Should you Buy an Annuity?

​Few financial products create more confusion than annuities. These are basically an investment issued by an insurance company and tied to an insurance policy. In some manner, the issuing insurance company takes a risk based on the anticipated lifespan of the person whose life the annuity is tied to (the annuitant). For taking that risk the insurer charges the annuity owner a fee of some kind. They also pay a fee or commission to the agents who sell them.
I have heard salesman tell clients they won’t pay any commissions or fees because the insurance company pays the fees for them. Such claims are usually not the case. Insurance companies are a business that does in fact pay agents to sell their products. But the money for those payments can only come from the customers they serve.
Discussions surrounding annuities can be quite polarizing with often little room for middle ground, much like the current political climate. Some profess that all annuities are bad while others sell them like they are suitable for everyone. In this debate, both sides are being unfair. Once understood, annuities offer benefits that can be a blessing to those who need them and who understand the limitations and costs. But they are certainly not suitable for everyone and must be used judiciously to solve specific financial challenges.
When our office does initial meetings with potential clients, we ask about their entire investing experience and when we get to annuities, we often get a very emotional response. From these personal experiences I have concluded that people who own annuities are unhappy with them and feel they were misled in the sales process. This does not surprise me because there is a huge industry in America that focuses almost exclusively on selling annuities, and I have often seen them presented in ways that focus on their strengths while minimizing their weaknesses.
Confusion surrounding annuities can be avoided since these are highly regulated and the terms of the contract are very specifically spelled out in the paperwork. Although the contracts are not easily understood by most people, individuals can always seek out second opinions from other trusted professionals before making a decision. Unfortunately, too many rely heavily on the advice of the agent making the sale without doing proper outside research. Since annuities may lock your money up for many years, it certainly pays to take a few weeks to understand what you are getting into.
I have seen many people unhappy with their annuities. I have also seen many who bought them for a specific purpose, who understood the limitations and costs, and who were quite pleased with the outcome. In our office we have found them to be especially useful in planning and controlling distributions to heirs. An annuity used properly and in very specific situations can be a great benefit. An annuity used improperly or sold without a clear understanding of its costs and limitations, will likely lead to disappointment.