARANTEED sales pitch crap.  There are no back tested numbers that reflect todays current interest rate and economic climate.  But you knew that….right?  Of course you did!

Indexed annuities are CD products…..and can be used to attach income riders (i.e. monopoly $) for future income needs.  In my contractual guarantees only world of “Will Do. Not might do.”, indexed annuities are nothing more than a delivery system for the incomer rider….if that transfer of risk addition is appropriate and suitable for your ‘Income Later’ goals.

“Mutual funds homeruns with guarantees”

Having worked at some of the larger brokerage firms in my drunken past, I know for a fact that variable annuities are the last place that your so called “wealth advisor” can make a big commission.  Believe me when I tell you that I know where all of the bodies are buried with these wire house firms, and the recommendation of a variable annuity is a commission driven cop out.  If someone that has been managing your stock and bond portfolio suddenly recommends a variable annuity, then you are getting ready to buy them a Porsche with the commissions generated.

You and I call then mutual funds, but the variable annuity companies refer to them as “separate accounts.”  Chicken soup.  Chicken shit.  Whatever.  They are mutual funds.

So the pitch is full market upside with the glorious mutual funds, and attached contractual guarantees just in case the investment plane flies into a 2008 mountain.  Sound fantastic Sparky the advisor!  Where do I sign up?

Before you whip that pen out to sign off on “having your cake and eating it too”, there’s a few ‘oh by the ways’ you need to be aware of.  First of all, the average annual fee of a variable annuity with surrender charges is 3% every year……for the life of the policy!  By the way, that 3% fee comes out of any mutual fund gains you have.  So, in essence, you start every investment year at minus 3!  Good luck with that one Gordon Gecko.

In addition, with most variable annuities….once you add a contractual guarantee (like an income rider) to the policy, the annuity company limits your mutual fund choices.  In other words, you can’t go ‘investment balls to the wall’ aggressive with the funds because those guarantees are attached.  No sir.  Remember, insurance companies have the big buildings for a reason.  They don’t give anything away.

As I always tell people who ask about variable annuities, if you want to buy mutual funds…..then go buy mutual funds.  You don’t need a variable annuity insurance wrapper to do that.  And as for those yummy guarantees you can attach to the policy, most are not competitive when compared to the same type of contractual guarantees offered by fixed annuities.  As Bill Murray said once in a movie, “That’s the fact…Jack!”

Lies….sales pitch lies….agent commissions

The reason I have a scar on my forehead is because when I hear “but why would the agent tell me that if it isn’t true?”, I reflexively bang my head against my desk.  Who would believe such sales pitch drivel?

Why do you think agents and advisors tell you these “too good to be true” things about their annuity of choice?  You got it……commissions!

Indexed and variable annuities are the 2 most popular types of annuities sold by agents and advisors.  It just so happens that they are also the highest commission products on the annuity planet.  Coincidence you say?  Uh….no.

So here’s the take away of this rant of an article.  If you want real market growth, don’t buy an annuity.  If you want “market participation”, don’t buy an annuity.  If you want to be in the stock market, don’t buy an annuity.  Am I clear?…..Am I clear?!

And your answer should be “crystal.”  You are now crystal clear that annuities are not market growth products.

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