The Misleading Trick of Annuity Sales
What if I could show you an investment that since 1999 has grown 135% of the S&P 500 and...not even one negative year. In fact, you are guaranteed not to lose money.
Welcome to the misleading world of annuity sales. There is nothing wrong with annuities. Annuities have their place and can be effective. The problem is that investors think that they are getting something they are not and it is because the industry is misleading them.
Fixed indexed annuities are designed to go up when the market goes up and not lose money money when the market goes down. Every 12 months the annuity is valued based on a formula. If the formula makes money, the annuity investors gets the growth. If the formula loses money, the value of the annuity stays the same. You never lose money.
For example, let say that you can earn up to 50% of the growth of the stock market every 12 months. Let's say that the market goes up 10%. You would get a growth of 5% added to your annuity value in the 12 month period. Here is the problem: Financial advisors are showing prospects how that particular formula (50% of the growth) performed over the past 20 years and they are referring to it as past performance. The results are pretty impressive even after fees.
There is one thing that is not exactly explained or disclosed or the financial advisor doesn't make sure that the prospect understands. All the prospect is focusing on is the sure thing - guaranteed against loss and great performance - who wouldn't like that? After all, look at the past performance, right?
Here is what is misleading - The formula can and WILL change. The insurance company has the right to change the formula at each 12 month anniversary. They retain that right because they are offering guarantees against loss.
Do you really think that the insurance company can afford to let someone earn 135% of the stock market over 20 years and guarantee against loss? Of course not!!
Thus the illustration is misleading for one main reason! There is a low probability that the insurance company is going to go for 20 years without changing the formula. So, why show an illustration that is alluding to past performance that has only the slightest probability have happening? It makes for a compelling reason to invest. The problem is that insurance companies are turning the other way as advisors are showing these illustrations. Brokerage companies that are helping the advisors are marketing to the advisors using the same type of marketing. They are using disclaimers and fine print. Yet, it is like reading Greek.
Like I said, there is nothing wrong with annuities. There is something wrong with they way they are being recommended. Be careful!