Why Annuities May Earn Investors' Respect Now
Perhaps you've noticed that the word "annuity" sounds similar to "ennui." Or you've been alarmed about the reputation surrounding certain types of annuities. Or you've tried to make sense of these products and felt all the thrill of staring into a bottomless bowl of cold oatmeal.
Misunderstood at best and reviled at worst, annuities rank as the Rodney Dangerfield of investments: no respect at all. Yet experts say that annuities -- already setting sales records -- could well innovate in the coming years, provided that the same high-tech changes shaking conventional investments make it to this sector.
%VIRTUAL-pullquote-The annuity sales model is currently like the old-line travel agencies.%"The annuity sales model is currently like the old-line travel agencies," says Stan Haithcock, an annuities expert and salesman based in Ponte Vedra Beach, Florida. "Now we book our travel all online, and life insurance has made that leap where it's all sold online. We're going to see that same change in annuities."
Haithcock sees consumers taking charge of what is now a business driven by salespeople -- often aggressive ones -- who hawk certain annuities to score a high commission. "I predict the change will happen in the next five years," he says. "By 2020, we're going to see people able to buy annuities direct."
If so, an opportunity awaits some high-tech annuities gurus, as sales figures suggest that annuities are indeed here to stay. According to a recent survey by the Connecticut-based Life Insurance and Market Research Association, sales reached $235.8 billion in 2014, with record annual numbers in indexed and income annuities. Still, that doesn't take into account one threat: the bad reputation variable and indexed annuities have earned.
Variable annuities, which are tax-deferred and invest your funds, come loaded with costs. These include large, upfront sales commissions, surrender fees for the first withdrawals, account administration fees and insurance company charges over time. Indexed annuities have likewise come under fire for their high costs and complex terms.
"Some consider annuities to be bad because they have surrender charges for early withdrawal," says Jim Poolman, executive director of the Indexed Annuity Leadership Council. "However, annuities are a long-term product, so the surrender charge shouldn't be a deterrent for someone looking to save for the future."
Hard to Explain
Yet annuities are a tough financial category to explain in detail. Sold by insurance agents, annuities are designed to accept and grow your funds, and then pay out once they reach a maturity point, called annuitization. But investors' eyes often glaze over when agents try to explain the many kinds -- 15, to be precise.
Even a blog starring a goofy cartoon duck, Earl E. Bird, doesn't seem to be changing the reputation of annuities much. Whimsical as they may appear, webbed feet can only go so far in tackling a tangled financial web.
But they do have a fascinating history that dates to the Roman emperor Tiberius. The term comes from the Latin word annua, and the Roman government created annuities in 13 B.C. as lifetime pension plans for soldiers and their families. When soldiers went off to war for years, annuities guaranteed they'd be taken care of. In modern times, Andrew Carnegie started the first company that sold annuities, and it's still around today: TIAA-CREF Financial Services, based in Charlotte, North Carolina.
Fast-forward to 2015, when annuities could regain some of their luster and a more solid reputation, thanks to the Qualified Longevity Annuity Contract. Established by the Internal Revenue Service in 2014, it sets new guidelines for investors to create annuity-based pensions.
"I think QLACs are great," says Clarence Kehoe, chairman of the tax department at Anchin, Block & Anchin in New York. "It was a very creative suggestion by the government to assist retirees and provide them with some retirement security for the future by keeping them from running out of money." That is, as long as a person lives, the annuity payouts keep coming.
But a QLAC does come with a cap -- 25 percent of your total IRA-type assets into these annuities, or $125,000, whichever is less. "These contracts do provide some form of protection against running out of funds in retirement," says Mark Edwards, a tax attorney with Gardere Wynne Sewell in Dallas. "But [a QLAC] generally would not substitute for defined benefit pension programs that used to be widely maintained by employers."
Regardless, Haithcock points out that it will be virtually impossible for salespeople to game QLAC. Because variable and indexed annuities don't qualify, "they can't juice the numbers, they can't overhype it and you can explain it to a 6-year-old," he says. "The government sets the guidelines."
Haithcock is on a one-man mission to out the shady practices that have dogged the annuities industry, while acting as a self-styled consumer advocate. He's not your typical annuities salesman, to be sure: He wears a T-shirt that says "I [heart] ANNUITY HATERS" and professes love for death-metal music by the likes of King Diamond and Lamb of God.
Further, it might seem strange that an annuity salesman would get excited about online platforms that would eat into the turf of people in his line of work. But he sees that as step toward wiping out the bad apples of annuities.
"Whenever you have that kind of online sales model, you get a guy like Jeff Bezos who takes an Amazon approach and says, 'I'm going to sell annuities direct,'" Haithcock says. "In fact, it surprises me that Bezos hasn't done it already."