Annuity IQ

I had canceled my Money Magazine subscription last month and today was contemplating why I canceled it. Then I got to the article that initiated my cancellation. It was titled; ‘All You Really Need to Know about Dumping an annuity’ by Denise Topolnicki. This has been an increasing popular title in many articles over the past couple of months.

What disturbed me the most about this article was it bundled both equity index annuities and variable annuities together. These are two completely separate investments and need to be identified as such. The variable annuity is a registered product which has standardized rules for sale and is governed by the NASD. A variable annuity product also offers sub-accounts to invest in which gives you significant upside potential along with certain guarantees through living benefits.

The equity index annuity is a guaranteed investment that performs as well as a traditional fixed Annuity and is regulated by the states. This product has a minimum guarantee, caps, spreads and in some cases averaging of the index if follows. Since you are not really investing in the index you choose in the product your upside is limited to the good will of the issuing carrier, based on their cap, spread or averaging method. Also, these products historically have high surrender schedules which can last up to 20 years in some cases, the average is about 10 years.

Since these two products are clearly different they should not be grouped together. Never the less, Money and many other publications make this mistake. Grouping equity index and a variable annuities in the same category is like saying a mutual fund and an individual bond are the same. The only thing they really have in common are that both are investments, but they have very different objectives.

The Money article I am referring to had provided 6 ways to ‘dump’ your annuity. It also references that annuities are ‘lousy’ investments, which is not accurate and was an uncalled for statement. Clearly they could have framed the article better and been more neutral on them, but I digress.

The 6 ways they list are also very well known in the industry as it takes advantages of basic contract structures. Here are the 6 ways they give:

Free look the contract, only if you purchased it recently.

If the annuity is unsuitable ask for your money back, but according to them all annuities are unsuitable. The likelihood of asking and getting your money back is also highly unlikely. They are essentially telling you to blackmail the adviser and the firm. In this case you would be threatening a lawsuit or legal action if you do not get your money back, I thought they disliked strong arm tactics?

Appeal to regulators for help, in other words file a complaint. If blackmailing the adviser and the firm does not work then file a complaint and destroy the adviser’s livelihood. While some adviser’s may deserve this because of questionable tactics, the vast majorities of adviser’s do not deserve this and are entitled the benefit of the doubt, especially if it is a biased source telling you what to do.

Look for loopholes in the contract allowing for 10% or more in free withdrawals from the annuity contract. That is not a loophole that is standard practice and has been for decades. I think that statement is a testament of their knowledge of these products.

Perform a 72 q calculation to get money out pre-59 ½ without the IRS penalty. This is a good idea, but it works just like a 72 t calculation and the payments have to be equal and substantial lasting for 5 years or 59 ½ whichever is longer. Since these are based on account value chances are the amount taken in withdrawals will be small and defeats the purpose of even recommending this option.

Swap out your annuity into a low cost alternative, but wait until the surrender schedule is up or reduced to a lower level. This is a viable option, but you may be giving up substantial benefits by just switching contracts. These benefits might be a higher guaranteed income base or a higher death benefit value as compared to the new contract. Switching an Annuity should be carefully considered and is not a decision that should be made because Money told you to do it. Considering Money says to watch out for switching annuities are they negating their own advice?

Those are the 6 ways they tell you to ‘dump’ your annuity, but they are not new ideas and do not look at the bigger picture. The reality is you or your adviser bought the Annuity for a reason and you should make sure that your objectives have changed before you make such a drastic move.

Also, given their lack of knowledge on the products it would behoove you to seek qualified investment advice before ever listening to a source geared to provide advice to the masses. Remember this is the same magazine that recommends the best mutual funds to own every month or so and they are never the same mutual funds.

annuities are complicated to a degree, but with the help of a qualified adviser you can get the right advice from someone who actually knows how the product works. Nothing, except experience, can replace a financial adviser. This article was the reason I finally canceled my Money Magazine subscription and, by the way, if you cancel your subscription they will offer you substantial savings if you give them another year. How about that as a money saving idea!