I too often meet with new clients who want their past financial decisions checked to make sure they are in alignment with their current and future financial goals. My favorite question to ask is “Why did you purchase this?”. Most of the time there is NO clear answer or reason. I usually hear responses like “It felt like the right thing to do” or “Interest rates are so low that my banker suggested it as good alternative to my low rate CD”. Most of the time NO one can explain how it fits into their overall financial plan. Annuities are great financial tools if used at the right time and place.
I fear that many Financial Advisers are more interested in their own financial well-being than they are the clients. As an Adviser, if you serve the client in a “Fiduciary” role the potential conflict of interest can and should be avoided for the benefit of the client. There will be a time in the future when a client’s financial plan has to be put into place. With proper planning client’s goals can be achieved in the most effective manner based on their unique circumstances.
Annuities come in various forms and designs. You may want to simply grow your funds with a guaranteed interest rate by using a “Fixed Annuity”. This type of annuity is offered by various companies with varying guaranteed interest rate periods. Indexed Annuities are available and credit interest tied to various market indexes while at the same time guaranteeing principal. Variable Annuities have their performance tied to sub-accounts (separately managed investment accounts) and can vary in performance as well as value (no guaranteed downside value typically). All annuities have cost involved and typically don’t have front end loads. Most will have varying surrender fees in the early years of the contract life.
Using an Indexed or Variable Annuity in a financial plan can make sense if you utilize the “Guaranteed Minimum Income Benefit” or “Income Benefit” feature that provides a guaranteed monthly income based on a fixed growth rate. You pay for this feature via expense charges by the insurance company on an annual basis. This feature may work if you are attempting to pool all of your assets to create a monthly income plan that is reasonable for the future. The annuity product allows you to nail down a guaranteed monthly income in combination with the potential growth of the value of your assets that are invested in the stock and/or bond markets.
In summary, annuities are great tools if used in the correct manner. Don’t simply purchase an annuity until you can answer the questions, “Why?”