MARINA DEL REY, Calif., Sept. 20, 2000 (PRIMEZONE) -- Everyone knows that when you buy a car you have to kick the tires and take a look under the hood. The last thing you want to do with your hard earned cash is lock it up in a lemon. Even after you make your decision, you have to keep up with the maintenance to get the most out of your wheels before trading it in for a newer model.
The same is true with your investments. You need to take the time to do the necessary research - assessing your own needs and seeing what products best match your current situation and your goals for the future.
Take annuities, for example. Tax-deferred annuities are one of the best ways to put money away for retirement. As with your 401[k] or IRA, they offer the power of tax-deferral - which means your money has the potential to grow much faster - sometimes 30-40% faster than in similar taxable investments. Even better - and unlike your other savings plans - annuities have virtually no limits on the amount of money you can invest. They are a great place to stash all or part of an unexpected lump sum, such as an insurance settlement or bonus from the boss.
However, annuities are often misunderstood and one needs to take the proper care before choosing one.
"I'm the first person to admit that annuities are often 'over sold' or sold in the wrong circumstances by brokers and agents more interested in commissions than their clients," said AnnuityScout.com Chairman and CEO Gregory G. Yost. Yost is a respected authority on tax-deferred investing who has served as an expert commentator for the NBC Nightly News, Bloomberg's Money Talk, Business Week and many other publications and broadcast outlets.
"Conversely, when used in the right circumstance in an otherwise well-rounded portfolio, tax-deferred annuities are a great way to save for one's retirement and help ensure your family's financial future," Yost added. "There are not too many people left who believe they can retire on Social Security and it is important for those that don't believe in Social Security to start making the right decisions now."
With that in mind, Yost has assembled a list of 10 common mistakes annuity buyers and owners often make, as a public service for those considering adding an annuity to their portfolio and for those who already own one. Yost urges anyone who has any questions about this list to call one of the highly-trained annuity specialists at 1 (800) TAX CUTS or visit the AnnuityScout.com Web site at www.AnnuityScout.com.
The 10 Common Mistakes Made By Annuity Owners
For All Annuities:
1. Sheltering the "Wrong" Money from Taxes
Remember, the money in your IRA, 401[k] and 403b grows tax-deferred wherever it's invested, so it doesn't need to be invested in an annuity. Typically (barring special needs) an investor should put the tax-qualified funds somewhere else, such as a brokerage account, mutual funds, managed account, even a certificate of deposit. So, fully fund your IRA, Roth IRA, or 401K first (particularly if your company matches your contribution), then consider an annuity to tax protect additional funds. Annuities accommodate larger sums of money than IRAs and these other plans, allowing you to save more on a tax-deferred basis.
2. Investing in An Annuity to Fund a College Education
Any money taken out of the annuity prior to age 591/2 will be subject to an IRS penalty of 10% plus ordinary income tax on the gain. Assuming that your kids go to college at age 18, you should only consider using an annuity to fund college tuition if you were aged 42 (or older) when your child was born. There are better ways to save for college (ask your financial advisor about 529 plans for example).
3. Trusting an Insurance Agent Too Much
Remember, the insurance agent or broker will be paid a commission from the insurance carrier you invest with. The longer the surrender charge period and the higher the annual fees, the higher the commission that's paid. It's amazing, but some plans will pay a higher commission to the agent than the interest rate paid to you. Do your homework; find the plan that suits your needs, not your agent's paycheck. Here's another hint, get a second opinion from another agent. No one can point out the faults of an annuity quicker than a competing agent. Pit two agents against each other and watch the commissions and the fees drop (and your potential yields rise).
4. Annuity In the Drawer
Too many people buy an annuity, stick it in a drawer, and then forget about it. Annuities are assets and just like any other asset, they need to be managed. With a fixed annuity, you'll receive an annual statement. With a variable annuity, you'll receive a quarterly statement. Look at the statement. Is your money allocated to your best advantage? Take action, keep it working hard. Sub-account changes can be made tax free and variable annuities typically allow 12-20 free sub-account changes every year.
5. Old Annuity Sitting Liquid
One of the biggest mistakes you can make is to ignore your existing annuity once the surrender charges have expired. An annuity can be upgraded or exchanged into a new, more competitive annuity. On the fixed side, this can mean a higher interest rate with a highly rated company. With variable annuities, there are several benefits:
1) A chance to lower your annual Mortality and Expense (M&E) fees; all variable annuities have some insurance expenses, but today's "new breed" of variable annuities have fees that are considerably lower than in the past. (According to Morningstar, the average M&E on a variable annuity is 1.29%. AnnuityScout.com currently features three variable annuities in the 0.65%-0.80% range.1) Lower expenses mean more money in your account to potentially grow.
2) A chance to lock-in the investment gains you've already earned in the form of a guaranteed minimum death benefit to your heirs. In many variable annuities, the death benefit is limited to your original investment. By 're-investing' your original principal and your gains-to-date, the total becomes your new principal.
3) A chance to expand the number of money managers and sub-accounts offered, providing more choice, flexibility and earning potential. Your investment goals may change over time and a wider array of sub-accounts allows you to more easily adapt your annuity to meet your current needs.
