Brad Tinnon

Brad Tinnon

The Annuity Nightmare

Have you ever had the thought, “Should I buy an annuity?” If so, you’ll appreciate this actual client story. A client of ours purchased an annuity from someone else many years ago.  But before I tell you this story, let me briefly explain what an annuity is and how I feel about them.

WHAT IS AN ANNUITY ANYWAY?

Annuities can take many forms.  But in general an annuity is an investment product sold by an insurance company.   The insurance company will generally “guarantee” that the annuity will never lose value and that you could potentially receive an income from your annuity for the rest of your life.  But, let me warn you that you should not fall into the trap that annuities are 100% guaranteed.

Think of annuities like pensions.  The premise of pensions is that when you retire, you expect to receive an income for life as a reward for your service to the company you worked for.  However, many people have had their pensions reduced, which came as a shock to them because they were under the impression that the pension was guaranteed.  Check out this most recent story of the possibility of government pensions being reduced.

My point is this: Don’t fall prey to the “guaranteed” claims made by annuities (or pensions).

Note: there are many different types of annuities and many different ways to receive income from an annuity.  But for simplicity sake, I was essentially just describing one type of annuity and one type of income feature.

WHY I DON’T LIKE ANNUITIES

As I just mentioned, annuities aren’t guaranteed, regardless of what the sales person told you.  Reason being is because the insurance company could go out of business.  This is just one of the reasons I don’t like annuities.  Following are others:

  • Annuities can be structured in many different ways. In fact annuities are actually a contract that has all the bells and whistles spelled out along with all the different provisions and caveats.  This makes annuities generally very complex for people to understand.  And it is generally not a good idea to invest into something you don’t understand.
  • Annuities are often times very expensive. Not to mention the fact that it can be extremely difficult to even determine what you are paying because the costs are buried in the contract.  Plus high fees can eat into your returns.  I prefer investments that have transparent, low cost fees.
  • Funds in an annuity are locked up until you are age 59 ½. If you withdraw money prior to that, then you will likely pay a 10% early withdrawal penalty.
  • Financial advisors are often times paid high commissions for selling annuities. As a result of this, the annuity company usually won’t allow you to move the money until a long period of time has passed (4 to 6 years is common – it’s known as a “surrender period”).  This basically locks you into a contract just like a cell phone carrier would do.  And if you move the money prior to that, you could lose thousands of dollars.  This leads me back to the story that I started to tell in the beginning.

BACK TO THE STORY

As I previously stated, my client purchased an annuity from another financial advisor many years ago.  She hired us as her advisor in 2012 and today (December 2014) the annuity is worth around $100,000.

Naturally you would think that if our client needed $100,000 she could sell her annuity and walk away with the cash.  But unfortunately that’s not how it works – at least in this case.

You see, the annuity company actually calculates a separate “walk away” value.  And in this client’s case that amount is $60,000 (called the “surrender value”).  This is a whopping $40,000 less.  This means that there is a $40,000 surrender penalty if the client wanted to get out of the annuity.

As I mentioned above, surrender periods generally last for 4 to 6 years, but in this case, the surrender period NEVER ends.  In other words our client will likely never be able to move this annuity.  This is criminal in my opinion, but unfortunately it’s all too legal.

So the next time you have the thought, “Should I buy an annuity?”, hopefully you’ll be more equipped to make an informed decision.

We would love to hear any comments or personal experiences you have.  Feel free to share them below.

Also stay tuned as I will be sharing another Annuity Nightmare story very soon.  Be sure to sign up for our eContent so you don’t miss the next post.

Thanks for reading!!

Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™

P.S. We would love to hear any experiences you may have had.  Please share them below.

Photo courtesy of The Gathering Shot

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