Do you think you made a bad decision on an annuity purchase in the past? Do you think you’re stuck due to surrenders and penalties? What are your options?
Dick and Eric examine the options that most annuity owners do not know about to possibly move out of an annuity that was misrepresented or one that no longer fits their financial objectives.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
It should be noted that prior to surrendering or replacing any annuity, careful consideration of all features, penalties and financial goals of the consumer should be evaluated — this is not a decision to be taken lightly.
Annuity Guys® Video Transcript:
Eric: Today we’re going to talk about how to get rid of a bad annuity. Well Dick, is there such thing as a bad annuity?
Dick: Unfortunately, Eric, there are some bad annuities.
Eric: Oh no, don’t tell me that.
Dick: Just like any other investment you can make a bad decision. You can buy a bad annuity. The best way I’ve found, to not have to get rid of a bad annuity, is just not to buy one.
Eric: If you don’t make the mistake upfront, you don’t have to suffer the consequences.
Dick: Right, right, right. So folks do you research, watch our videos, watch other videos. Just read, look at what’s out there, and just use some good judgment.
Eric: Well, that’s a nice summation. Are we done?
Dick: That’s the video.
Eric: Well, I guess we should define when we talk about bad annuities; it’s really a personal situation. It’s you end up with an annuity that doesn’t fit your financial goals or your objectives.
Dick: And it is possible that your financial goals or objectives change, so maybe the annuity wasn’t bad originally.
Eric: It’s just bad now.
Dick: It’s bad now and the other thing that we find happens, not so much recently as over maybe the past few years the annuities, folks, have went through quite an evolution, and we believe have reached kind of a level.
Where they’ve; I won’t say they’ve plateaued, but they’ve come out with these innovative riders, income riders; they’ve become very competitive with each other and we’ve kind of seen what would seem to be a leveling off of what we could expect for any of these annuities.
Eric: Yeah, and the nice thing is its innovation.
Eric: You’ve got companies, there’s competition for your dollars, they want to design the best product that one, creates a need or satisfies a need for you, and those strategies make you money, make the company money, and that’s really what they’re designed for.
Dick: And unfortunately, if you were one of the early ones in, buying the annuities that were available four or five years ago and you compare it to what’s on the market today, with the contractual **guarantees, you may be a little disappointed.
Eric: It’s buyer’s envy I guess, so if I own one that I bought five, six, seven years ago and it’s not meeting my needs…
Dick: Or let’s say it does meet your needs somewhat, but not as good as some of the newer generations.
Eric: All right, so you want to tackle all these? So I’ve got one of these, how do I go about deciding what’s the next step? First of all, can I get out of a bad annuity?
Dick: Well, the answer to that is always it’s your money and it’s your decision.
Eric: And it may depend on your annuity, if you bought an immediate annuity most of the time…
Dick: That’s true, that’s true, yes.
Eric: That’s my one caveat, that if you own the immediate you pretty much…
Dick: You’ve given up your lump sum, so it is your annuity.
Eric: And that’s why we always talk about that being a make sure that’s the right decision, because usually that’s it.
Dick: So if it’s a deferred annuity there could be some extenuating circumstances, first of all. If it was really genuinely a situation, where that annuity was truly misrepresented to you; it was not what you thought you were buying; there could be some aspects of going back to the company, going back to the agent, but again, this has to be fairly well-documented. That it was misrepresented. So in those situations if it was truly not suitable, it was misrepresented, it is possible that the company would allow you to get out of the annuity with no penalty, also the possibility of litigation, that type of thing, or going through the state insurance department if it was misrepresented, but let’s just say that it was not.
Eric: It was just what was available at the time and it’s it sounded good at the time. How many times have we made a decision based off of this sounded like a good decision at the time and it might have been the best available at the time.
Dick: And now interest rates are low. Maybe your interest rates have dropped on the annuity. The cap rates have dropped. You didn’t get one of the income riders that are now available, so you don’t have those contractual **guarantees. Well, one of the things that I think that you want to look at first of all is how close are you to maturity? Will that annuity be maturing, and all of the surrender charges will be gone soon?
Eric: Now and when we talk about maturity and this is always an interesting thing when I talk about it with consumers, because they say “Well, do I lose my income at the end of that contractual, that maturity period?” Really, it’s a surrender time frame typically is what that contract. You can continue past that surrender schedule period. That annuity’s designed to keep going and going and going until…
Dick: Right, they still have contractual **guarantees in place for the client, even though the money is available surrender and penalty free.
