I’ve written a lot in the past about the many problems with annuities. And while I hate to keep belaboring the point, I couldn’t let my most recent experience go without mention.
One of our clients, who was sold an annuity by another advisor 13 years ago, needed some money recently to help pay for an independent living facility. She has Social Security income, but simply need some extra monthly income from her annuity.
WITHDRAWAL OPTIONS
In our due diligence process we contacted the company to find out exactly how our client could withdraw money from this annuity. Annuities generally provide several ways to withdraw money. It’s really important that you understand the options because if you choose the wrong one you could end up with significantly less income.
During our initial conversation with the annuity company, we were told that our client could withdraw money in 1 of 4 ways:
1. Penalty Free Amount: this amounted to about $6,000 per year (capped at $30,000 total).
2. Surrender Value: this equated to a value of around $65,000 in total.
3. Annuitize: this requires the client to give up control of the annuity in exchange for a monthly income. Most don’t choose this option because they want to control their money and have an asset to pass on to heirs later. The amount our client would have received varied from $600 / mo to $2,500 / mo depending on the annuitization option chosen.
4. Systematic Withdrawals: resulted in about $12,000 / year (capped at around $119K) and didn’t require giving up control of the asset. This is the withdrawal option the client decided upon.
EVERYONE HATES PAPERWORK (EVEN THE EMPLOYEES)
The annuity company sent us paperwork to fill out and something just didn’t look right. The paperwork didn’t appear to offer the Systematic Withdrawal option the client desired. We called the annuity company back and we were on the phone with them for over an hour.
At one point the employee told us that Systematic Withdrawals aren’t even an option. She even sent us the annuity contract to prove her point, but upon close inspection the contract did allow for Systematic Withdrawals.
We then talked to a different employee who sent over a different withdrawal form, but as you can imagine it was also the wrong one. The employee insisted that it was the right form and I must have challenged her at least 4 or 5 times saying that this form doesn’t allow the client to take out Systematic Withdrawals. It turns out that I was right.
We were finally patched through to another employee who sent us the right form. Had the client filled out the wrong form initially, then they would have likely received much less money and it may even have been an irrevocable decision.
So, not only are there problems with annuities, but they are so complicated that even the employees don’t fully understand them. Learn from our experience and be very careful if you head down the annuity path!
I would love to hear your thoughts on whether or not you like annuities. Do you think they are beneficial? Have you experienced any annuity nightmares? Have you been told one thing only to find out later that it was incorrect? Feel free to share any questions, comments, or experiences you have below.
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