Today lets look at Annuities ...

Annuities can be good. But too often they're tools of greed that
fatten the seller's wallet at the expense of trusting people like my
grandmother, says Jeff Opdyke.


His grandmother called him to her house recently to dig through her
insurance and financial documents. She has named him executor of her
modest estate, and she wants me to 1) know exactly what she has;
and, 2) know what she wants to happen when the time comes. Going
through her records, however, he noticed something that set off
alarm bells: What was once a $20,000 certificate of deposit at a
local bank is now a $20,000 deferred annuity that the local banker
sold her.

He immediately recognized it for what it was: a disaster. As a
personal-finance writer, "I've seen too many older people enticed
into buying these investments, typically without understanding what
they're getting talked into."

"I probably can't do anything to help my grandmother; she bought her
annuity a year ago and the grace period to cancel the contract ended
10 days later. She signed all the appropriate documents stating she
understood the transaction, though as she told me recently, "I don't
know a damn thing about this stuff; the guy at the bank just told me
to sign these papers."

So I write this in hopes that when an annuity salesman approaches
you, your parents or your grandparents with a compelling pitch --
and their pitches are always compelling, if not entirely honest --
you will remember my grandmother's story.

I am not against annuities. In fact, in the right situation, an
annuity can accomplish a host of beneficial things: It can be a
great vehicle for accumulating wealth before you retire. After you
retire, some annuities can be the perfect tool for creating a stream
of income you can never outlive. And in some circumstances it can
help with estate-planning needs.

But too many annuities are sold for the wrong reasons. And those
reasons typically have to do with the commission the salesman is
pocketing rather than the financial needs of the investor.

Just to be clear, I'm complaining largely about variable annuities
and deferred annuities, both of which allow money to grow tax-
deferred. Basically, you invest your money, say, $20,000, with an
insurance company that guarantees some level of income in the
future, either through a lump-sum or a monthly payout that lasts for
years or until you die.

But to me, buying such an annuity in retirement generally makes
little sense, especially for those who are much older, like my
grandmother. That's because these are simply not short-term savings
vehicles. Not to be morbid, but older savers generally don't have
the number of years remaining that might make an annuity practical.
Often, they'll never even benefit from it.

Annuities have two phases: accumulation, which can last for years,
and then the distribution. At her age, my grandmother has no need to
accumulate; her only worry is living off of what she has. Thus, it's
absurd for an older retiree to invest the bulk of her liquid assets
in an instrument that locks away money for years, which most
annuities do because of the so-called surrender period. That
essentially blocks you from touching your money for seven to 15
years or more -- and if you do, you lose a hefty chunk in the form
of a surrender penalty.

Here's where this diverges away from the purely financial and into
the personal: Buying investments late in retirement often creates
tensions in a family. Retirees either panic immediately after
signing up for an investment they're unsure of, or they find out too
late that they've been duped. Often, they're too embarrassed to
admit they didn't know what they were doing, or too proud to
approach their kids for advice. But when they finally do announce
the problem, family members get livid that Mom or Dad or a
grandparent invested foolishly without seeking anyone's counsel.

When I asked my grandmother why she just didn't call me for advice,
she replied: "Well, you were still living in New Jersey." I reminded
her that they do have phones there, and she just looked at me
sheepishly.

Of course, I can't blame my grandmother for not understanding what
she bought. These are complex insurance contracts larded with bells
and whistles that make them enticing and expensive, and often
misunderstood by the very people selling them.

This is where families come in.

* * *
My grandmother is 84 years old and, as she says herself, doesn't
know an annuity from a Portobello mushroom. She's very trusting of
people like bankers. Yet her $20,000 CD represented two-thirds of
her liquid assets, reason enough for any conscientious investment
peddler to steer her away from a contract that imposes an eight-year
surrender penalty that will suck away as much as 8% of her account
if she needs her money early.

What's worse is that the salesman was, at best, clueless about what
he sold. My grandmother invested for one reason only: to keep her
spendthrift daughter from accessing all the $20,000 upon my
grandmother's death.

"The banker assured me she wouldn't get all the money at once," my
grandmother told me when I questioned her.

Imagine her surprise when I read this line, from the very first
paragraph of the contract summary: "Upon the annuitant's death, the
cash balance will be paid out in full to the beneficiary." To put
that even more plainly, the beneficiary, my mom, gets a lump-sum
payout when my grandmother passes away. Thus, the annuity does
nothing to accomplish my grandmother's wants.

Moreover, the fat interest rate my grandmother thought was so
impressive -- 5.25% -- lasts for just one year. Then, as the
contract notes, it falls to the minimum 2% for the duration. To put
that into perspective, I just stashed the $900 my son has in his
savings in a one-year CD that pays 3.15%.

Unfortunately, I may have discovered my grandmother's purchase much
too late to fight for her -- though I'm currently trying.

But others out there can still fight for their parents and
grandparents. Talk to them now; implore them to speak to you before
investing in an annuity. If they tell you they recently bought one,
rush over to examine the contract, and if it looks onerous have it
annulled. You generally have 10 days to cancel.

If you don't understand how the annuity works, talk to a trusted
lawyer about the contract's provisions before signing anything.

Annuities can be good. But too often they're tools of greed that
fatten the seller's wallet at the expense of trusting people like my
grandmother, who never needed the investment in the first place.

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