There are many problems with these products, but the biggest is that the caps and participation rates they quote you when you first buy the annuity are typically not guaranteed contractually. In fact, many of the “promises” they make up front are not guaranteed. They may give you a participation rate of 100% initially, but if you read the contract they have the right to lower it at their discretion. So if the markets move in a direction that hurts the insurance company, you may find out that they have the right (contractually) to lower your payout to 50%, or your cap to 3-4%.
I know this to be true first hand as my Dad purchased one. Believe it or not, he was told his participation rate would be 110%. And it was for the first year! But when his anniversary date rolled around he received a letter from the insurance company. You guessed it…they were reducing his participation rate down to 50%, and there was nothing he could do about it because the annuity had a 7 year penalty period if he cashed out early. And can you guess what his participation rate was for the remaining 6 years? You got it…50%. And I’ve heard the same thing from clients of mine who have had these products with caps that started at 10-12% and are now down to 4%. And if you have one that charges a fee, that fee can be raised contractually.
Another problem with these annuities is the length of time you are locked in to the agreement, called a “surrender period.” Most of the ones sold today lock you in for 10 years, meaning if you take your money out early you will pay a penalty. The number one selling EIA in 2011 had a 10 year surrender period and the penalty was 10% for the first 3 years on the contract. I have also seen higher surrender periods and penalties. I met with a client a year ago and her surrender penalty was 17% in the first year with a surrender period of 15 years.
So how do you protect yourself? The easiest way would be to avoid these products altogether, as there are better options for you. If you ARE considering an Equity Indexed Annuity, then make sure you do your homework. Make sure you are getting your advice from the right person, which is probably not the person who is pitching it to you. I recommend getting a second opinion from an advisor who doesn’t earn a commission from the product.
If you have had any experience with an equity indexed annuity (good or bad), please share it with us by leaving a comment below.
Am I kidding you? ABSOLUTELY!
If you have retired recently, or are going to be retiring soon, you have probably been hit up to purchase an Equity Indexed Annuity (EIA). No? Oh, that’s probably because the financial service industry has done a bang up job of marketing. You may not have even been told it’s an annuity. You’ve probably heard how you can get “Stock Market Returns without Risking your principal.” WOW! If that were the case, who wouldn’t do it. The sad truth is, retirees are doing it by the truckloads.
Total 2011 indexed annuity sales set a record at $32.3 billion dollars, capping off a fourth consecutive record year. So why are retirees flocking to these investments while the state insurance departments and the Financial Industry Regulatory Authority (FINRA) has issued warnings about these products (click here to see the FINRA warning)? The answer is simple. Financial salespeople motivated by large commissions and incentives!
Now, before I get a bunch of angry emails from EIA reps…Can an Equity Indexed Annuity ever be a good choice? Possibly, but you probably won’t find it from the rep who is inviting you to a free dinner seminar or giving you a “complimentary consultation.” So, how do you protect yourself? Knowledge! You need to know enough about the product to recognize it when you see it. So keep reading and you will…
An EIA is simply an annuity that links its return, interest rate, payout, annual credit (whatever they may call it) to the return of an associated index…typically the S&P 500. In other words, the return you get on your money will be linked to what the S&P 500 index return is for the year. Sounds simple enough…but the truth is that it is far from simple. These products are extremely complex and the crediting methods are even more. The return you get may be tied to the S&P 500, but it is far from equal to that return. Why? Because the insurance company has to guarantee your principal. Let’s just say they compensate themselves by taking part of your return, charging you a fee or both.
Most plans take part of your return by setting a cap on the return they pass on to you or setting what is called a participation rate. For example, they may set a cap of 8 % meaning you will get whatever the S&P 500 returns for the year up to a maximum of 8%. So, if the S&P returns 6% for the year then you get 6 %. If it returns 15% for the year, you only get 8%. A participation rate is similar but is a percentage of the total return. For example, 90% participation rate would mean you get 90% of whatever the S&P 500 returns for the year.
“So what is the problem?” you may be asking. Join me for Part 2 of this series where I will discuss some of the problems and what you can do to protect yourself.
Things are changing all over the place at Seniormark! We are so excited about these changes, because it means we will be able to provide the same excellent service our clients are used to, while being able to add even more ways of teaching and expanding the knowledge base of our clients.
Today’s exciting announcement is that our website has been completely redesigned and has a fresh new look! We hope you will head over there and take a peek. We will continually update it with new videos, keep our prices current, etc. Bookmark it and visit often for changes!
Please check out the new website at https://www.seniormark.com and let us know what you think!
