Hear the lamentations: a client pulled out of an annuity, in the process taking a big hit in surrender charges.
The money was shifted into another annuity with poorer returns and a longer tie-up period. What motivated this dubious move, she wondered? The client’s response: an insurance urged me to do it. We presume a degree of head-shaking by our author and a good deal of hand-wringing by the customer, eventually.
Was the insurance agent taking advantage of an elderly customer? Possibly, but perhaps more likely the agent didn’t understand the original annuity’s role in the client’s financial plan. Annuities should perhaps not be judged simply as standalone products. They’re complex and clients often find them hard to fathom. Let’s examine some common pitfalls.
Annuities come with terms governing the surrender period. If you back out of the fund, the penalty can be severe – in the case described, the customer paid a $13,000 fee. You shouldn’t withdraw from an annuity unless the hard numbers are there to explain the sense of the move.
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There are three key terms to know and lots of customers get tripped up on them. First, there’s the interest rate: this might be a fixed amount, or indexed to market movements. Don’t get confused and be sure you know your rate. Then there’s the withdrawal rate. When the policy matures, this is the percentage of the principle you can withdraw every year. Some customers confuse this percentage with the interest rate.
Finally, some annuities have cap rates – that’s the maximum percentage the investment will pay for the year, no matter how the market moves. Customers sometimes accept excessively low cap rates, likely confused over their true meaning.
For more information, please read:
5 Mistakes NOT to Make with Annuities | Kiplinger