Question: Annuities seem to be the hot financial product with all of the advisors I have recently met with. They can’t be good for every single person, so who should not buy an annuity in your opinion? from Walt S. in Lincoln, Nebraska
Answer: Great question for the annuity buying public Walt. Much appreciated for the opportunity to provide this much needed answer.
First of all, it’s important to know what annuities actually are and what they should solve for within your portfolio. Annuities are contracts from life insurance companies that were originally designed to solve for lifetime income. Since those humble and simple product beginnings, annuities have morphed into unnecessarily complex “trying to be” one size fit all dream products that can sometimes become fee monsters.
I use a simple acronym to determine if someone should consider an annuity. Just because you might answer “yes” doesn’t necessarily mean that you need an annuity, but it could mean that it might be worth consideration. That Stan The Annuity Man acronym is P.I.L.L.
P stands for Principal Protection
I stands for Income for Life
L stands for Legacy
L stands for Long Term Care
Notice that there isn’t a “G” for growth. That’s because I feel that annuities should be owned solely for their contractual guarantees and not for potential market type growth. You can do much better in the growth department with non-annuity products. That’s a fact.
To make it even easier for you and the readers, I have listed below who SHOULD NOT buy an annuity in my opinion. This list isn’t all encompassing, but it should cover most of the needed bases. As with anything, there are exceptions to every rule, so these are broad stroke “should nots” when it comes to annuities. I’ve commented (giving my Stanalysis) on each to subside the annuity nitpickers.
You SHOULD NOT buy an annuity if………….
- You are under the age of 40
Stanalysis: Most attached benefit income riders cannot be issued unless you are 40 years old. If you are younger than 40, you should really have your money in the stock market for maximum growth potential, which means not an annuity.
- You are looking for pure market growth
Stanalysis: Even the best no load, no surrender fee variable annuity is limited when it comes to investment choices. Pure market growth potential is always found outside of the annuity world.
- You are over 85
Stanalysis: There is an argument for people in their 80’s to buy Single Premium Immediate Annuities if they need income. But that would be the only reason, period!
- You are worried about hyperinflation
Stanalysis: There is not an annuity product on the planet that can address hyperinflation. You can contractually add a cost of living adjustment rider (COLA) to a policy, but it will lessen your initial payout.
- You need 100% liquidity & flexibility
Stanalysis: If you need full liquidity, then keep your funds in a money market at the bank. No load, no surrender charge variable annuities provide 100% liquidity, but this is the only annuity type that could even be considered….and that’s a stretch.
- You want all of the market upside with guarantees
Stanalysis: This is the typical variable annuity sales pitch. The reality is that once you add guarantees to the annuity policy, then your investment choices are contractually limited. You CAN’T have your cake and eat it too!
- You want all of the market upside and no downside
Stanalysis: This is the typical indexed annuity (also hyped as “hybrid”) sales pitch. Just remember that indexed annuities were designed to compete with bank CD returns, not the market. Enough said. No cake here either!
If you will just remember my Stan The Annuity Man saying of “own an annuity for what it WILL DO, not what it might do”, you should be in good shape. Make the decision solely on the contractual guarantees of the policy, so if that guarantee solves for your specific goals, then an annuity purchase might be suitable and appropriate for your specific situation. Don’t buy the dream, buy the annuity reality.
*If you have a question for Stan The Annuity Man, please send your question to firstname.lastname@example.org. He will answer all questions directly, and might include yours in his next Annuity123 “Ask Stan The Annuity Man” blog.
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