Why does it seem as though everyone wants
to sell you an annuity?
Annuities are the type of investment that
sounds too good to be true: You invest a certain amount, you receive
a tax-deferred payment from the annuity for a fixed number of
years, and there is even a death benefit. According to the investment
advisors that I work with, annuities may be a good investment
for someone who is in a high income tax bracket, and who is also
not a senior citizen. But, according to an article in the Wall
Street Journal in 2002, an independent insurance analyst
was quoted as saying, "Annuities are almost never appropriate
for seniors."
Then why do a lot of seniors
have annuities?
The commission paid to the investment advisor
is often in the 6 percent range, and sometimes as high as 8 percent.
At a 6 percent commission, for example, sale of a $200,000 annuity
will bring in $12,000 for the investment advisor. But the commissions
don't stop there -- annuities have internal expenses that can
run about 2 percent per year, with all of that coming out of
the principal of the annuity.
Besides the commissions,
what is the problem?
Although annuities are promoted as a good
basic investment, there are some major differences between annuities
and stocks or mutual funds. Annuities usually have a period,
usually seven years, during which the annuity cannot be cashed
in. In other words, you are stuck with the annuity for at least
seven years.
Not every annuity will hold its value.
A "variable" annuity is actually a collection of mutual
funds that may substantially lose their value in a bearish stock
market.
The tax advantages of annuities often are
cancelled out by the high fees charged by the institution selling
the annuity.
Annuities can also mean additional income
taxes for heirs of the person who buys the annuity because the
annuity does not offer a "step-up" in basis when it
is inherited, unlike securities and real property.
How are annuities taxed for
federal estate tax purposes? The value of the annuity contract,
determined as of the date of death, is added to the owner's gross estate.
This is usually the amount that will go to the owner's estate or the
designated beneficiary. If there is no remaining benefit at death, the
value is zero.
What should you do if you want to buy
an annuity?
1. Shop around to find
an independent financial advisor who doesn't rely on commissions for his or
her livelihood. Look for an advisor who charges an annual percentage
of the funds that are being managed for you.
2. If you decide to get an annuity, read all of the
information that you are given. Do not rely on oral statements about the
annuity from the salesman. Ask some hard questions about the annuity,
including the "lock-in" period, and the chances of losing part of your
investment, the commission and the internal expenses.
