A few weeks ago, I went into a branch of a small, locally owned savings bank near my home and happened to see one of their customers filling out the paperwork for a money market account yielding 2.25 percent.
I thought this was curious, since it’s easy to find an FDIC-insured money market or savings account on the Internet yielding several percentage points higher.
So, I asked the gentleman, “Why are you opening this particular account?” He explained that he has received loans from this bank in the past, and keeps some deposits with them as a “thank you” for loaning him money when he needed it – a very logical answer.
This man is not naïve. He knows he could get a better financial product elsewhere, but he has very good reasons for buying the product he is buying.
Some commentators and even regulators believe that buyers of fixed annuities, including index annuities, are naïve. The Wall Street Journal reported that the Massachusetts Securities Division has gone as far to say, “For investors over age 65, annuities are probably not for you.” This is a shocking statement, considering there is more annuity money owned by people older than age 65 than by those younger than 65.
Without denying that there are situations where a naïve client purchases a fixed annuity without adequately understanding it, let’s address the question: Are there rational reasons for people to buy fixed annuities?
And the answer, of course, is yes. Let me give you five.
Without question, safety is the top priority for every person when they are saving their money. But safety means different things to different people. To some people, safety means putting money in the bank because banks have FDIC insurance. To others, it means having money diversified across a variety of stocks. To some people, safety means picking their own stocks after they have researched the underlying companies; and to others, it means entrusting their money to professionals.
I think we can agree that no one puts their money in a place where they expect to lose it. They put their money in a place where they expect to get it back one day, hopefully after experiencing some nice growth.
The great thing about fixed annuities is that they uniquely offer three levels of protection, which makes them the gold standard of safety.
Level No. 1: By contract, a fixed annuity guarantees that your principal is protected and that you can get it back again. There may be a penalty for early withdrawal, but as the annuity owner, you can control your withdrawals. So, there is no circumstance that can cause you to lose money in a fixed annuity.
Level No. 2: Even if your insurance company fails, the value of your annuity (up to $100,000, or more in many states) is guaranteed by your state insurance guaranty fund. In other words, your annuity is backed by a government guarantee similar to those that protect your bank deposits.
Level No. 3: If you have a problem with the insurance company that issued your annuity and you want to get a regulator involved, the regulator is located in your home state no matter where that insurance company is located. Here, annuities even beat money in the bank. Since most banks are regulated at the federal level, your bank’s regulator may be in Washington, D.C.
With these three levels of protection, there is nowhere safer for your money than a fixed annuity.
Once people are satisfied that their money is safe, the next objective is to have that money grow as quickly as possible. With a fixed annuity that carries a rate of interest, that means they want the highest possible rate of interest.
Fortunately, insurance companies are not ignorant of that fact. Many carriers offer annuities with very attractive rates of interest. And, the annuity industry invented index annuities precisely so that they could offer even better rates of interest under certain conditions.
3. Tax advantages
Again, people want their money to grow as quickly as possible, and besides having a high rate of growth, they want some type of tax advantage that helps to accomplish that goal.
Annuities cannot claim to have the best tax advantage possible. However, neither can stocks, stock mutual funds, or even 401(k)s or IRAs. The fact is that no tax advantage beats that of your home, where you can deduct the interest that you pay on a mortgage loan and pay no taxes on the growth of the market value of your home.
Even though annuities cannot claim to have the best tax advantage possible, the fact is that they do have a tax advantage, and that is better than no tax advantage. Some people buy annuities for their tax deferral.
Most people recognize that liquidity, safety and growth do not co-exist very well.
For example, with a checking account, you get excellent safety and total liquidity, but most checking accounts pay little or no interest. With stock market mutual funds, you get good liquidity and hopefully a good rate of growth, but you are sacrificing some safety.
So, if an annuity is going to give you bulletproof safety and a good rate of growth, there needs to be some sacrifice in liquidity. Otherwise, we might as well have everyone close their checking accounts and put the money in annuities.
The good news is that most annuity products build in enough liquidity to make many customers comfortable. Even retirees who need to withdraw money every year to supplement their incomes can find annuities that allow them to take such withdrawals.
The fact is that if you have an annuity that lets you take out 10 percent of your value every year, and you consistently need to take out more than that, you may be burning through your retirement savings at a rate you cannot sustain without running out of money during your lifetime.
5. Estate advantages
At some point in their lives, many people consider what will happen to their money after their death. This is another area where annuities may not necessarily have the best treatment for everyone’s situation, but annuities do have some estate advantages that could be very helpful.
One advantage is speed. With an annuity, you get to name a beneficiary and typically avoid the probate process, so an annuity can be the quickest way to get money to a beneficiary after your death.
Another advantage is privacy. With an annuity, you get to name a beneficiary and avoid passing assets through your will. For example, this can allow you, to direct money to a particular child who has been very helpful to you as you have aged, while still having your will provide for an equal division of assets between all your children.
The point is that there are a lot of perfectly valid reasons why someone, even someone over the age of 65, would want to buy an annuity. These people are not necessarily naïve.
It would be nice if the commentators and regulators in our industry could find a way to allow annuity salespeople to help customers buy fixed annuities without constantly being subjected to negative press.
There are many types of annuities: indexed,immediate fixed, variable annuities and some with long term care and living benefits, access to funds when terminal or critical illness arise. Contact Connie Dello Buono CA Life Lic 0G60621
at 408-854-1883 email@example.com for annuities suited to your needs and wants and retirement goals.