There's a new way to buy annuities -- online.
Stan Haithcock, a longtime industry gadfly, has founded one of a growing number of annuity-centric websites where you can get quotes. No more free dinners, no more hours-long sales pitches.
Most Americans are already familiar with annuities: We receive one when we retire, called Social Security.
But if you don't have a pension or want to buy an annuity for yourself, now you can shop the same way you do for clothes or cars online -- by comparing prices and deliberating before purchasing.
In an annuity contract, the buyer turns over a lump sum of cash to an insurance company, which holds the money for a set time, often 10 years or longer, and credits earnings, usually based on the performance of a stock index.
Like cars, annuities often have commissions built in -- which is why car sales folks are so cagey about prices. With annuities, commissions average about 6 percent, but can total double digits on some outlier policies.
The returns? Many are akin to those of bank certificates of deposit (CDs), or about 2 percent annually. Some provide a tax-advantaged way to invest in stock funds, and still other annuities can provide lifetime income streams.
You may have gotten mail at home or heard radio or TV ads for free-meal seminars talking about "risk-free" or "can't-lose" retirement options. If you attend, "the unregulated sales pitch that is too often used is ‘market upside with no downside.’ Only the 'no downside' part of that is true,” says Haithcock, who operates the website Annuities.direct.
Annuity buyers participate in the upside, he says, but that's limited based on "participation rates," caps and other fine print. Plus, the insurance company may change the rules of the annuity contract -- at any time.
“That’s a key fact that is rarely disclosed,” says Haithcock.
Why did he set up an online site for annuities? To give price quotes upfront, rather than have everything hidden in the contract. (For more information about Haithcock, see www.stantheannuityman.com).
Also, "commissions are often way too high on these annuity products,” says Haithcock.
For example, an insurance agent or adviser might receive $6,000 to $9,000, plus another $1,000 to $2,000 in bonuses, when a new client buys a $100,000 annuity with a 10-year holding period. Annuities are regulated by the states, not the feds, and commissions don't have to be disclosed (except in a few states like New York).
Insurance companies such as Penn Mutual, Lincoln Financial and MassMutual and investment firms such as Vanguard, Fidelity, USAA and TIAA-CREF all sell annuities. But it's best to seek out an independent insurance agent or investment adviser, who isn't beholden to just one carrier or insurer.
Be warned: If you cash an annuity out early, expect to feel financial pain. You can accrue big penalties, known as "surrender charges" or "diminishing exit fees." Those are euphemisms for getting back less of your own money.
Annuities.direct offers quotes without your having to talk with anyone, or give out a phone number.
"When we started Annuities.direct, we looked at everything our competitors were doing wrong and did the exact opposite," Haithcock says. "They will email and call you into oblivion. We will not. Annuities.direct is like Amazon for annuities or buying a plane ticket on Orbitz."
What about annuity commissions?
He doesn't disclose them online, only because insurance companies "will not allow that. All annuity commissions are 'built into' the product, and are never seen by the consumer. I don’t agree with that, but that’s the way it’s been done for decades," he notes. "With that being said, if someone asks the hidden commission that is being paid, I will tell them. Commissions are different with each carrier and product type."
Some local advisers avoid certain types, such as fixed index annuities.
"They almost always have fee structures that are obscene. There's an incredible level of hiding of fees and obfuscation," said Scott Puritz, a founder of Rebalance IRA, which manages $440 million for retirees.
"The embedded fees can be 8 percent per year," Puritz estimates.
Paul Tully, with Eagle Advisors in West Deptford, says that if annuities "were that good, every institution in America would own them. These products are sold, not bought. Plus, because these firms don’t use FINRA-regulated brokers or advisers, they can pretty much make any claims they want, including 'no fees, no costs.'
"That's technically true, because all the costs are buried in the product," Tully says, "but do people think the TV ads and dinners are some type of public service? It would be funny if people’s money was not involved."