Annuities Are Insurance, Not Investments

I smacked my forehead in frustration at a story about annuities in last week’s issue (October 15) of Barron’s. One shouldn’t expect Barron’s to know a lot about annuities, because its sweet spot is stocks and bonds. But still.

The author of the article tried to discover if she could buy an annuity online without interference from an insurance salesperson or advisor. “Frankly,” she wrote, “I would be more likely to consider an annuity if I could complete all the steps online, avoiding the possibility of talking to an advisor who sounds like, well, an insurance salesman.” Let’s hit the pause button right there. People generally need assistance when buying an annuity. Why? Because most annuities have an irrevocable aspect, and people should consult knowledgeable (and licensed, because annuities are highly regulated) intermediaries before making irrevocable decisions.

Why is there an irrevocable aspect to annuities? Because the active ingredient in many annuities is the guarantee of a certain return or a specific income, and those guarantees often depend on the illiquidity of the underlying bond investments. In a word, guarantees are insurance. By definition, insurance isn’t something you can easily jump in and out of. The Barron’s  writer continued: “I’m put off by the feeling that I can generate more income investing on my own [than buying an annuity].” To repeat, annuities are not investments. Insurance is always more expensive than investments (unless you happen to count negative returns as an expense) because you are buying protection.

As for her quest to buy an annuity online, the Barron’s writer called several no-load investment companies (Fidelity, Vanguard and TIAA-CREF) and an insurance company (USAA) but was dissatisfied with the annuity services. I wish that she had called, where the staff works hard to screen annuities for high quality and help individuals buy appropriate products via Internet and phone.

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