Annuity Audit App

This is the 10th exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can read the backdrop for the exercise HERE, or just jump right in with the instructions given below:

It is my hope that this is an extremely brief exercise for you, but many people who have long-term relationships with folks in the insurance, brokerage, or banking industries have a lifetime of annuities built up.  If that is your scenario, it is very important that you do this exercise to get a handle on where your money is and what it is doing (or not doing).

When you did your Personal Balance Sheet or Mutual Fund Audit App, you probably pulled together the statements for any annuities you own.  These statements often lack the information you’ll need for this exercise, so I also want you to pull together each of the contracts you received at the inception of your annuity policies as well.  Then, using the App (link below), fill in the information cataloging the following: owner[i], annuitant[ii], beneficiary[iii], contract value, surrender value, cost basis (the sum of your contributions), and the surrender schedule.  Some of this will be on your statement, but the remainder will be in your policy contract. You may have to do some digging.

Once you’ve collected the information, the analysis should start with a diagnosis of the investment value.  If it is a fixed annuity, you’ll know very quickly if the rate is competitive with today’s rates.  If it is a variable annuity, examine how it has performed versus the various benchmark indices.  If it is an equity indexed annuity, the chances are very good that it is not a phenomenal investment, but it also probably has a very long and steep surrender charge which may make it prohibitive to move at this time.

If you determine you’d prefer to be out of an annuity contract, here are the questions to ask:

  • What, if any, surrender charge exists?
  • Is the surrender charge cost prohibitive?
  • How much longer will the surrender charge last?
  • How much have you contributed (what is your cost basis)?
  • How substantial would the tax impact be (would you have to pay a lot in taxes)?
  • Is there a gain on which you would have to pay a penalty if you are under age 59½?

Again, remember to make these decisions slowly because there are many moving pieces with annuities.  It is best to speak with a fee-only Certified Financial Planner™ practitioner AND a Certified Public Accountant prior to making any final decisions.

Click HERE to access the Annuity Audit app!


[i] The person who made the investment in the annuity

[ii] The person upon whose life the actuarial calculations in the annuity policy were based (this is often the same person as the owner)

[iii] The person or people to whom any annuity proceeds will be directed upon the death of the annuitant

Annuities are Not Bought…They’re Sold!

For those working as financial planners, that we will eventually be humbled by the recognition of a faulty thought process is not just likely, but a foregone conclusion.  One of the financial products that I was trained on intensely was annuities—fixed annuities, variable annuities, equity indexed annuities and immediate annuities.  And it wasn’t until I was in the industry over seven years that my continued research began to reveal that the benefits of annuities to consumers were exaggerated and the drawbacks, downplayed.  As that truth began to settle in, I had to acknowledge that I was wrong.  That was humbling, but I wouldn’t trade my initially faulty thought process for anything, because learning “the hard way” has helped me grow through experience and it makes me a better planner today.  Here’s my confession, which kicks off Chapter Twelve in The Financial Crossroads:

From Chapter Twelve, The “A” Word:

Funny_Sales_Cartoon_sales_callrememberingnames  In the realm of personal finance, no word has been dragged through the mud more times than The “A” Word—Annuities.  Yet, annuities still survive and even thrive.  How they do is not a mystery.  

There is not an outcry on the part of consumers demanding annuity products.  The reason for the continued vibrancy of annuity products and sales is that they pay a big honkin’ commission to the selling broker or agent.  (There, I’ve said it.)  And, as most of the financial sales tactics exposed in this book, I’m especially qualified to make such a statement, because I have sold them myself.  I wasn’t a bad person in those days, conniving to separate prospects from their hard-earned money for my own selfish benefit.  Conversely, every time in years past when I sold an investment product to a client for a commission, I did so thinking it was best for the client.  My recommendations met all the legal requirements of suitability that are required of a broker, but I declare to you now that in hindsight there is no question that my judgment was partly influenced by the amount of money that I could make (or not make) in the sale.  

And how could it not be?  Let’s say you, as a salesperson, had three different products to sell with the following characteristics: one would pay you 1% for every year that the investment continued to be held by the client, one would pay you 5.75% up front followed by .25% each additional year, and another would pay you 12%—all up front.  Which one would you be likely to pick, all things being considered equal?  Hmmmm.  Let’s add to the scenario the assumption that you were selling in the midst of an economic downturn which had resulted in a significant loss of revenue for you and your family.  Is it possible that in that circumstance you may be inclined to favor the product that pays 12% up front over the one that pays 5.75% up front?  And forget about the one that pays 1%, because in tough times, that simply isn’t going to butter the bread.  These aren’t imaginary numbers that I’m using. One percent is a slightly below average amount that a financial advisor may charge for discretionary management of your investment assets; 5.75% is the average commission paid to a broker who sells a mutual fund (A share); and annuity products pay up to—and in some cases over—12%!

The sale of annuities is justified entirely too often because of the massive commissions that go to the broker or agent selling the product.  Powerful organizations have made it their lives’ work to decry this very notion and have built elaborate systems designed to convince themselves, their brokers and agents, and the consuming public to believe in the justness of their actions.  I was a part of one such group and was encouraged—along with a room full of other financial folks who had been invited to San Diego for an all-expense paid trip to hear what this organization had to say—to join the ranks of the “Safe Money Specialists.”  Other people were selling products.  We were selling peace of mind and getting paid 10 times as much!

I repeat: people who sell annuities aren’t bad people.  But, they are sales people.  You expect timeshare salespeople to have an economic bias to sell you a timeshare.  You expect a phone solicitor who interrupts your dinner to keep you on the phone to convince you to buy something before you hang up the phone.  You don’t, however, expect someone who refers to themselves as a financial planner or advisor or professional to have the primary aim to sell you something.  Unfortunately, many of them do.  Your broker or agent may have drank the company Kool-Aid and genuinely believe that he or she is doing the best thing for you, so treat them with respect when you tell them you’ll be moving your business.  As I learned growing up in the Baptist church, we should, “Hate the sin, not the sinner.”  We will be discussing in much greater detail the ways that financial services employees and financial advisors are compensated and what you should look for in Chapter Seventeen.