A good rule of thumb when you’re trying to eat healthy is to beware of any food you see advertised. The most beneficial fare — whole grains, fruits, vegetables — tends not to have a marketing budget.
Similarly, investments that are enthusiastically pushed by commission-earning salespeople may not be the best for your financial health. Before you buy any of the following, you’d be smart to investigate lower-cost alternatives and to consult an objective, knowledgeable third party, such as a fee-only financial planner.
Equity-indexed annuities are insurance products that base their returns on stock market benchmarks. They’re often promoted as a way to benefit from stock market gains while being protected from losses.
But the contracts typically limit how much investors get when the stock market rises, says certified financial planner Anthony Jones of Groveport, Ohio. Two clients, who had purchased equity-indexed annuities before joining his firm, received only a fraction of last year’s 30% increase (as measured by the Standard & Poor’s 500 benchmark).
“They expected bigger returns in 2019 and were very disappointed,” Jones says. “They each had less than a 3% return.”
Equity-indexed annuities typically come with high commissions and surrender charges that can make it expensive to get your money out, says CFP Scott A. Bishop of Houston. The contracts can be extremely complex, and many buyers don’t understand what they’re getting, he says.
“They are not necessarily bad products, but they are really more like bond alternatives than stock alternatives,” Bishop says.
Reverse mortgages allow homeowners 62 and older to convert some of their home equity into a lump sum, a series of monthly checks or a line of credit. Borrowers don’t have to make payments on the loan, which doesn’t have to be paid back until they die, sell or move.
But borrowers don’t always realize that their debt is accruing monthly interest. The amount they owe may grow so high they no longer have any equity in their homes, says Barbara Jones, an attorney with the AARP Foundation.
Reverse mortgages typically aren’t a good fit for people who may need to rely on their equity for future expenses, such as medical bills or nursing-home care. Reverse mortgages could be a way to avoid foreclosure if a homeowner can’t afford to make payments on a regular mortgage, Jones says. There may be no equity left for their heirs, “but at least the person gets to age in place,” Jones says.
Non-traded real estate investment trusts
Real estate investment trusts allow people to invest in commercial real estate without having to buy and manage the properties themselves. Most REITs are publicly traded, so it’s easy to buy and sell them.
Non-traded REITs also invest in real estate but are designed to reduce or eliminate taxes. The trade-off is that your money could be locked up for years. Also, non-traded REITS tend to have high upfront fees that reduce the return on your investment.
“Non-traded REITs make my heart sink when I see them in a new client’s portfolio,” says CFP Jonathan P. Bednar of Knoxville, Tennessee. “These are very complex products, with high fees, and oftentimes not the greatest-quality underlying holding.”
Bednar prefers that clients own investments they can easily sell if needed, such as an exchange-traded fund that invests in real estate.
Cash-value life insurance
Cash-value life insurance combines a death benefit with an investment component. (Whole life, universal life and variable life policies are all types of cash-value life insurance.) Sometimes the policies are promoted as a tax-efficient way to invest for high earners who have maxed out their other retirement savings options, says CFP Alex Caswell of San Francisco.
But the premiums aren’t deductible, and the policies tend to have high costs, Caswell says. Many investors have better alternatives, such as using a tax-efficient investment strategy in a regular brokerage account, he says.
Also, premiums for cash-value policies tend to be much higher than premiums for the same amount of term insurance, which has a death benefit but no investment component. The higher premiums can lead buyers to skimp on coverage or to drop the policy because it’s too expensive. And sometimes policies are sold to people who don’t need life insurance at all, such as single people with no financial dependents, says CFP Tess Zigo of Lisle, Illinois.
Zigo says the higher commissions paid by cash-value policies can lead insurance agents to recommend them even when there are better alternatives.
“If all you have is a hammer, everything looks like a nail,” Zigo says.
This column was provided to The Associated Press by the personal finance website NerdWallet.
Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.” Email: email@example.com. Twitter: @lizweston.