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FEBRUARY 19, 2013

Protect Yourself when Considering Annuities

By Gary L. Hall, 2/19/2013

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 two of this two-part series, we discuss reacting to the markets.

Reacting to the Market

Annuities are sold as guarantees and safety but what if a poorly timed annuity purchase could actually hurt your chances of meeting your long term goals? In our February 5th post, we explained how annuity commissions can lead to advisor conflicts of interest. But since you can still demand any product, it makes sense to carefully evaluate your own reasons for wanting an annuity.

As the stock market drops and losses mount, most investors become more fearful. Many folks have a strong urge to safeguard their assets in low risk investments until a recovery is well established. However, history shows this is usually a bad strategy when it comes to meeting their long term goals, since the period following large stock market drops are typically followed by strong gains.

Since fixed annuities are similar to interest paying accounts, they make the most sense to buy when interest rates are high. Unfortunately navigating the stock market in real time is not so easy and sales figures show purchases spike when rates are lowest, after the stock market has fallen from its highs.


The fixed annuity locks in low interest rates for a predefined period of time and because these are long term contracts, participating in the subsequent stock market recovery is difficult without incurring significant surrender penalties.

The opposite is also true; when the stock market has been rising for several years many people worry they are missing out on the gains and have an urge to put more money into stocks.  Unfortunately when stock market euphoria runs rampant and many investors are interested in putting more money into the stock market, this may be one sign a bull market is nearing its end.

Variable annuities have mutual fund qualities that provide increased stock market exposure, so the best time to buy would be when stock prices are lower. Again, the actual sales data reflect emotional investing with purchases peaking when stocks are high.

UnderstandAnnuities_When are variable annuities a good investment

Like fixed annuities, exiting variable annuities can be difficult and have many hidden expenses.

Annuities aren’t inherently good or bad for everybody, but investor behavior means they’re often misused in ways that may not get you to your long term financial goals. Taking a rational stance and asking the right questions can go a long way to making better long term decisions associated with annuities.

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