By the time you’ve reached your 40s and live in an affluent community, you probably have received at least one alluring invitation for a free meal at a fine restaurant. Of course if you accept a high-quality meal, you suspect you’ll have to eat through a sales pitch. You just hope that it’s not so intrusive that you can enjoy your night out in relative peace.
For every person who successfully fends off these advances, there are others who end up making rather permanent decisions. Not all dining “seminars” feature bad products, but you should keep your eye out for these potential offenders to personal finances when deciding how to spend your evening.
Variable Annuities with Surrender Fees. Variable annuities are a form of investment inside of an insurance contract. The usual pitch for variable annuities will emphasize its tax advantages and investment guarantees. We could devote an entire column to dissecting a single annuity policy, as evidenced by the lengthy contract you must sign to purchase one.
Let’s make this simple. Most variable annuities charge fees of 8 percent or more of your original investment if you decide you’d like your money back. That the insurance companies are marketing savants is not in doubt, as they require you to wave the white flag and “surrender” just to take back your money after the free look period.
It’s true you can avoid these charges by holding a variable annuity for many years, but with annual fees often close to three percent the insurance companies will extract their pound of flesh regardless of whether you leave now or later.
The tax advantages are oversold as you don’t get an upfront tax deduction, and merely defer taxes on the growth. What more you owe ordinary income tax on the growth when you take a lump sum payment. The vaunted income guarantees mean little as most come with so many trap doors embedded in the contract they often don’t pan out for the investor.
Timeshares. You may hear about this during a week-long escape to the mountains or beach, offering you affordable access to exclusive properties around the globe. Public disdain for timeshares has grown over the years, so marketers have pivoted to expansive language in discussing the benefits of “fractional ownership” or vacation club membership. In most cases it’s the same. You pay tens of thousands of dollars upfront plus annual expenses for the right to stay in a vacation home for a certain week each year.
There are variations on this theme. You may have rights to peak or off peak vacation times rather than a particular week. There are typically options to deposit your week in exchange for points that can be used for sister properties. Just remember that once you pay for a timeshare, after a cooling off period you can’t get your money back. In fact it can be hard to even give away a timeshare, as potential recipients do not want to be liable for the annual fees that go up every year. If you must buy a timeshare, look at the Timeshare Users Group at tug2.net. You’ll discover timeshares on the secondary market can be found for free in some cases, and the cautionary tales of long-time timeshare owners who willingly share their experiences.
Cash Value Life Insurance. Cash value life insurance is a policy that has an investment component. While it has its place in limited situations, in most cases it’s not the best use of your money. There are many forms of cash value life insurance, such as universal life, variable universal life, and whole life. Before you consider a policy, you should have a demonstrable need to leave money upon your death regardless of its timing. For most people, term life insurance should be considered first as it’s a more cost-effective method of covering your life for a certain number of years, typically fifteen to thirty. As with variable annuities, asking for your money back with cash value life insurance may involve thousands of dollars of surrender charges. Leave evaluating your existing policy (or one you’re contemplating) to the independent experts, including evaluatelifeinsurance.org, which is endorsed by the Consumer Federation of America.
The common thread with all of these traps is that you can’t easily get your money back with little cost or hassle if you change your mind a year or two down the road. Use that test first when evaluating a new investment idea, particularly if sold when you have a wine glass in your hand.