9 Nov2014

Common Objections to Annuities – Clark Howard, Fees, and the Glorified Savings Account

I speak with retirees on a daily basis and seem to run into some common objections.  I’m taking the opportunity to address some of my favorite misconceptions and discuss them here. Here goes:

1. “Clark Howard doesn’t like annuities.”

Ladies and gentlemen, Clark Howard is great. I’ve met him at an Atlanta Hawks game before and he’s literally one of the nicest radio personalities that you’ll ever meet. However, let’s be candid. Clark Howard is not a licensed insurance agent or a licensed financial advisor (Google it). He is great at saving people money and is quite knowledgeable about a lot of things. However, let’s keep in mind that his job is to sell radio ads, books, speaking engagements, and his TV shows. Thus, he must present a polarizing opinion. One of my friends in the industry wrote a terrific rebuttal to some of Clark’s opinions on annuities. Here’s the link – it’s a terrific read:

Clark Howard Rebuttal

2. “Annuities have high fees and high commissions.”

For the most part, this is a misconception. I’ve seen some robust variable annuities that have total annual fees in the 2% range. For that particular client, those fees might be worth it. Generally speaking, the basic fixed annuity has no fees. In order to add on different features and benefits, a fee might be assessed. For example, a fee of .5% might get you an annual income account guarantee of 8%. Sounds fair to me. You are paying to add a guarantee just in case the account doesn’t grow to your satisfaction during the contract period. In all reality and relative to other financial products out there, the fees for fixed index and fixed annuities are much lower than traditional investment products. In addition, the commissions paid to the advisor don’t come out of your pocket. In all cases, the insurance company pays the advisor the commission. Generally speaking, an annuity fee is likely to be much lower than other financial products available. In regards to the commissions, annuities are some of the select few financial products that don’t require payment to the advisor from the owner. As far as the commissions being high, they are normally equal to or lower than the commissions paid on other financial products. This is also addressed in the Clark Howard article above.

3. “Fixed Index Annuities sound like a Glorified Savings Account”

I recently had a great meeting about one the fixed index annuities that we offer. I was making my presentation to a client. He seemed a little skeptical about the fixed index annuity that I was suggesting for him. He was asking all the right questions about the annuity and then said the fixed index annuity “Sounds like a glorified savings account to me.” I can’t tell you how many times I’ve heard this description. It has become a very popular characterization of a fixed index annuity or traditional fixed annuity. I smiled and thought to myself, “This couldn’t be any more perfect.” I said to the gentleman “You don’t expect me to pay you for saying that, right?” He laughed.  I replied to his comment, “I agree. A fixed index annuity is a glorified savings account. It’s true. I talked about how it had the complete safety of a savings account (although savings accounts these days can be at risk based on your bank) with additional features that can’t be found in other financial products. These features are numerous: a lifetime income stream that cannot be outlived, upfront bonuses on your accounts to help with previous market loss, participation in the upside of the market with no downside risk, the highest guarantees in the financial marketplace, and they are safer than banks. After this, I asked him, “Now who wants a savings account like that?” He smiled and raised his hand.

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