Article by Patricia J. Schraff and Allison Mantz McMeechan
You have just received a personal invitation from a financial advisor unknown to you. The invitation is for a meeting or presentation on how to avoid all of the financial perils you may face as an older person. The invitation uses catch phrases that attract you such as “protect your hard earned money from the costs of nursing home care,” “avoid the high costs of probate administration,” and “protect your assets from the reach of creditors.”
You attend the presentation because, after all, it is hard to resist. Before the seminar is over, you are asked if you would like to meet privately with the advisor, one of his associates, or his staff. Since you would like the answers to your own personal questions, you schedule an appointment. You find the advisor is more than happy to come to your home to meet with you. You are, of course, much more comfortable at home than anywhere else so you schedule the appointment for your home.
The day of the appointment arrives and the advisor informs you that the investments you so carefully planned either alone or on the advice of your long term financial advisor are all wrong and that in order to achieve your goals, they must be changed. You are advised to withdraw your certificates of deposit or to liquidate your annuity and invest instead in the annuity proposed by the financial advisor. Should you buy this annuity? What should you do? The answer is be wary – be very wary.
This scenario is becoming an ever increasing experience for many over the age of 55. There is a great deal of motivation for those who wish to sell you annuities to do so. The motivation may have less to do with your welfare and more to do with the large commissions that the sale of annuities generates.
What are annuities? Annuities are investments based upon your life expectancy and tax deferred income. Annuities can be fixed meaning that they provide payments on a regular schedule or they may be variable meaning that the investments are made in the market. Frequently the sales pitch for an annuity confuses the buyer because the buyer often believes that he is investing in something comparable to a certificate of deposit but with tax deferral.
There are several things that older purchasers of annuities must consider before ever purchasing an annuity: 1) What is the chance that the purchaser will outlive the term of the annuity? 2) What surrender charges are contained in the annuity product? 3) Are you locked into a 10 year surrender period meaning that in order to get out of the annuity you will lose a percentage of your annuity? 4) Are you passing an annuity to your children who will pay higher taxes upon their inheritance? 5) Are you being asked to put a significant portion of your assets into the annuity?
The fact is that the purchase of an annuity by an older person should be very carefully considered. Although annuities have their place in limited instances, you should seek the advice of your long time advisors such as your personal financial advisor, your accountant, and/or your attorney before you purchase an annuity. If you do not have those relationships in place seek the advice and opinion of a paid independent financial advisor or attorney or at least seek two other opinions with regard to the product you wish to purchase. Annuities may be oversold to seniors who do not reap the benefits of their investments as promised.
* The opinions expressed in this article are solely those of the authors.