|Why annuity sales have skyrocketed
Ask most financial planners about
annuities as an investment strategy and you'll probably get a look
that resembles the first whiff of bad cottage cheese. Don't even
But then you look at the sales of both fixed and variable
annuities and they're through the roof. Between 1989 and 1999, the
American Council of Life Insurers reports that premiums on annuities
more than doubled from $49.4 billion to $115.6 billion.
An annuity, if you're not familiar with them, is an
insurance contract that's best used -- and most often marketed --
as a means of tax-deferred savings for retirement. The money in
an annuity isn't taxed until it's withdrawn.
There are several kinds of annuities, but the bulk
of them are either fixed, which means there is a guaranteed rate
of return, or variable, which have a return tied to the performance
of the underlying investments.
A Forbes special report on variable annuities, citing
research from Variable Annuity Research and Data Service, noted
that the industry reached a milestone last year when assets passed
the $1 trillion mark and that annual sales grew by 1,200 percent
over a 10-year period.
Buying and selling
So, what gives? If annuities are such a bad deal, why do people
keep buying them even though financial planners don't care much
One of the major reasons for the steady increase in
sales, the financial advisers say, is that annuities have very nice
"People aren't buying them; they're being sold,"
says John Sestina, a fee-only certified financial planner in Columbus,
Ohio. "That's not to discredit an insurance person, but right
now, there are people making a living selling annuities."
On the Web site FundAdvice.com, Paul Merriman cites
typical commissions of 5 to 5.5 percent of the money invested, with
some contracts paying up to 14 percent commissions. And unlike commissions
on mutual funds that go down at certain break points as the account
balance increases, annuity commissions go up right along with the
Also, while the numbers look very impressive, you
need to understand a little about how the numbers are reported,
says John Wesley, product manager of personal annuities for TIAA-CREF,
short for Teachers Insurance and Annuity Association and College
Retirement Equities Fund.
While virtually every other investment reports net
flows, "the annuity industry for years reported just on gross
sales," he says.
It's an important distinction because many of those
sales are actually assets that have been moved from one fund to
another under what's known as a 1035 exchange, a provision in the
tax code that allows people to take money out of one tax-deferred
investment and put it in another one without paying any taxes or
"When a contract is surrendered, Company B picks
it up as a sale, but Company A didn't report it as a loss,"
he says. "If you look at research data like Research Insight,
a good 50 percent is probably 1035 money moving around."
An underlying reason behind the transfers, Wesley
notes, is once again, commissions.
"As these things come off surrender charges,
if I can convince you to move from one company to another, it generates
another commission," he says. "The Securities and Exchange
Commission is very sensitive to that right now. They're taking a
hard look to make sure (insurance companies) are not churning these
accounts. It's not always in the consumer's best interests."