Why is everyone talking about Annuities? Are they good or bad?

SITUATION: I recently inherited money from my grandparents. I know my grandparents were very frugal that they would not want me to just blow this money. I went to several investment firms to get advice and found all of them recommend that I purchase an annuity. They all try to explain what makes them so great but I can’t understand what they are telling me. Is there something special about them that makes them better than any other investment?

First, we want to commend you for gathering several opinions. However, you probably were talking to commission- based advisors who are under pressure to sell annuity products.

  • An annuity is a contract with an insurance company that promises to pay distributions over a given period of time or for a single or joint lifetime. Many people who purchase annuities never have the intent to convert the lump sum into a revocable stream of income. The contracts can be very complicated which is evidence in the fact that it may contain up to 100 pages to explain the details of the contract you purchased.

We recommend you seek the advice of a fiduciary advisor who will analyze your personal finances and objectives to determine the best use of the inherited funds. Sometimes the best investment is the elimination of debt, therefore you should be open to a strategy that could include elimination of debt that could allow you to increase contributions to retirement plans that could further reduce your income taxes.

I’m terminally ill and want to know what my heirs will get from my annuity.


SITUATION: I purchased an annuity many years ago with the goal to leave the entire amount to my heirs. I am hearing horror stories about death payouts that are a fraction of the annuity value from the children of my friends. I want to know what my kids will get when I die but the company just tells me to read my contract. I must admit, I don’t understand it. How can I find out the amount of money the kids will receive when I pass away?

It is often easier to ignore matters regarding finances when your mortality is looking you in the face. However, nobody invests with the goal of leaving the majority of the money to the insurance company. Yet this can happen because nothing can be changed after the death of the contract owner.

  • Many of the contracts sold today are called two-tier contracts. There is one calculation that is reported on the statement that often refers to the amount of money used should you choose to surrender your value to the insurance company in exchange for an annuity, which means a stream of income. An entirely different value is calculated for a lump sum payout including if the payout is due to death. It has been our experience that most of the agents who sell these contracts do not understand the intimate details and are not good sources to get answers. The agent is provided marketing material and doesn’t always read the contract that they sell. In our experience, the marketing material focuses on the annuity value rather than the lump sum payout value. To make things even more complicated, the contract has a definition section that may have different meanings of common words as they apply to the contract which adds to confusion for the agent and the annuity owner.

What is my liability if I make a mistake?


SITUATION: Should I be worried that taking action as a POA or trustee could result in liabilities that could cost me money?

Yes. When acting in these roles, you are acting as a fiduciary. A fiduciary is required to put the interests of others above themselves. Losses could occur as a result of theft, poor investments, or simply making a mistake. Saying you are sorry does not reduce the liability that is created by those mistakes! It may be beneficial to buy insurance or to use a professional to assist you if you have been asked to serve in these roles.

The first step is to find a professional advisor to help you read and understand the contract. The contract will define how the death benefit is calculated. The advisor should be able to assist you during a phone call to properly ask questions of the insurance company based on the contractual definition of terms. The answers to your questions would then typically be sent by US Mail or email as the customer service representatives may not have the tools to calculate death benefit values. We have seen many cases where the lump sum value is less than one half of the annuity value. Once you receive the values, you can determine if you should take advantage of the annuity option or to determine if the lump sum is more beneficial for your heirs.