An Annual Warning on Annuity Salesmen

Beware financial companies that grow rapidly. Beware if you are an investor; beware if you are a consumer; beware if you are a regulator. Fast growth usually means at least one of the following is wrong:

  • The accounting, whether regulatory or GAAP
  • Consumer disclosures

I write this evening, because of this long article from Bloomberg on a division of Aegon, namely, World Financial Group. In this case, I don’t know about any accounting difficulties, but the disclosures to consumers are lacking.

The founder of ICH Corp, once said something to the effect of, “Insurance is a great business. You issue promises, and people send you money.” Thankfully, ICH is no longer among us.

Now, I don’t like the annuity business, and I advise my friends only to buy them if they have maxed out all their other ways of saving on a tax deferred basis. Have you maxed out your 401(k)? Your Roth or non-deductible IRA? If you have, and still want tax deferral, a deferred annuity could be useful. Consider getting one from Vanguard, because the fees from everyone else are dreadfully high.

Beyond that, product design is complex for annuities, and people don’t understand their annuities well. In general, I think that small investors are best served through simplicity, and the various variable and equity-indexed annuities don’t pass that test. Aside from that, the insurance industry uses complexity to hide fees.

Now, I have worked for three aggressive life insurers in my time. They wrote annuities like crazy. I know what the sales culture is like from the inside: very focused on getting a product that is easy to sell, and then selling like mad. I’ve also been on the legal committee at one of those insurers, and it is not fun.

My advice remains — buy what you determine to buy, not what someone is trying to sell you. Call for a “time out” at minimum with salesman, and if he will not assent to that, show him the door. Get your network of intelligent friends together, and analyze it if the salesman is willing to wait.

Buyer beware. Unless you have complex tax-avoidance needs, stick to simple insurance products.


  • Doug says:

    I would add that TIAA-CREF also has a “less bad” annuity product.

  • There are at least two other reasons for annuity purchases, aside from tax deferment:

    1. They are more judgment-proof than many other forms of investment, so any business-owner should at least consider them.

    2. Need to show a guaranteed income, perhaps a retiree planning to expatriate.

    Agreed, the simple products are best.

    The best way to avoid getting “trapped” is to use a fee-only advisor, then purchase the products oneself. It would be hard to imagine a fee-only advisor selling unneeded annuities for commissions they don’t get …

  • Doug and Bill, good points, thanks.

  • Steve says:

    David, I remember Executive Life and Charter Life going bankrupt back in the 80’s during the junk bond crisis. In New York State the assets were taken over and annuity holders were secure. What will happen if one of these new fangled guanteed income variable annuity products bankrupts and the underlying principal is underwater. Who will want to buy the asset then? Or am I missing something on this? Thanks