Beware of High Yielding Annuities

Larger returns are enticing, but you also need to research your provider.

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Roger Wohlner

The other day I heard a radio commercial from a company called Professional Life and Casualty. They claim to offer at least a 2.5 percent fixed interest rate on tax-deferred annuities including investments for your traditional and Roth IRA accounts. In this environment that’s a great rate on a fixed investment. Or is it?

Who’s behind the offer?

A quick Google search of Professional Life and Casualty revealed the following:

  • A.M. Best, a major insurance company rating firm had withdrawn its rating of the company in 2011 at the company’s request.
  • In the last report that A.M. Best had issued on Professional Life they rated the company’s financial strength as “marginal.” Best cited a high level of below investment grade securities held by the company as a well as “ … the absence of an asset/liability management strategy … ” among the reasons for this poor rating.
  • In looking at Professional Life’s website I found little but sales material and certainly nothing substantive about this fixed annuity product.
  • Why should I hesitate to grab the highest rate that I can?

    Certainly more is better when it comes to return on an investment. But with a product like a fixed annuity you want to make sure the company offering this high rate of return has the financial strength and staying power to maintain these interest payments. The A.M. Best review of Professional Life should at least cause a prospective annuity buyer to ask questions about the company.


    What’s the lesson here?

    The point of this post is not to denigrate Professional Life and Casualty, but rather to use their radio commercial to illustrate the need for you to be a savvy consumer of financial products. I don’t know if it’s a solid company or not, nor do I have any specific knowledge of the quality of their financial products.

    However there are several lessons here:

    • Question any claims made by any seller of financial products. Understand the company behind the product, take nothing as a given.
    • If an offer (or rate of return) sounds too good to be true it often is.
    • In order to offer a higher return than other providers a company has to somehow earn more on their investments and/or keep their costs lower than everyone else’s. Earning a higher return often involves taking more risk. If this is the case how will this company fare during the next precipitous decline in the financial markets?
    • Financial products of any type should not be purchased based upon a sales pitch. In fact I would suggest that you shy away from dealing with any financial type who leads with a product sales pitch as opposed to a financial plan.
    • Financial services advertising is designed to sell products. Don’t bite. Buy products that fit your needs based upon a financial plan and only then after you've done your homework and research.

      Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.