The surge of 'platform' annuities - annuities sold by banks and savings and loan institutions - Column

Nation's Business, Sept, 1992 by Peter Weaver

It used to be that when you bought an annuity from an insurance agent or a stockbroker, he or she explained the details and suggested a course of action. But now an increasing number of these retirement-planning investments are being sold over the counter by tellers at banks and savings institutions, in what the financial industry calls "platform" sales.

Last year, platform sales totaled $10 billion. Within two to three years, according to some industry estimates, sales will reach $40 billion.

Basically, an annuity is life insurance in reverse. It protects you against living too long--that is, outliving your assets--by promising to pay you a guaranteed amount for the rest of your life. An insurance policy, by contrast, protects you against living too short a time, by providing money for your dependent heirs if you die prematurely.

Why the rush on annuities sold by banks? "Because the income generated by an annuity is tax-deferred, so banks can offer customers an investment with a higher interest rate than they can get from certificates of deposit," says Robert M. Sanders, vice president of the Holden Group, an insurance-product marketing company in Los Angeles.

This summer, the after-tax rate for annuities (which, unlike CDs, are not federally insured) was ranging between 5 and 6 percent, while CD rates were running at 3 percent or less.

"Another reason people are buying annuities," Sanders says, "is because you can select any one of a number of payout options, which you can't do with a CD."

After a specified retirement age, you can get a monthly check for the rest of your life, or for a certain number of year, or you can get a lump sum. You can cover a spouse (and receive lower monthly payments) or cover yourself only.

The banks and savings institutions are selling a fixed-income annuity product similar to a CD. But the insurance industry also offers a variable annuity that is similar to a mutual fund with stocks and bonds in its portfolio.

"For some people, a variable annuity may be a much better buy," says Alexandra Armstrong, who has her own financial-planning firm in Washington, D.C. The trouble is, she says, you won't hear about it from a bank teller, because that's not what the bank is selling.

Tellers also might sell you an annuity to put into an IRA, Keogh, or some other retirement plan. "This is a mistake," Armstrong says, "because you don't put a tax-deferred investment into a tax-deferred pension plan--it's redundant."

First, invest your money up to the tax-deductible limit of your retirement plan. Then, if you want to put even more money away for retirement, invest in annuities.

You should adopt this strategy because retirement plans approved by the Internal Revenue Service typically provide a double tax benefit. Your taxable income from wages is usually reduced by the amount you out in the plan (an exception: IRAs, for people whose income exceeds the statutory limits), and the interest earned over the years is tax-deferred. Although annuity income is tax-deferred, money you put into an annuity does not reduce your taxable income.

Sanders admits that some tellers at banks or savings institutions might not give you all the advice you might need for deciding whether to buy an annuity for an IRA, or whether you should buy a variable annuity instead of the fixed-income product the bank is selling. But he says that "the situation is improving because states are tightening up on training and licensing requirements for tellers who sell annuities."

So, before you buy, find out more about how annuities work, and look into all the options. Also, find out what penalties you might encounter by withdrawing your money prematurely. Ask your bank, savings institution, insurance company, broker, and other for booklets on annuities.