New Location: Best CD Rates Beware of Annuities
New Location: Best CD Rates
 
Types of Annuities
Information to help you pick the best annuity for your needs. Note we have a new location for our Best CD Rates web site.

Background.  If you are like most people, you don't suddenly wake up and say "I need to buy an annuity."   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.

I have an account at World Savings (now Wachovia) and have liked the bank for many decades. It is a great bank for purchasing CDs with enough money to qualify for World's free checking with interest account, safe deposit box, notary public service and travelers checks.

Beware their annuities!

World Savings will offer high "teaser rates" to get those who rate shop to come in with new money. Their recent 10 month, 6.0% CD was actually a money loser for them. It was a "loss leader" much like grocery stores will sell Coke or Pepsi below cost at Thanksgiving so you buy the rest of your food for the big celebration meal from them.

World's sales force, usually called "tellers," are trained to ask if you are interested in a better rate than advertised. If you are (who isn't?) then they ask you to speak to their "Atlas Representative."
This "Atlas representative" will offer you an annuity that pays a higher "teaser rate" for a few years, but you are locked with high back end fees and a much lower overall rate of return than if you simply bought Treasury Bonds at the TreasuryDirect.gov.

A recent annuity was paying 7.55% the first year, 5% the second but they only "guarantee" 3.0% as their minimum rate! If you wanted out when you figured out you were only getting 3%, then you had backed loads as high as 7% even after several years! You will also have to pay a 10% tax penalty since the interest you are earning is tax deferred. As far as I am concerned, these types of annuities are a sneaky way large insurance companies have locked people into annuity products, probably with large campaign contributions to both parties.

Finally, the commission they pay the "Atlas Representative" is very high... since this is a great deal for the bank... but not for the saver. I strongly recommend most people avoid all annuities completely and buy CDs and treasury bonds instead. If you have a high enough income that you really need to defer it, and all your IRAs are fully funded, then go to some of the low cost annuity places such as Fidelity and Vanguard.

 


Common Mistakes with Annuities:
  • Do not put IRA money into an annuity.  IRAs are already tax deferred.  The only reason to put your IRA money into an annuity is to collect fees and lock you into that investment for a long time.  If ANYONE advises you to put IRA money into an annuity, smile, say "thank-you for your time" and walk out.
  • Not taking advantage of better tax deferral methods first. 
When annuities make sense.
  • Leaving money to a disabled child or someone you believe will have difficulties managing the money well.  An annuity can guarantee income for their life.

Disclaimer:
  First and foremost, I don't sell annuities or CDs.   I write for several web sites about investing and I edit an investment newsletter where I teach people my "core and explore" approach to investing. Core means place 80 to 99% of your money into a CORE portfolio of well diversified, buy-and-hold, no load mutual funds, ETFs and or blue chip stocks then Explore with the remainder as you learn.  
(More Info) and  (Click for Free Sample Issue)
I am also compensated by advertisers on this site.

I also co-edit "The Retirement Advisor."   Get a Free Fixed Income Primer on page 2 of The Retirement Advisor


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Reference:  SEC on Annuities

Updated 11/20/07
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