Annuity Industry Needs to Go Back in Time

Annuities started as simple products to help investors guarantee lifetime income and keep their money safe.  As time has passed, many annuities have increased exponentially in complexity.  This is for many reasons, including adding benefits to consumers and helping insurance companies make money.  In the Cincinnati Enquirer’s Simply Money section, Nathan Bachrach talks about how annuity changes have affected consumers in “Overly complex annuities load up consumer pitfalls.”  The so-called new and improved annuities are not always such because increasing complexity could mean that your money is less safe than the original goal of an annuity.

High interest rates made fixed annuities a good product for consumers, advisors, and insurance companies alike.  But as interest rates fell and the first two groups still received their guarantees, insurance companies started losing profits and making changes to annuity products.  Indexed annuities tied to a specific stock market index came about to make the guaranteed returns come more closely in line with what is happening in the marketplace.  With these new products, there are cap rates, participation rates, and spreads that could limit your actual return.  These things aren’t all bad and insurance companies shouldn’t take the entire hit on a low market, but you need to understand them up front so that you are getting what you expect.

In addition to the insurance companies making changes, the author (along with others in the industry) is calling for some changes in the way advisors market and are paid commissions.  Salespeople should not be offered incentives like vacations for selling annuities.  Restrictions need to be put on free lunches and other annuity information sessions geared towards selling annuity products to anyone regardless of fit.  Surrender charges shouldn’t be longer than 5 years, which is enough time for the insurance company to make up for the commission paid in case you cash in your annuity.  Commissions over 5% are extraordinary and should possibly be eliminated.  Mr. Bachrach also recommends getting rid of the term “bonuses” for annuities because he says that bonus money is actually more like a loan.

Making some changes in the way that annuity salespeople receive commissions could be a great thing for the industry.  Consumers understand that interest rates are low and they may not get the offerings they did 20 years ago.  But in addition to consumers lowering their expectations, insurance companies and salespeople should be affected as well.  The lower market effects should be spread throughout the line.  Highly rated insurance companies are selling great indexed annuity products right now.  Look for products that are simple, pay lower commissions to salespeople, and have low surrender charge periods.  Consumers will benefit most from the older type of products that had features in the consumers’ best interest.

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