The Pros and Cons of Annuities

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Index Annuities - Immediate Annuities

Life Insurance


Slow motion withdrawals processed the next business day or two later

Understand that with a deep discount brokerage you can make instant trades (of normal investments like ETF's and stocks) and have instant access to that money to make another trade within seconds. Switching from one investment to another is 100% liquid and takes place as fast as you can perform a few clicks of your mouse. You'll also get instant email confirmation of trades. None of this is the case with annuities.


Annuity trades are priced at the final closing value of each trading day. You can place a trade at any time before or during market hours (leading up to the close of trading at 1 PM Pacific Time) but your instructed trade will always be valued at the closing day's price. So you can imagine if investor panic causes the stock market to free fall and you wanted to make a quick withdrawal (or reallocation to less risky funds within a variable annuity) during market hours you can just forget about it! With annuities any withdrawal or reallocation order that you place must occur before 1 PM (Pacific Time) or it will not take place until the end of trading on the next trading day.


Also if you want to do a 1035 exchange to Vanguard, don't expect the insurance company to move any faster than a lobby clerk at the post office. Once they cash you out of the annuity they won't mail the check until the next business day, even on the West Coast when the markets close at 1 PM! Slow is their policy! And unless you specifically tell them to send the check overnight mail to Vanguard, they will just send it 1st class mail, as if you enjoy being out of the market for even more trading days. Fortunately Vanguard will honor the check as soon as it arrives (as a good faith payment) without waiting for it to clear, and invest the funds immediately (at the closing price of the day) as long as the check arrives before the close of market at 4 PM Eastern Time.


Old fashion FAX technology - Not done online

Also, with annuities, if you want to withdrawal money you must first fill out a form "in good order" and then FAX it to the insurance company before the market close. Then if there's one small issue that the insurance company has with how you filled out their form (not "in good order") then they will disallow your trade and usually without letting you know until sometime the next day! Don't expect to get any sort of email confirmation from your insurance company either. They communicate in slow motion via phone and they take their sweet time! So these bureaucratic insurance company ways of doing things could literally cost you thousands of dollars as the market free falls.


Short-term trading or "timing the market" is discouraged or not allowed

If you are one who wishes to "time the market", the idea is to get out of riskier investments (like growth funds) when the market has run up to relative highs, then move that money into less risky investments like cash, bonds or fixed accounts, then buy back into riskier investments after the market has corrected to low points. Unfortunately most insurance companies have a clause in their prospectus that says that they do not want you to benefit from short-term price fluctuations, and so they have administrative procedures to discourage large, frequent or short-term trading. For example they may limit the amount of fund transfers that you can make quickly (by phone, FAX or through their website) within a 12 month time period. If you exceed their fund transfer limit then they may require that all future fund transfer requests be made by "snail mail" (US Mail) in a rolling 12-month period. All of this lack of liquidity is one more reason to invest in exchange traded funds instead, which have no such ridiculous restrictions that may handcuff you from properly managing your money.


No rocket science to variable annuity manager stock picking

When you look at the familiar names of the top 30 stock holdings that they pick, you will ask what on earth am I paying these bloated annual costs for??? Any novice investor can pick Apple, Microsoft, Home Depot, Oracle, Boeing, Johnson & Johnson, Bank of America, etc. Variable annuity sub-fund managers invest in stable, large cap, household name bellwether companies. There's no rocket science here. You can just as easily invested in a broad market ETF (such as VOO or SPY ) instead, or thrown darts at the DOW JONES industrial average stocks. History has shown that broad market ETF's consistently outperform actively managed funds (like those found within variable annuities).


Limited choices

Annuities usually have very limited investment choices. Usually the various funds that you get to choose from are simply warmed over variations of the same large cap stock funds, government bond funds, and a cash fund -- No corporate bond funds, no gold funds, and no high dividend paying stock funds. In late 2011 Sun America suddenly decided to eliminate its "cash management" fund from at least one of its annuity groups, thus forcing investors to stay invested in riskier securities and further discouraging market timing. As the national debt sours and some investors are hedging positions by moving some of their money to the sidelines, annuity investors without a cash sub-account to choose from can't do this.


The legal "suitability standard" won't protect you from your broker

To help you feel more comfortable about investing in an annuity, your over-zealous, commission hungry annuity pusher may tell you that the National Association of Securities Dealers and the Securities and Exchange Commission have laws that require that agents determine if any investment is "suitable" for the client or not by taking into account such rudimentary factors as life expectancy, money available to pay bills, risk tolerance, tax implications, and overall retirement goals. Unfortunately these "suitability standards" are nothing less than a joke. The suitability standard is the problem! Annuity salesmen obviously don't consider the suitability of the very investment itself: the annuity! Why would any agency approve of subjecting your money to "ordinary income" taxation, locking your money in prison for 10 years, 20 years or more under threat of an additional mandatory 10% tax penalty, etc, etc? After reading this page you will agree that NO annuity is "suitable" for anyone!

Annuities are not part of any diversified portfolio either

Some "advisers" may try to reason with you by suggesting that annuities are part of a "diversified portfolio" of bonds and stocks or that you can replace the bond portion of your portfolio with an annuity. This is like saying that you need a few bad players on a football team, which is of course nonsense. And replacing bonds with an annuity is a serious mistake because bonds and stocks work together to balance each other out. If stocks crash then bonds often post bigger gains. If you instead put your bond money in an index annuity then that same annuity money (that was supposed to be in bonds) would earn nothing in that year! In essence you are less protected from stock market decline, which is the very thing that investors who are attracted to annuities fear. In the end commission-based advisers will say anything to make the sale. If they can't convince you to dump all of your money into an annuity then getting you to put a portion of your money into an annuity is better than nothing. It's all about the commission money.


Expensive Variable Annuity Bells & Whistles

Many variable annuities charge you an extra 1% per year for a "mortality and expense charge". It guarantees that when you die the value of your variable annuity will at least be the amount that you put into it. According to Forbes Magazine, to collect on this insurance, you would have to "pick a rotten investment — and then drop dead before the investment recovers". If you simply invest in age appropriate bond and stock ETF's it is just highly unlikely that you will lose money. In reality, with a variable annuity mortality and expense charge you simply guarantee that after 10 years you will have subtracted another 10% from the value of your investment in addition to the other high hidden fees and turnover costs.


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