The Secrets Of Annuity University Exposed

My readers are likely to hear numerous pitches for annuities. Americans over age 50 are prime sales targets because they have the money. This age group has more wealth than any in history, and many are susceptible to pitches that promise to preserve that wealth. Few annuities are appropriate for older Americans, yet annuity sales rise each year. That might be because most annuities pay commissions of 3% to 5% of the amount invested.

Annuities aren’t purchased; they are sold. You might benefit from learning how at least some of the sales people are trained. Recently, two Wall Street Journal reporters attended and reported on a two-day annuity seminar billed by its sponsors as Annuity University. The firm says it has trained approximately 7,000 agents over 13 years.

At Annuity U., agents are told to attract groups of seniors as prospects by sponsoring an introductory seminar that includes a free meal, because “they like freebies.” A goal of the seminar should be to generate fear among the crowd. An annuity can be sold only if it solves a problem, “but you have to create those problems first.”

Agents are encouraged to tell seniors that their finances are completely wrong and that they have problems with taxes, asset protection, and investment returns. Annuities are the solution to each and every problem, according to the seminar leaders.

Full solutions should not be offered at these introductory seminars. Instead, agents are urged to tease the audience with hints that annuities will solve their problems without explaining how. Then, the seniors are encouraged to sign up for free follow-up appointments.
The sales seminar gives tips on how to act at seniors’ homes, earn their trust, and learn key financial information.

The Journal article says the agents are told to “Treat them [seniors] like they are blind 12-year-olds.” The seminar also says seniors buy on emotions such as fear, anger, and greed. Agents are urged to stimulate these emotions instead of intelligently discussing annuities. Annuity U. also teaches agents to say that annuities are safe and guaranteed like bank certificates of deposit.

Annuities can be useful to different investors. I have recommended them in the past, but only in particular situations. Annuities, however, are not for everyone and are not the answer to every financial problem.

Variable annuities allow the investor to choose how the account is invested from among options offered by the insurer. All investment returns are tax deferred as long as they are not distributed from the annuity. When income and gains are distributed, they are taxed as ordinary income. In addition, variable annuities charge extra costs for administrative fees, mortality expenses, and investment management.

Because of the ordinary income and higher costs, it takes years for a variable annuity to pay off. In a low-cost annuity, the investment returns must compound for at least 10 years. In an average-cost annuity, at least 15 years of compounding are needed for buying an annuity to make sense. The long pay-off period makes a variable annuity inappropriate for many older Americans.

Deferred fixed annuities also have their income compound tax deferred. These annuities are more conservative than variable annuities. The deferred annuity account earns an interest rate that is similar to the yield on intermediate term bonds. The rate usually is changed once a year.
Deferred annuities also have expenses subtracted from the income before it is credited to the account. There often also are fees if withdrawals begin before a minimum time passes. Once again, it takes a few years for the tax-deferred compounding to overcome the expenses and restrictions.

Immediate annuities are a third type of annuity. They begin making regular distributions shortly after they are purchased. They can be a good addition to a portfolio for those who want a source of steady, guaranteed income during their retirement years. These annuities, however, should only be a portion of a retirement portfolio, not the entire portfolio.

Purchasing the right immediate annuity takes some work. There are several options for determining how the distribution amount will be determined and how long distributions will be paid. The options must be considered carefully.

All these issues related to various types of annuities were covered in our past monthly visits, and those discussions are in the archive section of the web site. Review the archive before purchasing annuity. Rest assured that we’ll update these and other issues in future visits.