With confidence in the securities markets eroding, the economic outlook cloudy and higher taxes a threat, people like you are looking for safe harbors. What better than an investment that guarantees you a fixed income for life, with the interest build-up tax deferred?
That's what many of you concluded in the late 1980s when you made annuities a "hot" new investment. The life insurance industry is betting you'll make annuities an even hotter investment in the 1990s.
Highly promoted and widely debated, annuities achieved a sales increase of about 34 percent in 1989. Insurance companies anticipate a gain of 40 to 45 percent in 1990, with individuals having socked $80 billion of their savings into annuities during the year.
It hasn't hurt sales that a popular TV game show has been offering a $35,000 annuity as one its grand prizes. If you win it at age 25 (assuming an 8 percent interest rate), the prize will be worth $760,357 when you retire at age 65!
* Tax reform in 1986 eliminated most tax shelters. But tax relief is important to people preparing for retirement. In fact, according to Northwestern Mutual Life's marketing research, it is pivotal in their investment decisions. Annuities offer one of the last shelters for tax-free accumulations of earnings. You pay taxes on the interest only when it is withdrawn. You then presumably will be in a lower tax bracket.
* Annuities provide a guaranteed retirement income. You simply can't outlive your retirement fund, nor can your spouse.
* You don't have to be a sophisticated investor or handle the paperwork. All that is done by the issuer.
But, if all this sounds too good to be true, consider that annuities are long-term savings vehicles. Once you enter into an annuity agreement, it is binding.
Annuities are no easier to buy than any other security. A multitude of new issuers have come into the market, and all companies have expanded the number of policies they offer, with numerous and confusing options.
How can you sort it out? Shop around. Compare policies. What are the fees and penalties for withdrawal or surrender? What is the performance record? Look at the sales charges. Are they up front or deferred? Are interest rates guaranteed? For how long? Be wary of a return rate that is above the market -- would the company invest your funds in high-risk securities?
Service is important, but the overriding consideration in the purchase of an annuity is the quality and ranking of the issuer. The company must be one you can trust for decades.
How do you judge? Look for companies that are well-known, have been in business for a long time, and have ample reserves. The primary rating services are Standard & Poor's, Moody and A.M. Best. The published reports of all three are available at most public libraries. Look for an overall rating of no less than A plus. Avoid companies with large holdings of junk bonds or non-performing real estate loans.
Financial planners and insurance agents sell more than 50 percent of the annuities issued, according to a private insurance industry study. Banks and savings institutions account for only 13 percent of the sales, with the rest being acquired through mutual funds, brokerage firms and other sources of securities products. No matter who sells it, you are buying a contract with an insurance company.
Annuities, like most investment products, come in varying sizes and shapes. Meridee Sagadin, director of annuity marketing at Northwestern Mutual Life, reports that at her company its fixed guaranteed annuity has been the most popular product, accounting for 69 percent of annuity sales. It's an attractive package for anyone over 50, she says.
"Growth in the 1990s," says Sagadin, "is expected to come from sales to a younger group, those in their late 30s and 40s. Most are approaching the securities market for the first time and they are leery. We feel they will respond favorably to variable annuities, a safe alternative investment with good potential. Unlike fixed annuities, yields of variable annuities tend to fluctuate with their underlying markets."
During most of the 1980s, investors had it too easy. High yields were commonplace. But those days may be gone forever, along with the tax shelters of the past. Tax deferment may be the best that you can expect today.