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FEBRUARY 05, 2013

Protect Yourself when Considering Annuities

By Gary L. Hall, 2/05/2013

You’ve likely heard of annuities, own one yourself or know someone who does. But despite being popular financial products, annuity education is lacking—even among many financial advisors. Like most investment options, they have a role in the landscape and are appropriate for some investors. However, a lack of education about annuities means potential conflicts of interests go unnoticed.  In part one of this two-part series, we discuss the role of advisors.

The Role of Your Advisor

Opinions on annuities are strong and frequently biased. Lucrative sales commissions lead to overzealous annuity sales tactics, while annuities’ popularity leads to opposition from competing financial services. Similarly, annuity advertisements featuring tax benefits and guaranteed income are just as easy to come by as articles denouncing annuities for hidden costs and high surrender fees.

But financial tools are rarely so black and white. Cutting through the noise reveals annuities are similar to life insurance. If life insurance is meant to protect your family from accidental or premature death, an annuity is insurance meant to protect your family for extended longevity.

What’s missing from the conversation is real help deciding whether these complicated products are right for your unique financial situation. One reason is the high commissions paid to advisors for selling an annuity—they’re often more motivated by the size of their next paycheck than what’s appropriate for you. As a result of this and many other annuities, a suitability requirement when recommending annuities only recently gained traction with lawmakers and the Financial Industry Regulation Authority (FINRA).

A suitability requirement put into effect in July forces advisors to justify why a particular product is right for your particular situation and goals. This is a big step in the right direction but ultimately the decision still comes down to you.

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