Don't Always Bank on Annuities
Annuity Sales in Banks
Banks sell a lot of annuities - and sometimes those annuities aren't the best fit for the customer. If you've got a lot of money sitting in your checking account, you may wonder if you can earn more with a different investment. The money's already at the bank, and the people there know about money, so why not ask about alternatives?
All too often, customers with large cash holdings are pushed towards fixed annuities (and other types of products).
Customers might not be impressed by the rates available on certificates of deposit (CDs), or an agent at the bank might be especially fond of annuities.
These aren't the "lifetime income" annuities that pay you for the rest of your life, although you can often convert to an income stream if you wanted. Instead, these are more like investment accounts that you make deposits to and (hopefully) earn more on your money.
Sometimes the annuity is exactly what the customer needed. However, there are too many stories about consumers walking out of the bank with a product they didn’t need.
Are annuities bad?
Let’s be very clear that annuities are not all bad. They offer features and guarantees that you can’t find in any other product. Nevertheless, annuities have been abused by some because they pay high commissions.
Annuities in Banks
In the past, a common reaction from the bank was to offer annuities to a customer who needed more than a plain-vanilla deposit account.
Banks get insurance licenses for select employees so that they can offer these products, and the employee is rewarded either through a commission or the bank’s incentive program. An alternative arrangement might be to have independent third-parties offer products that the bank doesn’t offer (as a way to offer more to customers).
By selling an annuity, the bank is able to keep a relationship with the customer and generate some revenue. However, what if the customer needed something besides that annuity? For a long time, annuities were the favored arrow in the bank’s quiver of alternative offerings. With just an insurance license, the bank can offer a lot of different options.
Some banks even contact customers proactively to offer annuities. Customers with large cash balances get letters and phone calls letting them know that the bank does more than just savings and CDs.
Questions to Ask
If somebody at your bank recommends that you use an annuity, investigate their motives. Some questions to ask might be:
- Why should I use this annuity?
- What are the differences between using this annuity and using CDs (or money market accounts, or savings, or whatever)
- Is my money locked up (for how long, and what are the surrender charges for pulling out early)?
- What fees and expenses do I pay for this product, and are there other fee structures?
- How long does it pay the interest rate shown in your advertisements (the first year only, or forever)?
- What happens if I cash out and walk away - how much do I get to keep?
- Will you and/or the bank earn a commission if I use the annuity?
- Do you have the expertise, licensing, and/or authority to offer me something besides an annuity?
These questions should help you get a better understanding of who you’re dealing with and if they are serving your best interests. Trusting somebody with your money requires that you know what you’re getting into, and the above questions should help you make at least some progress towards that goal.
An honest agent will answer these questions in a matter-of-fact manner. They should acknowledge that they may be biased, and continue to offer a balanced view of the tradeoffs between annuities and other products.
Use your common-sense to decide if you're truly getting "help" or a sales pitch. Everything needs to be explained in terms you can understand. Remember that nothing is perfect, so you'll want to hear about what you're giving up or paying before you move forward.
If it sounds too good to be true, it probably is.