Annuities: the Good, the Bad and the Ugly.
So, you think annuities are confusing and prone to abuse? You might be right.
One of the biggest challenges to a successful retirement is making sure you don’t run out of money once you begin living off your nest egg. Multiple studies show that Americans’ number one retirement fear is running out of money. In fact, some studies show that almost 60% fear running out of money more than death!
Yet, despite this widespread fear, many Americans are unwilling to consider annuities, which could provide lifetime income options and alleviate the fear of outliving retirement savings. Annuities are useful financial tools that have been around for decades, but many consumers view annuities as confusing and the annuity industry as full of abuses targeting retirees. As a business that offers annuities, you might expect us to disagree. Perhaps shockingly, we think these are valid points.
It may be helpful to begin with breaking down what an annuity actually is and how they can be helpful conceptually, then take a look at how annuities have gotten the reputation they have.
What is an Annuity?
At the most basic level, an annuity is a contract between an individual and an insurance company. In exchange for paying a set amount of money, usually a lump sum up front, the insurance company agrees to pay out monthly income to that person for a set period of time. There are two broad categories of annuities that are important to understand:
- Immediate vs. Deferred – this difference is actually somewhat self-evident. With an immediate annuity, you usually start taking the monthly income payments immediately after purchasing the contract. By contrast, deferred annuities allow you to wait until some future time to begin taking the income.
- Variable vs. Fixed Annuities – With a variable annuity, your return is based on the ups and downs of the market and there is always a risk that the value of your contract could go down. This is different than a fixed annuity, which provides a guaranteed interest rate or return, regardless of what may happen in the market.
For those planning for retirement, annuities can provide an interesting benefit that cannot be found in many other financial products: guaranteed lifetime income.
Annuity contracts with this feature offer the certainty that the customer will receive the same payout no matter how long he or she lives. This lifetime benefit provides protection against what is known as “longevity risk” which is really just a fancy name for the risk of outliving your money.
However, as with many financial products, layers of options and complexity have been added to annuities which can make it difficult to understand what you need, what you are getting and, most importantly, what you will pay for it. For example, annuities often have different features that you can add-on (called “riders”) which offer different benefits with different costs to the consumer. While the ability to customize an annuity to your particular situation can have advantages, it also introduces the possibility that you could be sold products and features you do not need by unscrupulous insurance agents.
Annuity Industry Abuses
Anyone who performs a simple web search for “annuities” will find a host of articles and websites highlighting potential issues and abuses in the annuity industry. There are also numerous examples of state and federal regulators that have taken action against insurance companies, broker dealers and insurance agents for what the regulators view as unfair sales practices. Some of the most common of these complaints involve allegations that consumers are being sold products that are either not right for them or that they do not need by agents looking to push annuity products to generate high commissions which are paid by the insurance companies.
In addition to the sales practices, many view some elements of the annuity contract itself as inherently unfair. For example, one common concern about these products is what happens if you die early. In many cases, the annuity contract may allow the insurance company to pocket the amount you paid to buy the annuity without paying out anything to your next of kin or beneficiaries. If you do want to pass on the value of your annuity, the insurance company may let you, but they will charge you extra for that right.
This history of abuse, combined with a product that is getting ever more complicated, has led many Americans to avoid annuities altogether despite the potential benefits they may provide as part of a balanced retirement portfolio.
Create an Annuity Designed for Modern Retirement
At Kindur, we decided, rather than trying to convince consumers that existing annuities are “good” or that the potential for abuse in the industry doesn’t exist, we would build a new annuity product with a structure that avoids the problematic practices which have caused many Americans to avoid annuities altogether. To accomplish this, we searched for a partner that shared our vision and found a leading insurance company to build a deferred fixed annuity designed specifically for those approaching retirement.
First and foremost, we wanted to make sure our annuity was available for purchase online. This means you can purchase our annuity from the comfort of your home when you are ready and when you feel you have the information you need to sufficiently understand the product. You won’t need to deal with an insurance agent and, if you decide an annuity isn’t right for you, there are no uncomfortable conversations or pushy sales pitches. Simply close your browser. We won’t be offended!
Second, to address the perception that the industry is full of abuse and unfair practices, we wanted to challenge the idea of a commission-based product to ensure the incentive to sell the annuity is aligned with the customer’s best interests. In many cases, it is not clear how much an agent will actually receive for selling you an annuity or if they are better compensated for selling you additional features. So we eliminated the commission from the insurance company. Instead, we have simple, straightforward pricing that you pay us as your investment advisor. We are completely transparent about our fees and prominently disclose them on our website (kindur.com/annuity). More importantly, as your investment advisor, we have a mandatory fiduciary duty to act only in your best interests.
Finally, we wanted to get back to a simple annuity product that’s easy to understand and that can meet the needs of modern retirees. The annuity we offer does not contain costly optional riders and you won’t be asked to pay extra for features. Instead, we took only the features that we believe should be part of a product designed for retirement and built them in. For example, guaranteed lifetime income isn’t an optional rider for a Kindur annuity; it’s standard.
Similarly, we don’t believe that you should have to pay extra to leave your money to loved ones if you pass away. The annuity we created provides a standard death benefit that allows you to pass on the contract value of the annuity to your beneficiaries and even permits your spouse to receive lifetime income depending on the payout option you choose.
While annuities are not right for every person or every situation, when used as part of a holistic retirement plan and a balanced portfolio, they can be a helpful tool for getting through retirement without running out of money. At Kindur, we believe in providing our customers with the tools and knowledge to understand their options, decide what their particular retirement should like, and retire fearlessly.