For Variable Annuities:
6. Buying a Variable Annuity Primarily for the Bonus
On the variable side, a 3% to 5% bonus can be offered to "help make up" for the surrender charges on your existing annuity. There is no free lunch. Most of these plans have a full nine years (that's Nine Years!) of surrender charges, a hefty Mortality & Expense Fee, and a large annual fee, all on top of the management fee. Do the math before you buy based on a bonus - or let an annuity expert do it for you.
7. Sitting in the Money Market Account, Forever
Believe it or not, an astonishing number of investors do the research, pick a variable annuity, invest the money and then for some unknown reason, they keep their funds in the money market sub-account, as if they're frozen. Most carriers have toll-free numbers to call to switch between the sub-accounts. Once you've done it, it becomes easy. Many variable annuities allow 12-20 free sub-account switches per year - with no tax implications.
For Fixed Annuities:
8. Buying a "Trust Me" Fixed Annuity
These annuities look great on the surface, but don't always stand up to a closer look. "Trust Me" annuities guarantee a higher interest rate for the first year and then ask the buyer to "trust" the insurance company that the rate will remain competitive after that (and the company's definition of "competitive" is more often less competitive than what you might expect). These annuities often have surrender periods up to seven years, but that great rate is only "fixed" for the first year. In this scenario investors find themselves locked into low yielding fixed annuities with high back-end surrender charges.
9. Buying a Fixed Annuity Primarily for the Bonus
Don't fall for the first year bonus sales pitch ("14% guaranteed for the first year"). Sure, many of these plans give the investor 14% the first year but then they lower the renewal rate to 4% or 5%, while you're stuck with a seven-year surrender period while the insurance company earns the bonus back.
10. The Roach Motel Annuities
You can get in, but you can't get out. The industry calls these "two-tiered annuities" because you earn one interest rate (the advertised interest rate) if you stay in the product and eventually annuitize (take a monthly income stream) with the same insurance carrier. However - you knew something was coming - when you try to exercise your right to do a tax-free exchange (one of the great advantages of buying annuities) they retroactively give you a much lower interest rate - leaving you with much less than you thought you had earned.
When buying any fixed annuity, simply ask if the rate guarantee period (the number of years for which the rate is guaranteed) matches the surrender period. If it doesn't, find one that does. Your first year rate might not seem as attractive, but you'll almost certainly earn more in the long run.
AnnuityScout.com's Free Services Help You Avoid Common Mistakes One way to avoid the common mistakes made by annuity owners is to use the free services offered by AnnuityScout.com. AnnuityScout.com is a leading annuity marketplace representing more than 50 highly rated insurance companies. Unlike single-carrier, single-product sites, AnnuityScout.com maintains its independence from any one company, placing its priorities on the needs of clients. The company has a state-of-the-art call center fully staffed with nationally licensed Annuity Specialists. AnnuityScout.com encourages customers to speak with a live representative about annuity questions. (1 800 TAX CUTS) The AnnuityScout.com Web site is specifically designed to meet the needs of all levels of annuity shoppers. The home page offers visitors four distinct paths from which to choose. Those new to tax-deferred annuities are offered a series of easy-to-use tools to help them decide if an annuity is right for them. Those familiar with annuities may choose to view a side-by-side selection of current fixed and variable annuities. Current annuity owners can compare their investments with current offerings to assess whether or not it is time for a Tax-Free Annuity Exchange. The final path detours "offline" as the "Call Me" button enables Web visitors to schedule their own phone appointment with an Annuity Specialist at the date and time requested by the customer.
Interesting Facts About the Annuities Industry
LIMRA International (an independent service that monitors the Insurance Industry) reports that overall annuity sales (combined variable and fixed annuities) grew from $98.5 billion in 1995 to (an estimated) $155 billion in 1999. This represents an average annual growth rate of 12%. Variable annuity sales have shown even greater growth. According to The VARDS Report (an independent service that monitors variable annuity sales), the variable annuity market has grown from $51 billion in 1995 to $121 billion in 1999, a compound annual growth rate of 19%. First quarter 2000 sales for variable annuities reached $35 billion (The VARDS Report), a trend that could make 2000 a record year for variable annuity sales and could push the overall market past $200 billion. According to the prestigious @Plan market research organization, there are 15.1 million current annuity owners "on line" (defined as annuity owners who regularly use the Internet and e-mail).
Licensed employees of Independent Advantage Financial and Insurance Services, Inc. dba AnnuityScout.com, are registered representatives of, and securities are sold through, Sentra Securities Corporation, a registered broker-dealer, member NASD/SIPC.
Variable annuities are sold only by prospectus, which contains complete information on charges, expenses and risk factors. Prospective investors may obtain a free prospectus by contacting AnnuityScout.com at 1 (800) TAX CUTS (829-2887). The prospectus should be read carefully before investing or sending money.
Variable annuities involve investment risks including the possible loss of principal. An investor's contract, when redeemed, may be worth more or less than the original investment amount.
Annuities are designed as long-term retirement savings vehicles. Earnings withdrawn prior to age 59 1/2 may be subject to a 10% federal tax penalty. Individuals should consult their tax advisor for questions regarding their particular situation.
1 We simply averaged the expenses in variable annuities available to the general public. We did not include variable annuities which are closed to new investors or tax-qualified plans. Morningstar data as of 6/30/00.