• Fee structure: A major objection is multiple layers of fees. The insurance product structure itself has fees. The guaranteed return of principal upon death means the product itself is insured. The underlying funds offered by sub-account managers have management and administrative fees. These add up. In difficult market years, modest appreciation can be negated by fees. In bad years, a principal decline can worsen because of fees. Fees must be considered in the context of other charges the client is paying to the adviser to manage their money.
• High sales charges: A cause for concern for many investors and commentators. Why should you pay all that money up front? The phrase “Pay me now or pay me later” – coined by FRAM, a US manufacturer of automotive oil filters, when promoting ongoing maintenance –comes to mind. If an investor has an ongoing relationship with an adviser, it is likely they will pay for advice as an annual percentage charge on assets, or by the purchase of products with upfront sales charges with the expectation they will receive service afterwards. Commission-free annuities exist in the US, but the investor needs to find them and conduct due dilligence.
• Safety: “The guarantee is only as good as the guarantor.” Although annuities share similarities with bonds, such as return of principal and periodic income, they are not the same. The investor relies on the solvency of the insurance company. A wise investor would buy annuities from several companies to spread the risk. Indeed, they would utilise annuities as one of several investment vehicles.
In the US, states individually regulate insurance. Some states, such as New York, have stricter standards of investor protection. Outside ratings agencies report on the creditworthiness of insurance companies. Unfortunately, ratings agencies received lots of bad press during the financial crisis.
• Taxation: Given a choice between paying taxes now or paying later, most investors would opt for later, especially if the rate of tax is lower in retirement; growing your assets in a tax-deferred environment is compelling. If the market does well for several years, it makes sense to compound growth instead of earning profits, paying taxes, reinvesting and repeating. Taking allowed withdrawals during the accumulation phase might allow the investor to remove perhaps 5 per cent a year while replacing that amount and more through market appreciation.
