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Beware of Annuities
Kirk
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Beware of Annuities Updated May 22, 2018:   If you are like most people, you don't suddenly wake up and say "I need to buy an annuity."  Odds are you have some cash that you want to invest safely at the highest interest rate possible.  Many banks looking to enhance their profits at the expense of the best interest of their customers take advantage of this desire to get higher rates. 

Annuities are insurance products that usually carry high fees, surrender charges and other items that are great for the annuity seller but not always for the buyer. A CD with a great rate nearly sells itself (see Best CD Rates) while most annuities need commissioned sales people to sell them.

Background.  I originally posted the original of his article when my local Savings and Loan, World Savings owned by Golden West Financial, was offering high "teaser rates" on CDs to get deposits.  It turns out they were working hard to gather assets to get a better price when they sold out to Wachovia Bank just before the financial collapse where Wachovia was taken over by Wells Fargo Bank.

I had taken a lot of profits in the rising stock market before the financial collapse in 2008 and wanted to invest some of those in safe, reliable CDs that paid great rates. 

Better Rate Trap: When I asked my branch teller if they had any other "special rates" that they often have for new money, I was directed to a speak to a "representative" who eventually tried to sell me a fixed annuity.   The annuity they offered had rates similar to what I could get elsewhere but it had many "strings" that made it far less attractive.   Some of the strings may include:
  • A guaranteed rate of return over the life of the contract that may be far less than the "teaser" or starting rate. If you have to dig to get a straight answer why you can't get a fixed rate for the life of the contract, then I'd walk away.
  • The rate after the first year is often an amount that may be set at the insurance company's discretion subject, however, to the minimum amount.
  • Liquidity can be an issue.  With a CD, you usually have to pay back some interest if you have to close it early.  Annuities can have much higher fees as they try to capture the fees they would get if you held to maturity.
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Even today  the very low advertised CD and savings account rates offered by "big" banks such as Wells Fargo and Citibank seem designed to help sell annuities to the uninformed who want competitive interest rates as well as take advantage of customers too busy to move their money elsewhere.

For example, banks could offer you a 5-year fixed annuity that that pays 1.5% which sounds great compared to the 0.10% you might be getting.  They could use that money to buy a 100% guaranteed 2.80%, 5-year US http://kirklindstrom.com/Articles/Beware-of-Annuities.htmlTreasury bond and pocket the 1.3% as their "profit."  They could use the annuity fee structure to make sure they get that full profits for the full five years too.

I was a bit upset with myself for wasting time and have learned to ask "What is the highest rate you offer n a CD that has FDIC insurance and is not an annuity?"  Then I compare them to this survey of
to see if any of the unadvertised CDs they have can beat or come close to the specials listed in that CD rate survey.
 

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Disclaimer:  The information contained in this web site is not intended to constitute financial advice, and is not a recommendation or solicitation to buy, sell or hold any security. This blog is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright © 2018 Kirk Lindstrom. Note: "CORE & Explore®" was coined by and is a registered trademark of Charles Schwab & Co., Inc.