Friday, July 20, 2012

Who Earns the Most on an Annuity?

Would you want to make a $90,000 investment when you knew the person selling it was going to take $20,000 out of your investment, so that you end up with only $70,000 in the account? Happens all the time, when a person selling an investment product like an annuity brands himself an investment advisor. His best interests and yours are diametrically opposed, but he's befriended you and proposed an annuity as your best investment option.

Investment advisors come in a lot of different stripes. There are fee only (my preference), then fee based (fees plus commissions), then commission based, and finally product based "advisors". The product based investment advisor sells things -- mostly insurance-type products, and gets paid a commission for doing so. Those include insurance policies and annuities, and other investment vehicles, like IRAs that have insurance policies or annuities inside them. That's where you want to be watching your wallet -- the commission-based advisor (agent/salesman) has an inherent conflict with your interest. His interest is selling a high-commission product, regardless of your interest.

If you're talking with a product-based investment advisor, it won't take very many meetings for him to decide your best wealth-building vehicle is either cash value life insurance or, more likely, an annuity of some type. Annuities and annuity salesmen have had a resurgence in this choppy equities market, which has spooked most retail investors and left them looking for something perceived as "safer".

What's safe about an annuity is this: The lion's share of the annuity's benefit goes to the insurance company writing it. They stand to earn the most through hidden fees, costs, etc. that may cause your actual investment yield to be substantially lower than you're led to believe. Of course, they keep the money if you die before the annuity pays out.

Second in line is the annuity salesman. How much do these guys make for selling one of these? Hold onto your hats.

Sometime back, CEBI got listed in a directory somewhere as an investment advisor -- no idea how that happened or how to get it fixed. A curious side benefit of that is I'm on occasion getting mailings intended for "insiders" in that business. Here's a recent one (quoted word-for-word from the mailing):

"A Financial Planner offered an annuity through Woodbridge with an 8% yield on cash flow from Metropolitan Life Insurance Company. That Annuity was comprised of 240 monthly payments of $2,500 starting 10/10/2030, going through 9/10/2050 for a purchase price of $71,000. The Financial Planner offered this to his investor to yield 7%, a difference in yield of 1% to the investor. The investor's purchase price was $91,000, netting the Financial Planner a profit of $20,000!"
Read that again. This is a promo to financial planners, and the case study is that a salesman bought an annuity product for a $71,000 one-time deposit, then quoted it to the customer at $91,000, pocketing the $20,000 difference. Of course the customer has to live 18 years to collect a dime and 38 years to collect the full benefit, which then ceases (he has no upside, but if he dies NY Life keeps the rest). This type of offering is known technically as a Structured Settlement, where an intermediary bought someone's annuity (taking a nice discount from the seller) and then resold it.

Cash value life insurance is similarly profitable, to both the company and the salesman, who usually gets the first year or two of premiums as a commission.

The primary pitches I've seen on annuities are safety (a questionable claim on many) and tax benefit. Considering the many other tax-advantaged investment choices you have, a $20,000 front-end haircut is a lot to pay for tax benefits.   These are very complex, high cost, illiquid products, and few consumers understand how limited their options are. 

Ask some serious questions about how your investment advisor is getting paid -- especially if he thinks your best investment vehicle is either an annuity or cash value life insurance. CEBI member Brian Fricke has offered a couple of resources for your use:

Tough questions to ask your advisor

Financial Planner Questionnaire

 Other CEBI Blog Articles... 

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Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

Financial Planner Questionnaire


  1. It’s hard to find knowledgeable people on this topic, but you sound like you know what you’re talking about! Thanks

  2. This is an interesting article and very informative. There are many reasons to sell an annuity. For example, paying for medical care or dental work, paying off a house, paying bills and debt, helping out an elderly parent, or paying for car repairs. In many cases, you may need to receive cash quickly, and selling an annuity is a liable option. However, I would also recommend to research sell structured settlement on the internet, and learn about the process. This is another possible way to receive a lump sum of cash quickly. However, I would advice to talk to a professional to see if this option is the right choice for you.


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