Based on the phone and email response to my recent article on annuity abuses, I am a hero with the Joe the Plumbers of the world and something worse than a goat with many annuity salespeople. A number of them suggested my exposé of one company’s terrible annuity product was representative of every annuity product and put all annuity salespeople in a bad light.
I can see their points on both issues. So let me say it now: not all annuity salespeople are uninformed on their products or disingenuous in their attempt to push any product they think they can sell on an uninformed public. Not every annuity is bad, either.
I contend that about 20% of the members of any profession or industry are real professionals who operate with integrity and care. Perhaps another 60% perform their duties with competence, but don’t necessarily have any passion for their work or larger commitment to their professions. The bottom 20% are outright frauds, taking advantage of consumers unlucky enough to engage them and giving a black eye to their industries. Whether it is realtors, financial planners, or insurance and annuity salespeople, you want to be sure you’re dealing with someone who is educated, honest, and transparent.
If you’re shopping for an annuity, then, what should you look for and look out for?
First of all, do your own research. Carefully read everything a salesperson gives you, but get some independent information as well. A good start is an internet search for “annuities pros and cons” to get some 
basic facts.
Some of the benefits of annuities are:
• Tax-deferred growth
• No income restrictions or limits on contribution amounts
• Guaranteed lifetime income
Some of the drawbacks are:
• High fees and sales commissions
• Payments are taxed as ordinary income rather than capital gains
• High penalties, taxes, and surrender charges if you take money out early
• Paying for life insurance you may not need
• The guaranteed income may be significantly less than what a diversified portfolio may yield
• Unlike most retirement plans, contributions are not tax deductable
Second, ask specific questions about fees and commissions. Insist on having the numbers set out clearly so you know exactly what the annuity will cost you each year in addition to the initial premium. Be sure you know the financial penalty for getting out of the annuity. If the salesperson brushes you off with vague or confusing answers, take your business elsewhere.
Third, comparison shop. Check out annuities from several companies, including brokerage firms like Vanguard, Ameritas, or T. Rowe Price, to compare rates, costs, and benefits. But don’t stop there. Compare the annuities to other investments, such as 401(k)’s, IRA’s, and mutual funds, to decide whether the annuity is the best place to put your money. Many investment advisors recommend that you not even consider annuities until you have maxed out other tax-deferred options like IRA’s and 401(k) plans and you are in the top income bracket (currently 35%).
Fourth, get independent advice. Before you sign any annuity contract, have it reviewed by someone you trust who is familiar with investments and has no interest in the transaction except your well-being. From my perspective, of course, ideally this would be a fee-only financial planner. If you don’t have a financial planner, you might get advice from an accountant, an attorney, or a trusted and knowledgeable family member or friend.
As always, remember two basic precepts: the more you educate yourself, the less you can be taken advantage of, and beware of anything that sounds too good to be true.
