I wasn’t a big fan of annuities for the longest time. I saw too many of them with high fees, complicated terms and so many hooks I had to get out my tackle box to house them all. That said, when I started offering annuities to clients with specific needs and desires not too long ago, I reviewed literally hundreds of them and in the pile I have found a few I thought advantageous.
First off, the description of annuity I like to use is a contract between an insurance company and a person that stipulates in return for a sum of money paid by the client, the company will promise payments over a period of time or even a lump sum at the conclusion of the contract. Annuities have all sorts of versions and terms but just know the contract is a promise to pay. How, when and how much depends on the contract.
The promise is a good as the company making it so realize they are not guaranteed by the U.S. government in any way, shape or form. You can pay the company a sum of money in a lump or over time. The annuity can be tied to a moving target such as a stock index or be just a fixed rate of return. There are other variations and they literally come in all shapes and sizes.
Without getting too technical, annuities can have a tie-up period where the client has to commit to leaving at least some of the money with the company for a specified length of time. Some allow a portion of money to be taken out at certain times at the clients option and most have a hardship clause that allow for special circumstances such as a death of the primary person(s) specified in the contract.
I find that investors who want a stream of income later in life that won’t go away or cannot stomach the ups and downs of markets are primary candidates for annuities but know that annuities are not for everyone nor should they be offered up carte blanche to all investors.
Certain investors will ask me for an annuity and others have to be explained as to how they work. As an advisory, I am approached by annuity companies trying to get me to offer their particular version but honestly, I find all but a handful of annuities way too complicated for most investors. Sure I could place a complicated annuity with a client but I wouldn’t do that knowing the client doesn’t fully understand how they operate. Truthfully some are so complicated I have to study them for an hour or two in order to fully understand them myself and I’m in the business!
The annuities I lean towards are the ones that are straight forward and simple. The terms are clear and usually there are not a whole lot of them compared to others. My thinking is if I can explain it to a client and they understand how it works, it will be better for all concerned, which is the investor, the advisor and the insurance company writing the contract.
The regulations and oversight on annuities is severe and very strict and protection to the consumer is a lot better than it was decades ago where annuities were sometimes regarded one of the black boxes of financial products.
Not so today. Many are simple, easy to understand and perform as promised. The importance of understanding them by both the client and advisor is tantamount to a successful placement and an honest and straight forward conversation by both parties is the cornerstone of that success.
Marc Cuniberti is an investment advisor representative through Cambridge Investment Research Advisors, Inc. Cuniberti can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603, 530-559-1214, or moneymanagementradio.com. California Insurance License # OL34249.