'Safe' Investments - How Risky Are They? Commentary on July 14, 2009 CBS MarketWatch.com program

As published at CaliforniaAnnuityFAQ.

In a recent CBS MarketWatch program entitled - 'Safe' Investments - How Risky Are They? - editor-at large Jill Schlesinger promulgated at least four ideas about fixed indexed annuities that are either misinformed or entirely disengenuous. Let's consider at least four points that were made in this program and learn whether they are FACT or FICTION.

#1 - According to Ms. Schlesinger, "if it (the market) goes down, well, you won't get hurt as badly (with a fixed indexed annuity)."

This is a FICTION. In reality, if the market goes down, you won't get hurt at all with a fixed indexed annuity.

Fixed annuities pay a stated amount of interest, much like a bank CD, and are entirely unaffected by the market. Fixed indexed annuities do participate in market gains through indexed returns, still the worst case scenario is that one earns nothing at all - zero. So when markets dip or freefall as they have in 2008 and 2009, not one penny of investment principal is lost in a fixed indexed annuity. In fact, this is perhaps the most important features of fixed indexed annuities - SAFETY OF PRINCIPAL.

#2 - Ms. Schlesinger also said that annuities have "a big cost, huge cost - two to three times more expensive than mutual funds."

This, too, is a FICTION. In reality, fixed indexed annuities are much cheaper than their mutual fund counterparts.

This statement truly comes out of left field, or maybe even further. To begin with there, there are no sales fees incurred by an investor when purchasing a fixed or indexed annuity. Sales commissions are paid separately by the insurer and 100% of the premium deposited into an annuity goes to work on Day 1 the policy is in force. There are no up-front or back-end loads, no 12-b-1 marketing fees, account fees, investment management or wrap fees as are typical of securities products. Given the churning, reallocation, capital gains and myriads of fees associated with securities products, their managers, and their advisors, fixed indexed annuities provide a much less expensive alternative to mutual funds.

#3 - Ms Schlesingler stated that with an annuity "your money has to stay in this investment until your 59 1/2" and "if you need your money before then, there is a massive penalty".

There is some truth to this statement, but when considering an annuity as a stand-alone solution, this statement is also a FICTION.

Look, if an annuity is held within a qualified account like an IRA or a 401k then, yes, one may not access either the account principal or growth until age 59 1/2 without substantial penalties and income tax - but this is true for any qualified money whether it's held in cash, stocks, bonds or any other investment.

On the other hand, if an annuity is not held within a qualified account, there is complete access to all of the principal and growth at the end of the contract term. And this is true whether you are 30, 40, or 50 years old. Of course, since the earnings within an annuity are tax deferred, taxes on the gains must be paid when they are withdrawn. Still you will have access to your money regardless of your age.

#4 - Lastly, Ms. Schlesinger states correctly that "most people are investing for the long term," but then adds, "but you want access to it (your money) if you need it. This (an annuity) will not give you any access to your money."

This last statement is also a complete FICTION. Annuities do provide for access to a portion of the invested principal.

To be sure, annuities are not liquid like a savings or money market account. Never the less, almost all annuities provide for an annual free surrender - an amount the policy holder may withdraw without penalty. This surrender often equals 10% or more of the initial premium invested or more.

Furthermore, many insurers now offer a Return of Premium feature. In exchange for a slightly lower rate of return, this provides the policy holder with access to all of the investment prinicipal at any time and without any penalty.

Let's be clear - fixed indexed annuities are not a silver bullet solution for all investment needs, never the less they should be considered a part of a comprehensive retirement strategy. And remember, annuities offer several key features that qualify them as truly "safe money" investments:

• Guarantee of principal
• Tax deferral
• Guaranteed income that one may never outlive

Bad Agents Selling Bad Products Giving Annuities a Bad Name

A response to Dateline NBC's program entitled "Tricks of the Trade"

On Sunday, April 13, 2008, Dateline NBC aired a show entitled "Tricks of the Trade" that exposed many of the unethical and misleading tactics some salespeople use to persuade seniors to buy equity-indexed annuities. Although anyone taking advantage of the aged should rightly be exposed, the Dateline program did little more than paint the entire annuity marketplace with a broad and unfavorable brushstroke. Instead of focusing only on the real problem - rogue insurance agents selling inappropriate investments that were unsuitable for their senior clients - the program unfairly pigeon-holed all annuities and those who sell them into the same negative category.

The problem with the program's format is that it would lead many to believe that all annuities have extremely long surrender terms, little or no liquidity and truly excessive surrender charges - all of which are untrue. Many annuities feature surrender terms as short as three years and most allow for annual withdrawals without penalty  - an advantage that most annuities have over their more conservative counterparts the CD.

Furthermore, the program would also lead many to believe that annuities are always an unsuitable investment for seniors - also untrue. Although it would be unwise for a senior to invest their entire life savings in a long-term annuity (or any long-term illiquid investment for that matter), many seniors today successfully diversify their portfolios by investing a portion of their assets into annuities many of which now offer valuable living benefits not available through more traditional investments. Other seniors find immediate annuities an attractive solution in providing lifetime income they cannot outlive. And still others somewhere in between incorporate laddered annuity strategies that provide a combination of both growth and income.

Although annuities are not the solution for everyone, they continue to serve as a popular investment option because of their tax-deferred growth, tax-free transfer privileges, guaranteed death benefits for beneficiaries and options for a guaranteed lifetime income. And as mentioned before, new living benefits make many variable annuities particularly attractive for those who want to participate in equity markets while protecting investment principal.

Despite the misleading and dishonest practices of some in the industry who are only seeking a big commission and a quick buck, reports like these also serve as a valuable opportunity to explain how basic investment principals and sound guidance will never go out of style.