This is a myth. I don't use some of them, the expensive ridiculously high commissioned restrictive poorly performing ones. But I agree with the authors of the article below: I neither like nor dislike "annuities" as a class because they are a widely divergent collection of financial tools. Some are indespensible and some are useless.
It just depends on your goals.
By John L. Olsen and Michael E. Kitces
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November 06, 2019 at 03:32 PM
As advisors who often talk about
annuities to financial advisors, we are often asked whether we “like”
annuities. To that question, our standard answer is that we neither like
nor dislike them—because they’re just tools, which work well in certain
circumstances and do not work well in others. Occasionally, that
response will elicit what may appear to be a better follow-up question:
“When—that is, in what planning situations—does an annuity make good sense and when does it not make good sense?”
That’s a core question, and one that might be in the mind of you, our
reader. What’s our answer? One answer might be that “it depends… on the
specific facts and circumstances of the case.” That’s a reasonable and
rather obvious reply, and what our audiences often expect to hear. But
it’s not our answer.
Our answer to that question is that the question in
unanswerable—until we know what the questioner means by an annuity in
the first place. Are we talking about a variable deferred annuity or a
fixed immediate annuity? Those contracts are hugely different.
Each is an “annuity,” but the two contract forms are designed to meet
completely opposite needs. Generalizations, always hazardous, are
especially unproductive when used with annuities. A true statement about
fixed annuities is likely to be false when applied to variable ones,
and vice versa. The same is true when the annuities are immediate versus
deferred. Yet many, if not most, consumers—and all too many
advisors—routinely generalize about annuities, often to the extent that
their conclusions are so flawed as to be worthless.
If we bear in mind this caveat—that we must generalize only when our
assessment can be generally accurate—can we now attempt to answer the
question posed earlier: “When, and in what planning situations, does an
annuity make good sense and when does it not make good sense?” We
believe that we can, and should, construct bright line tests to help us
determine when an annuity is likely to be suitable for our client.
1. Where the Goal Is Immediate Income
When immediate income is the primary goal, an immediate annuity may
be appropriate, so long as it is understood that it may provide no
benefit at the annuitant’s death. Indeed, if the annuitant lives beyond
the point where any refund element is payable, an immediate annuity will
not provide any death benefit.
2. Where the Goal Is Income in the Future
Where the goal is income in the future, several annuity strategies may be appropriate.
- Accumulating money now, to purchase an immediate annuity later
- Purchasing a longevity now
- Purchasing a “ladder” of longevity annuities over time
- Purchasing a deferred annuity now, and activating the Guaranteed Lifetime Withdrawal Rider later.
3. Where the Income Amount Must Be as High as Possible on a Guaranteed Basis
Where the primary goal is income and where the amount of that income
must be as high as possible on a guaranteed basis, an immediate annuity
is ideal. The key word, here, is
guaranteed, given that other alternatives (e.g., portfolio-based strategies) merely have the
potential of generating greater retirement income, but the investor/retiree cannot be fully assured that they will
.
Where the income period is a fixed number of years, a Period Certain
fixed immediate annuity will generally provide a greater amount per year
than can be assured from any investment alternative because the
non-annuity alternative must often preserve principal.
4. Where the Goal Is Accumulation of Capital
Where the goal is capital accumulation, an immediate annuity is
clearly not suitable, but a deferred annuity may be. If preservation of
principal is a requirement, a fixed deferred annuity might be
appropriate, but a variable one, in the absence of a Guaranteed Living
Benefit rider, might not. This is because a variable annuity, except to
the extent that its cash value is invested in the fixed account, does
not offer safety of principal.
If, however, the purchaser is willing to regard a return of purchase
payments in installments, no matter what happens to policy earnings, as a
guarantee of principal, a Guaranteed Minimum Withdrawal Benefit (GMWB)
rider to a variable deferred annuity can serve as an instrument for
capital accumulation with “safety of principal.”
Indeed, the GMWB provision of many contracts includes a step-up
feature that not only assures the return of the original investment in
installments, but also any contract gain accrued as of the point where
the step-up option may be exercised. However, it is important to
emphasize that in this context, the safety of principal provided by the
deferred annuity exists only if the annuity owner accesses the principal
according to the terms of the guarantee. In the context of a GMWB, this
means that principal is not guaranteed, unless the annuity owner is
willing to extract that principal as a series of periodic payments over a
span of many years.
(Excerpted from The Advisor’s Guide to Annuities, 5th ed.)
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