Wall Street Potholes

Chapter 7Annuities

Dave Pasi

This section begins with a history of my personal experience with investments in annuities. I will then describe the basics of what annuities are, who sells them, potential tax implications, and why buy them. I will review basic types and cost structures. Next, a brief tutorial on some current issues and applications relevant to the insurance industry, government regulations, and recent policy changes, with specific examples of typical annuity scenarios, trade-offs, benefits, and costs. Most importantly, I'll give you questions to ask an annuity salesperson next time you meet one. This will leave you knowing much more and will show that you probably don't need what he's selling.

Introduction

This is NO time to purchase annuities.

Annuities are high-fee, illiquid investments that make insurance companies a boatload of money. Does this sound too critical? Not really; don't get me wrong, there are investing situations that call for an annuity, but they are just few and far between.

Since the depths of the “Great Recession,” the insurance industry has capitalized on the fear most investors felt when the stock market swooned from September 2008 to March lows in 2009. You might recall that the market was down over 50% from its high. Fear can be a great motivator, but not when it comes to annuities. When fear grips investors, insurance sellers soothe them with words like “safe,” “guaranteed,” and “never worth less than your initial investment.” Insurance ...