September 03, 2019Individual Investment Management

With over 20 years of experience in finance, I've seen (almost) every sales pitch under the sun. From timeshares and teaser rates to penny stocks and partnerships, there's a multitude of ways to "invest" your money - and a never-ending parade of "advisers" who will sell them to you!

1.  BIG Fees!
Annuities (particularly deferred annuities) are consistently the highest paying commissioned products for insurance agents. As opposed to investing, which typically only has a single layer of costs, annuities often carry 3 or 4 layers of costs. These costs can be onerous and can kill the value of your invested dollars.

Commissions: 1%-3% of your initial deposit
Investment Fees:  2%-3% annually depending on contract
Mortality Charges:  0.5%-1.5% annually
Admin Charges:  0.1%-0.3%
Rider Charges:  0.25%-1% based on featured added
Surrender Charges:  between 1%-6% depending on cancel year

2.  Poor Estate Planning.
Annuities are often the worst vehicle for asset transfer to your heirs because they require extra costs to add beneficiaries. If you simply invested in an IRA, Roth, 401k, or similar investment account you would have the ease of adding a beneficiary without the extra cost. Often consumers are unaware that if they die, their heirs get nothing and the remaining contract balance in their annuity goes back to the insurance company.

3.  Bad Inflation Protection.
Unless you specifically purchase an inflation-adjusted annuity (and guess what....it costs extra!) then most likely you will get a fixed payment. In an era where rates are at historic lows, it makes little sense to lock your future payments in to a fixed-income stream. It is far better to employ a disciplined investment strategy which includes both equity and fixed income investments that will naturally reflect the movement in interest rates over time to your advantage.

4.  Dividends?  Forget it!
Annuities often market themselves as "hybrid" vehicles for both investment and protection. (I'm talking to you now, sellers of variable and equity-indexed annuities!) The pitch is seductive and goes like this...."give us your money and we will invest it for you. We promise you a minimum account value but you'll participate in the stock market gains too!" So...is this true? Partially...but with a big catch. The reason that companies can do this is because you don't get to receive dividends from the investments. When dividends are paid, they go into increasing the number of "accumulation units" of the annuity you own. Without getting too detailed, this is not the same things as owning the mutual funds or investments directly. An annuity sub-account doesn't pay you the dividends and therefore there is no natural compounding on invested dollars. This means you could miss out on 20-40% of your total potential gains on investment had you simply owned the same funds in an IRA or other account.