What should I be ready for when managing my mother's annuities as she gets older?
Ten years ago when my mother was 73 years old, she was convinced by an insurance annuity broker to empty her $300,000 worth of CDs into four annuities. According to the broker, her annual interest rate would be fixed at 3%. My mother lives off of her social security and the distributions from these accounts (~$300/month). This arrangement appears to be working for her. She only takes money out of these annuities when she needs to have work done on her house. The total value of all of her accounts tend to hover right at their initial value of $300,000. I am my mother's Power of Attorney, and recently wrote her broker to ask what fees were taken annually from my mother's accounts. His answer was that there were no fees. This concerned me. They have all reached their surrender dates, but my mother doesn't want to do anything different with her money. Should I be concerned about her broker stating that there were no fees? As my mother gets older, are there any other issues that might turn up with regard to these annuities? What should I be ready for?
Thank you for this question and I must say it is a complicated one. I will certainly answer as best I can based upon the information above, but I would highly suggest consulting with a fiduciary advisor (not a commissioned sales person) and review mom's situation.
You should get yourself a copy of the annuity contract and much of the information you need should be there. It is highly possible that the annuity contract (which I am assuming is a fixed annuity from your notes) would have a minimum crediting rate of 3%.
Typically there would not be fees associated with these contracts, outside of potential surrender charges during the first ten years or so (these vary from contract to contract). The idea here is that the insurance company uses moms deposit and invests it. Their goal is to achieve a higher rate of return than they are paying her and that is their "fee" or return. This is also why they impose surrender charges. Should the investor remove the monies early on it will prohibit the insurance companies ability to outperform the rate they are paying the contract holder.
I do not think you necessarily need to be concerned with the fact that he said no fees, but I would check the contract and confirm.
In regards to your concerns going forward, I would confirm that the beneficiaries listed currently are in line with mom's wishes. These can change over time and get over looked very often. Also be aware that any monies withdrawn from the contract during her lifetime, to the extent it exceeds her investment, will be taxed as ordinary income. Upon her demise the beneficiary will be able to remove the funds up to a maximum of five years in most cases.
I would highly suggest you get a copy of the contract, review with a fiduciary and consult with your tax professional. Good luck!
These sound like fixed annuities which are not securities but purely insurance contracts and the broker most likely is an insurance agent. In a way he is telling the truth. The fees are built into the interest rates they pay the annuity holder. Just like a bank's CD rates. The bank makes loans at 4% and pays 1% on CD's the spread is what the bank works on and could loosely be considered the fee. A fixed annuity is the same way, the insurance company is paying 3% to your mother but they are using her money to invest at 5% or 6%.
Variable annuities are security contracts and come under securities laws and insruance laws. They have fees deducted from the investment accounts and those are disclosed. Variablie annuities are invested in "outside" funds not owned or operated by the insurance company. Fixed annuities are totally invested with the insurance company.
If the 3% is adequate and is guaranteed there isn't much to do. Be aware that at your mother's death the money will pass directly to the beneficiary of the annuity contract and will not go through her will. You may want to check who the beneficiaries are and if that is still what your monther wants. Also check when the annuitization dates are for the contracts. This is a maturity date that upon reaching the insurance company will annuitize the balance (pay monthly lifetime payments and keep all of the principle) make sure the contracts do not annuitize.
My firm is a registered investment advisor here in Denver. This is a great question you have asked and I will answer it in the most direct manner possible.
Fist off. I generally get worried when people are working with professionals that only deal in one industry. Chances are that your Mother's insurance broker was only insurance licensed so the only product he could offer your mother was a fixed annuity ( or life insurance). Although this was probably a suitable invesement at the time, it probably wasn't the best overall or long term investment. The 3% interest rate sound about right for those products, however the rates can flucuate over time. The annual fee on a fixed annuity is generally very low so I do beleive the sales person is being truthful there, however, the fee is different than the comission. A zero % yearly fee annuity still will pay the insurance salesman a very high comission up front. The insurance companies can do this because they lock up the client's money for so many years and pay the client 3% while they inturn take the clients money and invest in low risk projects that yield 6% or higher. It's done every day by insurance sales people and the insurance companies.