Our Sidney office has moved! It’s just temporary, but for the time being our office is located at:
1271 Wapakoneta Avenue
Sidney, OH 45365
(Yes, we are just down the street from our old office!)
Our phone number is staying the same….so you can still contact us at 937-492-8800 or toll free at 877-492-8803.
Our Troy office is not affected by this move.
Look who turned age 65 in the month of June…
I recently read an excellent article in AARP Magazine about the inherent conflict of interest that many so called “financial planners” have and what they do to hide it from you. It’s the same thing I have been teaching people about for over 15 years and why I am a “fee only” Certified Financial Planner™.
Definitely worth the time…what you don’t know can hurt you!
SUMMER GAS CARD GIVEAWAY!
Celebrate summer with our gas giveaway!!! We will be giving away a $200 gas card to a random person the week of August 1, 2012.
It’s easy to enter! Just tell people about us!! You will receive one entry for every person that calls and tells us that you sent them. So, the more you spread the word, the more chances you’ll have in the drawing!
They do not need to purchase anything for you to be eligible. However, they do need to mention your name during their first phone call to our office or their first workshop they attend, so make sure you remind them!
As always, our current clients will still receive a $20 gift card to Bob Evans for every referral. But during the Summer Giveaway your fun is doubled because your name will also be thrown in the hat for our free gas card.
Good luck to everyone!
I am often asked about the health insurance coverage offered by the State Teachers Retirement System (STRS) of Ohio and whether a retired teacher should stay on the STRS coverage once they turn 65 and go on Medicare. I will be assuming here that the retiree had 30+ years of service with STRS.
As with all situations there is never a hard fast rule for everyone, but in most cases for the employee it is what I call a “no brainer.” The current premium in Ohio for the employee is $81/month. The plan offered by STRS is the Aetna Medicare Plan (PPO) which is a group Medicare Advantage Plan. The plan has a $500 deductible and a $1500 annual out of pocket maximum (which includes the deductible). More importantly, the prescription drug plan does not have the infamous donut hole like Medicare Part D has. So if you are a retired teacher, be very wary of “advisors” recommending you leave STRS to go on a Medicare Advantage plan on your own. If you have already made this mistake, don’t worry because you may be able to get back on your STRS plan. Just give them a call to find out what to do. You may have to wait until the Annual Enrollment Period (AEP) before you can get out of your current plan.
For the spouse of a retired teacher the story is much different. The current premium for the spouse is $290/month for the same Aetna Medicare Plan (PPO). On the surface it may seem like the answer is cut and dry, but not so quick. There is no doubt that you can get much better medical coverage for a much lower premium. But like I tell all of my clients, premium doesn’t tell the whole story. We can’t forget about the prescription drug coverage. Like I said above, you have to deal with the donut hole when you leave STRS and go with the Medicare Drug Plan. So whether it makes sense to leave STRS and go out on your own will depend on your medications. This is where you would be wise to contact a professional who can analyze the costs for you. Here are two clients I have worked with in the past, with two very different outcomes:
This gentleman was in good health and only on three generic medications. We were able to put him on a Medicare Supplement Plan G for $106/month and a Part D prescription drug plan for $25/month for a total of $131/month. He wasn’t even close to having to worry about his donut hole. With Plan G his annual out of pocket maximum on medical expenses is $140. So for this gentleman he saved $159/month and now has much better medical coverage.
This lady was in fair health but had a very long list of medications including several brand name meds. We could have put her on the same Plan G for $106/month and given her better medical coverage, but the real story was her medications. With her meds she was going to go WAY into her donut hole. This seriously raised her cost. The premium for her drug plan was only $25/month, but because of the donut hole her total cost was going to average $333/month. This combined with his $106 for Plan G made it a total monthly cost of $439/month, which would be $149/month more than she was currently paying. We obviously told her to stay on STRS.
As you can see, you can’t just look at premiums when you are making a decision on the best plan for you. Looking at the two examples above, the premium was the same for both clients, $131/month. But the expenses were VERY different. So before you make a decision you may regret contact a professional (not a salesperson) who can help.
If you know a retired teacher, please pass this article along (just click the SHARE button below). I’m sure they would appreciate it!
Are you turning 65 and wondering what the next step is?
Due to an overwhelming response to tonight’s Alphabet Soup Seminar, we have added another one next week. We still have a few open spots.
Thursday, March 22 @ 5:30 pm – Location: Troy office — 1385 Stonycreek Road.
This is an introductory session explaining the 4 parts of Medicare and what an individual’s options are when they turn 65 or retire and go on Medicare. We have had an excellent response to these meetings, so if you know of someone who could benefit, please let them know.
Seating is limited, so please RSVP: Toll Free – 877-492-8803, or comment on this post!