Eric: Right, so when we’re talking about maturity in this case we’re talking about when there are no more penalties that will be incurred by basically, surrender charges.
Dick: So if you feel that your annuity is not what you really wanted, you’re only maybe a year or two away from being out of surrender charges, you may want to wait until that couple of year’s passes. You’ll also have some other alternatives. Even if you’re fairly new into the annuity, within a few years or so into the annuity, there’s things that you can look at, which could be an offset to the annuity that you have, and the surrender penalties, if the new annuity that you were looking at has a bonus or a market value adjustment.
Eric: Now and this is where market value adjustments are really kind of an interesting not well kind of…
Dick: Not well understood.
Eric: … understood. Even by some agents. I mean we’ve seen people that have had problems with understanding them and really they work in two ways.
Eric: They can be and basically they work as an offset, for the insurance company in case of the change of rates, so what we’ve seen is they can either be, in addition to the contract at the time of surrender or a subtraction. Now if the interest rates have gone up…
Dick: They’re typically then going to add to your surrender charge.
Eric: Right, and if the rates have gone down, then we’ve seen here in the last few years…
Dick: Then you would have a positive MVA, where your surrender charge is actually reduced by a fairly large amount on the MVA.
Eric: And I know personally we’ve seen this happen. So it actually creates an opportunity for some people at times, when they’ve had an annuity that they’re not real happy with, and if things have gotten you think, surprisingly if they’ve gotten worse, there’s usually sometimes an opportunity to offset that surrender with that MVA, and the MVA is not the Motor Vehicle Association.
Dick: No, it’s not.
Eric: It is a market value adjustment, which is a mouthful.
Dick: And not all annuities have market value adjustment, so you have to look at the type of annuity. When I say the type of annuity, an indexed annuity, a fixed annuity, all of those can have market value adjustments, but not all do.
Eric: Right, so when we’re talking about this in relationship usually, it’s on a fixed or a fixed index and that’s because of what they’re using to reserve. So they’ve purchased bonds and that’s sitting behind it, and so if they have to sell them early that’s the reason usually most insurance companies use them, market value adjustment.
Dick: And the reason, another reason folks, why they have the market value adjustment is the annuities that do not have a market value adjustment on the annuity, typically cannot pay as high a rate or have as many **guarantees, as the one that has a market value adjustment. They have more latitude in terms of getting higher rates or better **guarantees, so that’s a good reason to use an annuity with a market value adjustment.
Eric: Sure. So there is one way to get rid of a bad annuity possibly, even that still has a surrender involved, because you still may have an offset from an MVA.
Dick: Exactly. Another is the new bonus or a bonus from a new annuity. So that if you have a considerable bonus from the new annuity that can help to offset some of the surrender, combine that with an MVA and the advantages of the new annuity if it makes financial sense, then it can be worth doing.
Eric: And that should be qualified. We’re not suggesting you would transfer from one bad product into another bad product.
Dick: Of course.
Eric: It’s got to meet your financial needs and this would only be something we’d recommend, if you’ve got something that’s not working, it doesn’t fit, this is an area where you can explore some options to basically, see if there’s something better out there.
Dick: Right. Unfortunately, it is a possibility that someone, Eric, would get involved in a bad annuity, and so there has to be different ways that someone could go about alleviating that situation.
Eric: Right and one of the things we’re talking about is using, usually a transfer of an annuity. We’re not talking about doing a withdrawal, and then rolling it into another one, though those are all options, but to avoid bigger taxation penalties even, we’ll typically look at transferring from one annuity company to another. So those things will keep you out of taxation penalties.
Dick: Yes, so I think that probably the best way to really avoid a bad annuity in the first place is to buy a good annuity. Do your research. Make certain that it is going to meet your objectives, and then, even if the newer generation annuity does come along, and does have a few additional advantages, if the original annuity that you set up met your retirement objectives, then there should still be some merit there and some good basis for why that was chosen.
Eric: Exactly, and you don’t want to just throw something. You don’t want to throw the baby out with the bath water I guess is the saying, and so make sure you’re not making just a rash decision to get something else.
Dick: That’s right.
Eric: And that’s why these annuities do have surrender charges, they do have these pieces, because they are designed to be long term, lifetime income generating products.
Dick: Make you think twice about messing up your retirement by ending your IRA or your annuity and that’s why these penalties are there.
Eric: Right, so as we say, you usually only get to do retirement once, so do it right.
Dick: That’s right. There are no do-overs in retirement. Thank you.
Eric: Thank you.