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Other Articles
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Annuities
Annuities: A Seller's Dream Come True
By Wayne Michael Lottinville, CFA
Chief Investment Officer, Cascadia Investment Consultants
No, not for you, but for those who sell them!
Annuities may reward the salesperson handsomely,
impose hefty annual fees, lock a customer in for
years, exact stiff surrender penalties, and carry
contract terms so obscure that even the issuer may
not fully understand them. Oh, did I say that all this
benefits the salesperson and her insurance company
to the detriment of her customer? It’s no wonder
that annuities are a favorite of commission hounds.
Then there’s the adverse tax consequences. While
annuity salespeople promote the benefits of taxdeferral,
they may “forget” to mention that payouts
are taxed as ordinary income, or up to 35% at the
federal level. They may promote the benefits of
various “guarantees,” but left unsaid is the guarantee
that the customer may pay too much for too little.
Better alternatives are almost always available. A
properly structured portfolio, for example, could
also defer gains; be taxed at no more than 15%, the
current capital gains rate; incur minimal
commissions and costs; and impose no surrender
penalties.
It’s scandalous. Consider a now-deceased
policyholder who bought a deferred annuity for
$43,000 when he was 73. Under the terms of his
contract, payments wouldn’t start until he was 115
years old. Unfortunately, he didn’t quite make it.
This particular case resulted in a suit against South
Dakota-based Midland National Life Insurance
Company. Midland disputes the charges, but to
support the allegations, the plaintiff’s attorney cites
the annuity’s low withdrawal rates and
unconscionable surrender penalties of 22%.
That said, not all annuities are so horrible. In those
rare cases where one is appropriate, those who know
the difference will use a reputable low-cost, no-load
annuity. Understandably, these are not the ones
offered by commissioned salespeople. Annuities are,
after all, little more than insurance contracts, and as
it’s been said many times, insurance is one of those
products more often sold than bought.
Buyer beware.
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