Why annuities are a terrible idea for most investors
Annuities aren’t for everyone. Insurance brokers now have to act in the best interest of their clients. Ever since the new law was passed, annuity sales have dropped. Here’s why.
What’s an Annuity?
An annuity is an insurance product that pays out income as part of an investment strategy. You invest in the insurance company, and they make payments to you at a set of future dates. You give them money upfront, and they pay you an income stream.
Payments can be paid out at set intervals or in a lump sum at an agreed upon date. The main advantage to annuities is that they allow you to defer taxes on large amounts of cash. Annuities come with several significant drawbacks.
Heavy Drawbacks of Annuities
Withdrawing money from your annuity early comes with steep penalties. If you have to make a withdrawal within the first five to seven years, you may get hit with fees of 7% or more. Other fees, like ongoing investment management or variable annuity, can range between two to three percent a year. Initial commision can be up to 10% of your investment.
The fee structures are often complicated and difficult to understand. Ask a lot of questions and be wary of insurance agents downplaying the drawbacks. With many annuities, if you die before receiving all your money back, the insurance company keeps the money. Read the fine print!
Annuities Aren’t in Your Best Interest
In 2016, the Department of Labor established new rules that insurance brokers had to act as fiduciaries. In other words, they can’t sell you products and services that aren’t in your best interest. Before the new rule was passed, insurance and stock brokers could sell you as much snake oil as they wanted.
Often, they pushed whichever services had the highest commissions. Since the passing of the new law, annuity sales have plummeted. Now that brokers have to act in your best interest, they can’t justify selling as many annuities. Annuities aren’t bad for everyone, but for most people, the drawbacks may outweigh the benefits.