Wise Information for K‑12 Employees



K-12 Story: Indexed Annuities: Understand the Sales Pitch

Like the last fight scene in Lethal Weapon 4, the new Department of Labor ruling will see the death of the suitability standard, which will be replaced by a fiduciary standard. Picture the following: Wah Sing Ku (annuity sales rep), played by Jet Li, holds his dying brother (the suitability standard) and stares down Riggs and Murtaugh (our fiduciary heroes). Murtaugh comments, “Aren’t we too old for these sales methods?”

Feeling the same as our fiduciary hero, I recently took advantage of an opportunity to attend an index annuity sales workshop.  Attending as an undercover agent for the good guys and abruptly walking out after 45 minutes of nonsense, my cover was blown.  I discovered bad sales techniques and I hope this will help consumers understand any sales pitch.

The Bonus

Most annuities pay a bonus to the buyer ranging from three to eight percent.  The buyer often feels like a genius gaining an instant return without any “risk.” It shows on the statement as an increase in relative cash value.

The presenter states that the bonus is a way to put the potential annuity buyer in a “better position.” The bonus offsets any redemption fee from liquidating an existing annuity before the surrender period ends. To the credit of the sponsoring group, discussing higher bonuses means higher or longer surrender charges were outlined.  However, the intent remains questionable, as it felt more like “Be careful and do not get caught.”

Compare it to a CD

During one point of the presentation, we were taught how to sell annuities by comparing them to CDs. “Everyone knows how a CD works” so “you want to relate it to a CD” rolled off the presenter’s lips. The agent even wrote on his whiteboard, “no losses and no risk” during his meetings.  The client is then instructed to take a picture of the wording to act as a reference later.

A client must wonder if this means that the products are FDIC insured.  The simple answer is NO! The U.S. federal government does not back annuities.   

Consider the following. If the annuitant takes more out of the annuity than any free withdraw amount, a large surrender penalty may be imposed.  Below is just one example from American Equity (1.) 

Surrender Charges

Surrender charges are deducted from your Contract Values in the event of:

  1. Full surrender, or
  2. Withdrawal in the first year, or
  3. Withdrawals in excess of the penalty-free withdrawal amount during the surrender charge period as shown below:

Issues Ages 0-80

  • Year 1 - 20%
  • Year 2 - 19.5%
  • Year 3 - 19%
  • Year 4 - 18.5%
  • Year 5 - 18%
  • Year 6 - 17.5%
  • Year 7 - 17%
  • Year 8 - 16%
  • Year 9 - 15%
  • Year 10 - 14%
  • Year 11 - 12%
  • Year 12 - 10%
  • Year 13 - 8%
  • Year 14 - 6%
  • Year 15 - 4%
  • Year 16 - 2%
  • Year 17+ - 0%

Surrender charges may vary by state. 

Good Returns

To explain the great returns that the index annuities have provided to clients, the presenter talked about the two in five years of double-digit returns a few of his clients experienced.  The information by itself does not seem bad.  When compared to the 12.45% rolling 5-year average annual return of the S&P 500 (as of the time of this writing, 6/6/2016), the client will likely wonder what he has given up.  Although an S&P 500 mutual fund or exchange traded fund by itself will have high volatility, when used with asset allocation, the investor may achieve a reasonable level of risk and maintain a respectable return without the annuity expense.

Make sure you ask questions about how the annuity works and compare it to a well-allocated and risk-adjusted portfolio.  Also, ask the agent about dividends.  Dividends, when reinvested over time, provide much of the index returns. Most index annuities use price to figure the returns, thus ignoring the dividend.

I Own This Product, Too

My favorite technique of the workshop requires the agent to buy the same annuity as the prospect.  After all, wouldn’t the agent use the same investment as the client?  The answer in this case is yes, but…the agent puts a small dollar amount in the product.  The agent can say, “Yes, I have this product too,” making you feel good knowing that he owns it as well.  However, his recommendation places 25% to 50% of your portfolio into the annuity


The public sees financial advisors or sales agents as experts who help them with complicated money matters.  Many advisors have a vast working knowledge of financial planning.  However, some finance professionals willingly swim in the shallow end of the financial pool. 

Our discussion leader encouraged us to know one to three products well.  Immediately, problems surface with this limited approach.  What are the odds that one or three products will best serve the needs of each prospect they meet?  Is this not like watching Charlie the Tuna ask all fish to squeeze into a sardine can? 

Wrap Up

Like any tool, if used improperly, more damage may result. 

  1. Clearly understand the surrender charges and any guarantees associated with the product.
  2. Complete a background check on the rep.
  3. If the agent says, “I own this too,” ask to see his statement.
  4. Request a comparison of the annuity and how well it has performed.
  5. Ask the agent about all expenses associated with the product
  6. Do not be afraid to ask for a second opinion on how the product fits your overall situation from an hourly or retainer-based planner.

Works Cited

  1. American Equity. Gold Standard for a Secure Retirement Bonus Gold. N.p.: American Equity, n.d. Print. https://agent.american-equity.com/documents/1107-SB-09.01.10-w-disclosure.pdf 
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Nathan Carmany, CFP® works for Watermark Wealth Management, LLC in Indianapolis, IN. Nathan enjoys meeting people and learning about where they come from, where they are going, their current challenges and helping them move forward. He can be reached at ncarmany(at)thewatermarkgrp.com