I have had many clients in a similar situation where they are living off SSI and a very small yeild from their investments. Although this situation may be working for your mother it is probably not in her best interest. In investing you must think of not just the return, but the risk adjusted return. It sounds like your Mother is probably very risk adverse and this is why she feels she must settle for such a low yield. She can safely get a higher yeild from her investments and still sleep at night. In my view it would be in your Mother's best interest to look at an investment that yields much more with the same amount of risk while also not tying up her investmnets in annuities with long term surrender periods. We can help her with that process if she is open minded.
As a fiduciary our firm must reccomend investments that are not just suitable but in the best interest of the client. We must put the cients interest before our own. These are my base line answers, however, as you suspected there are other issues that may come up with these annuities. Please call me to discuss in detail. (303) 386-2153
Joshua P. Mischke
Based on the feedback you provided, it sounds like she owns Fixed Annuities. To be sure please reference the following explanation of the various types of annuities (my answer is in there somewhere). If that is indeed the case, then the broker is being truthful. Fixed annuities do not have any embedded fees on an ongoing basis. The only fee that applies occurs when the contract is canceled during the surrender period. Basically, the broker made an upfront commission and the surrender period is what discourages the annuity owner from exiting the contract early. In other words, the penalties for canceling early cover the broker's compensation.
I am sure the insurance rep wishes there were better Fixed Annuity products he could offer because he would stand to make another commission. However, a 3% guaranteed interest rate is tough to beat in today's low-interest rate world. In fact, a Fixed Annuity is an effective alternative strategy to CDs for a conservative investor like an elderly woman. Quite often their rates are higher and the interest earned is tax deferred. On the flip side, the surrender period, time commitment, and lack of FDIC insurance are the biggest deterrents for owning a Fixed Annuity vs. a CD.
For someone like your mom, who owns annuities that are out of surrender, liquidity is not an issue. So if I were her I would probably stick with the current annuities as well because alternative principal protected products that pay a fixed rate can't touch the 3% she is currently guaranteed. On the other hand, in the event your mom is comfortable taking on more risk and/or doesn't need liquidity, then you may consider evaluating mutual funds, index funds, investment grade bonds, fixed indexed annuities, or (maybe) variable annuities.
The important thing to keep in perspective is to make sure your mom's lifestyle needs will continue to be met under the current strategies set in place. Without more detail, it is hard for me to say this for certain, but the greatest risk to your mom running out of money appears to be if she were to suffer from a chronic illness for an extended period of time. Therefore, it may make sense to reposition a portion of her annuities towards long-term care (LTC) insurance. There are hybrid annuity products that fall outside of the traditional "use it or lose it" way of paying for LTC insurance. Ultimately, it sounds like your mom is in good shape for now. At the same time, I would make sure you continue to do your due diligence and ensure she is protected from all forms of risk -- both now and in the future.
I was in the same position as you. My mother was the same age, had three annuities, and I was the power of attorney. She was actually the one who wanted to buy the annuities, and since I sell only life insurance, I brought in an annuity expert.
The specialist explained everything to all involved. Even though the products sounded complicated, he was able to get to the bottom line pretty quickly. There really weren't any hidden costs or expenses that would come back to haunt us. He and I worked on a little chart that laid everything out: interest rates, fees, distribution requirements, etc. It really was just a one pager. My mother was very glad that I provided her with a cheat-sheet to explain in simple terms where her money was, and how she could get it. It helped put my mind at ease too.
Somebody who knows the product and the marketplace can help you feel comfortable with your portfolio. Ask the carriers for a referral to an agent in your area. Or, find an advisor who really knows the product and could give you a briefing. You are probably in very good shape, but just need to see it in black and white.