The Seamy Side of Annuity Sales
A financial planner's tips based on Sen. Warren's blistering report
Recently, Sen. Elizabeth Warren (D-Mass.) released a scathing report on the annuity industry. In Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry, Warren found that 13 of 15 leading annuity companies she investigated “admitted to offering kickbacks either directly to agents, indirectly through third party gift payments, or both.” And, she noted, it’s all perfectly legal.
Agents got all-expense-paid trips to the Bahamas, spa retreats, lavish cruises, luxury-car leases, iPads and other awards for selling annuities.
Here’s what you need to know about what’s going on — what annuities are, how they’re sold and whether to buy one:
What’s An Annuity?
First, a little background. Annuities come in many different forms, but are typically financial products (offered by insurance companies and sold by agents) designed to grow your funds and then generate a stream of payments you can live on, later in life. They are generally complex, though some simple versions let you give the insurer a lump sum of money and, in return, receive a monthly cash stream for the rest of your life. That can be a very useful retirement solution.
Normally, the more complex annuities come with so-called guarantees. For example, a fixed-indexed annuity (formerly known as an equity-indexed annuity) promises a portion of the upside of the stock market while never losing a penny of your original investment. (I’ve written about these extensively and have been critical of annuities for years.)
Sen. Warren’s Report
Warren’s report said that “because of loopholes in the law, it is perfectly legal for some advisers to steer customers into complex financial products that will earn the highest rewards, perks and prizes for the advisers — even if they are bad options for their customers.”
These “kickback” practices, she found, are widespread. In fact, the report concluded that they cost Americans an estimated $17 billion every year. Warren’s view: “That’s $17 billion taken out of the pockets of retirees by unscrupulous advisers who are more interested in collecting fees and prizes for themselves than helping families build real security.”
Because most annuities are regulated state by state, disclosure requirements vary greatly. The Warren report noted that several critical disclosures about the agents’ perks were buried deep within documents that I suspect few will ever read.
What This All Means to You
Frankly, as a financial planner, there was nothing in the report that I found the least bit surprising. In 2012, I wrote about my experience being promised a handsome 6.25 percent commission and an all-expense paid trip to the Ritz Carlton Grand Cayman if I sold $1.5 million worth of a particular annuity.
I’d first have had to obtain my insurance license but, according to Stan Haithcock, aka Stan The Annuity Man, “In most states, you can start the licensing crash course on Monday, pass the test on Friday, give the 'bad chicken dinner seminar’ on Saturday, and then sell an indexed annuity after the attendees swallow the meal and the too-good-to-be-true sales pitch.”
After reading Warren’s report, I spoke with Haithcock, who said he believes that trips and other sales incentives get in the way of the consumers’ best interests and should be eliminated.
Playing the role of devil’s advocate, I noted to Haithcock that sales incentives are common in just about every industry. He responded that the difference is that, when it comes to annuities, we’re not talking about selling cars or mattresses, but rather people’s retirement and financial futures. “These incentives shouldn’t exist for people’s retirement,” he said.
I couldn’t agree more with Sen. Warren on this particular issue. I’ve seen at least one state insurance regulator turn a blind eye to deceptive sales practices for annuities.
When the stock market plunges, the annuity sharks smell blood and start fervently peddling their too-good-to-be-true promise of market upside with no downside risk. I suspect no one would buy the fixed-indexed annuities if they just stopped to ask the agent these six questions before buying one.
Before agreeing to buy any annuity, make sure you get the agent to write down why he or she thinks it’s right for you. If the agent won’t, swim away fast so you don’t become shark bait.
I’m generally leery about fixed-indexed annuities, variable annuities and universal annuities. As a rule of thumb, the better one of these annuities is for your agent (in commissions and perks for sales), the worse it is for you.
An immediate annuity usually promises a monthly payment for life starting right after you purchase. By contrast, the longevity annuity’s monthly payment generally begins 10 or 15 years after you’ve put down money for it to help protect you from outliving your money. One type of longevity annuity, called the Qualified Longevity Annuity Contract (QLAC), also provides some tax incentives.
Immediate and longevity annuities pay lower commissions than other types, but you should still get an agent to put in writing why the particular one being offered is right for you.
Finally, always remember that the best annuity on the planet comes from the U.S. government in the form of delaying your Social Security benefits. What you give up in payments for a few years (your benefits are larger each year you delay claiming until age 70) will buy you an inflation-adjusted monthly cash stream that’s far less expensive than one you could buy from an insurance company.
Unfortunately, no salespeople will try to sell that to you because there are no commissions or vacations in it for them.