Annuities: A Seller's Dream Come True

Annuities: A Seller's Dream Come True 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.