Get a Second Look Before Buying an Annuity or Your Money May Be Held For Ransom
Two clients of mine, a couple, came into my office one morning, and they mentioned they were heading over to meet with a financial advisor about their Equity Indexed Annuity after their appointment with me. Just as a fair warning, I shared with them what I have learned about the dangers of some annuities, making it a point to mention that some have steep surrender penalties that can extend anywhere from 7-17 years. What I didn’t know then is that they can be even worse than that.
They seemed surprised. Why hadn’t their advisor mentioned those downsides? They would ask him, they concluded, and then come back to finish up some business with me.
They did come back, and with some very concerning news. “He made it sound like we could never take all our money out without penalties,” they said.
And now they surprised me. I asked for their disclosure document, researched the product, and—to my frustrated astonishment—found it to be true: this annuity was basically holding their money for ransom.
You see, according to the rules of this particular EIA, they can never take out their money as a lump sum. Even after they have passed away, their kids will not be able take out their money as a lump sum either. The only way the couple can is by taking it out 10% each year for ten years after a five-year deferral period.
If they refuse to play by those rules and take out their money as lump sum anyhow, the penalties would eat up all their returns, bonuses, and more. They would only get $164,555, which is $61,859 less than their account value of $226,414 and about 10,000 less than what they originally paid into the annuity five years ago! In other words, they would have lost 27% of their money after having been invested for five years.
This illiquidity might be tolerable if the returns were decent, but that is not the case with their annuity. It has a cap of 3%. This means that no matter how good the markets are, the most return they can get is 3%. Period. All in all, this is a terrible deal.
Now, this is not to say that all annuities are bad or that all of them will tie up your money like this one will. But this example does serve as a warning that you can hardly be too cautious around these complicated products. Why? Because annuity salesmen (even those who call themselves “financial advisors”) may not tell you about these downsides.
My clients were not told about these penalties. Instead, they were sold on the guarantees, the promises of market returns without market risk and an upfront 10% bonus. Then, with a skewed perception of what they were getting themselves into, they signed away full rights to their money forever.
So, before you sign anything, I always recommend getting a second opinion, just to make sure the annuity is being portrayed as it really is. I am convinced that if all the pros and cons were laid bare, significantly fewer people would purchase them.
Thinking about getting into an annuity? Call Seniormark at 937-492-8800 and a Certified Financial Planner will give you a second opinion on whether or not it is right for you!