Written by: Cary Carney, Vice President of Sales at Kuvare, Guaranty Income Life Insurance Company, a Kuvare company.
When you look online for information about annuities, you might come across provocative titles such as, Five Reasons Annuities are Bad or Flaws of Fixed Index Annuities: Don’t Believe the Hype. No matter your search terms, you can find the haters who want to steer people away from annuities.
Some articles provide bad information in general. Is it because the writers don’t understand annuities, or they simply don’t take the time to learn about annuities and the benefits they can provide? Unfortunately, too many writers lump all annuities together and, when doing so, may mislead and minimize the effectiveness that an annuity can deliver. Or worse, these articles may scare you away from annuities. Interestingly, many retirees are dependent upon annuity payments to make ends meet, and they don’t even realize it’s an annuity when they are cashing their social security check. We never hear stories of people rejecting these payments because “annuities are bad.”
In this blog, I’ll cover three common myths about annuities.
Myth one: Annuities come with fees. This is more complex than meets the eye. Many annuities have no fees at all, while some do have fees. To simplify, I’ll only discuss fixed and fixed index annuities. Most fixed and fixed index annuities do not have fees as a general product. If you choose additional benefits, such as riders that may cover long-term care expenses, guaranteed income you can’t outlive or maybe an enhanced death benefit, there could be a fee. However, some of these additional benefits are also found on fixed and fixed index annuities without additional fees attached to the contract. Making a blanket statement that all annuities are bad because they have fees is not accurate.
Myth two: Annuities have long surrender charges and/or high surrender charge fees. Again, this is a generalization not pertaining to all annuities. You can purchase two-year annuities as well as 10-year or even 14-year annuities. Are the 10- or 14-year annuities bad and the 2-year annuities good? The answer again is not necessarily because each annuity is different and designed with an array of features and benefits to help accomplish financial goals. It is only bad if the financial advisor utilizes the wrong product for your objectives.
This is comparable to saying all stocks are bad because they are extremely risky. That isn’t necessarily true because some stocks have less risk than others. Certain stocks will deliver a potential better return than others because they are riskier, and for taking that chance you could achieve a better return than with a less risky stock. It depends on your goals and objectives as well as other factors.
Myth three: Annuity sales professionals earn high commissions. This goes along with misunderstanding two. Typically, the longer the surrender charge period, the higher the commission. According to a Q2 2021 Winks report, nearly 76% of all fixed and fixed index annuities sold had a duration of seven years or less. Of that 76%, nearly 38% had five- or six-year terms. A typical commission for a five- or six-year annuity may be 3 to 5%. On a $100,000 deposit, the financial advisor could earn a one-time commission of between $3,000 and $5,000.
If you apply this scenario with a different type of compensation that a financial professional may choose, which is fee based off the total assets, it could be much more. Is that bad? Not necessarily, but I suggest it is in line with the services you receive, regardless of if a commission or fee is chosen. As an example, if an advisor charges a fee average of 1% per year for that same $100,000, he or she could earn $1,000 annually on the original amount.
This person may also receive an additional 1% on any growth, and, if there are losses, still earn 1% of the assets. That could accumulate over time to well more than $5,000, depending on performance of those assets. This is not to judge how a financial advisor determines a payment structure or whether commission or fee based is better than; I’m simply showing that making a general statement that sales professionals who sell annuities receive high commissions is again not accurate.
Annuities can be a great fit for many financial needs and goals. Of course, it’s important to discuss the pros and cons of any savings solution with a trusted licensed professional.