Is an Entire Generation Getting Ripped Off?

My mother-in-law bought a couple of variable annuities two years ago. They “guaranteed” her money, she was told.

She could get stock market-like returns over time, but it was impossible for her account value to go below what she initially invested. At least that’s what the salesperson promised.  Too good to be true? That’s what I thought. So I did some digging and number crunching.

The funny thing is that the money you deposit isn’t guaranteed at all. I mean, if the markets collapsed, wouldn’t you be interested in getting your money back?

After all, the saleperson told you they’d protect every last penny in a market downturn. When the markets collapsed in 2008/2009, I wondered what kind of a guarantee my mother-in-law had. Could she call up the Insurance company and ask for her original deposit back.

After all, it was guaranteed, right?  The answer to that was, “No”. She had to keep the money in for 7 years or she’d end up with a stiff withdraw penalty.

When I ran the numbers on the fees she was paying, I realized that it was nearly an impossibility that her money with the Variable Annuity insurance company would beat a dull, guaranteed and very flexible Bank CD–which (for the amount she had deposited) was guaranteed by the government, and not some fledgling insurance company called AIG. Yes, AIG was the insurer issuing the “promise” that they would protect her money. Nice.

 The trouble is that these rigid, expensive products are selling like crazy.  Either the salespeople flogging them are unaware of how lousy they are or the majority of these peddlars are crooked. I’m choosing to believe that they’re just unaware. Maybe the salesman can sell himself: The sales line sounds good: You can’t lose your money. And it warms the hearts of anyone without historical stock market sense–and that’s a lot of people.

Even Suze Orman spouts off about how she hates Variable Annuities. They aren’t good for anyone but the person selling them.

Scott Burns does some number crunching and gives a deeper explanation here.

Expensive annuities are proliferating like zombies in a bad B movie. May the expensive Variable Annuity one day rest in peace.

(And always remember — if something sounds too good to be true it usually is!)

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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