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October 16, 2003 Saugus Advertiser
THE REAL TRUTH ABOUT ANNUITIES
The question, “Should I buy an annuity?” is on a lot of people’s minds lately. Interest rates have dipped to record low levels that have people searching for higher returns. Annuities are known to provide a higher return, but there are a few hitches.
Did you know that the well dressed salesman who sells you the annuity will get a commission of 4%-9% of the amount of the annuity. These large quick commissions have some salesmen eager to close the deal and at times recommend an annuity when that’s the last thing you need. There is a roving group of individuals across the United States who go by names such as “Senior Benefit Centers Network” and Senior Financial Survival Workshop”, among others, who target older investors and coerce them into selling their securities and purchasing annuities.
William Galvin, Secretary of the Commonwealth, has recently issued an ELDER ALERT on his web site concerning annuity sales tactics and filed suit against the two companies mentioned above. One page of their employee-training manual shows a picture of a blind child and says, “Assume you’re selling to a 12 year-old child who is blind yet smart. Sometimes they (the elder) are unable to make a decision. You have to make the decision for them. So when you close, you don’t ask, you automatically enroll them.”
Typically the annuities they are selling are deferred annuities also known as tax deferred annuities. These are annuities, which typically don’t pay anything currently to the owner and accumulate tax-free. You may of course choose an option to receive payments over time, but not all at once. They have penalties if you need your money back sooner rather than later that could be 10%-15% of your investment. These penalties usually drop the longer the annuity has been held.
And now the REAL TRUTH about some of the alleged benefits of owning an annuity.
BENEFIT NO. 1) Annuities don’t count as assets under MassHealth (Medicaid). The answer is false. Deferred annuities do count as an asset because you have the right to draw out the principal.
BENEFIT NO.2) Annuities are a good planning tool under MassHealth nursing home rules. False again. Deferred annuities are never useful for MassHealth. In some cases, married couples with one spouse in a nursing home can use an irrevocable immediate annuity to convert excess assets into income for the spouse at home to achieve MassHealth eligibility.
BENEFIT NO. 3) Your money will be available when you need it. Most deferred annuities have surrender charges (penalties for “early” withdrawal of money). Depending on the annuity, “early” may be 7 years or longer.
BENEFIT NO. 4) Your money is secure. Annuities are investments. You are investing in the insurance company or other provider of the annuity and it is that company’s financial strength that determines the security of your investment. If they have financial problems, you have financial problems.
In my opinion, there are certain times when a deferred annuity is NEVER the right choice. Older investors who are having medical problems should avoid deferred annuities. They need liquidity to be able to make plans in the event long-term care is necessary. Purchasing a deferred annuity in your IRA is also not the best idea. Your IRA is already a tax-deferred account. It makes no sense to purchase a tax-deferred investment in an account that is already tax deferred.
Annuities and MassHealth eligibility – Since the asset allowance was slashed on January 1, 2003 the use of annuities has become more widespread. On January 1, 2003 the asset limit, for married couples, was reduced to the lesser of one-half of the combined countable assets or $90,660, whichever is less. When one member of a married couple needs nursing home care and they have excess assets, the excess assets can be used to purchase an immediate annuity that will allow instant eligibility for MassHealth.
Before you purchase an annuity you should understand the following:
LIQUIDITY – Know how long your money will be tied up for and what the “early” surrender charges are.
RATE OF RETURN - Watch out for introductory or teaser rates that may be significantly higher than the rate of return specified in the contract.
VOLITILITY – Some annuities may drop in value if the underlying investment performs poorly.
PROFESSIONAL ADVICE – Never sign documents on the spot. Discuss it with your stockbroker, attorney, CPA or financial advisor.
DEATH BENEFIT – Not all annuities provide a death benefit. Know what happens to the proceeds upon your death.
Without a crystal ball there is no way to know for sure if you are doing the right thing. What does matter is that you understand the nature of the deferred annuity, ask questions and review the proposed transaction with a trusted advisor.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).