Are Annuities Bad?
Lets be very clear that annuities are not all bad. They offer features and guarantees that you cant find in any other product (review how annuities work if you need a refresher). Nevertheless, annuities have been abused by some because they pay high commissions.
Annuities in Banks
In the past, a common reaction from the bank was to offer annuities to a customer who needed more than a plain-vanilla deposit account. Banks get insurance licenses for select employees so that they can offer these products, and the employee is rewarded either through a commission or the banks incentive program. An alternative arrangement might be to have an independent third-party offer products that the bank doesnt offer.
By selling an annuity, the bank is able to keep a relationship with the customer and generate some revenue. However, what if the customer needed something besides that annuity? For a long time, annuities were the favored arrow in the banks quiver of alternative offerings. With just an insurance license, the bank can offer a lot of different options.
Questions to Ask
If somebody at your bank recommends that you use an annuity, investigate their motives. Some questions to ask might be:
- Why should I use this annuity?
- Whats the difference between using this annuity and using CDs (or money market funds, or savings, or whatever)
- Will you and/or the bank earn a commission if I use the annuity?
- Do you have the expertise, licensing, and/or authority to offer me something besides an annuity?
An honest person will answer these questions in a matter-of-fact manner. They should acknowledge that they may be biased, and continue to explain any advantages that the annuity might have over an alternative strategy. Use your common-sense to decide if the person is really helping you. They should be able to explain their ideas in terms you can understand.