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Brad Tinnon

Why I Hate Annuities

I was recently reminded why I hate annuities so much. A client of ours needed to withdraw some money from an annuity (that was sold to them by another advisor of course – sorry, had to get that in). However, in working with this client, I was reminded just how complex and detrimental annuities can be for people. 


Annuities are so complex that even the folks that work for the annuity company don’t fully understand them or know all the nuanced rules. This can cause tremendous problems if a client is making decisions based on the information they get from customer service reps (CSR).

A CSR previously told a client of ours that they could withdraw money in a certain way. But we recently just found out that what the CSR said was actually incorrect. Had the client acted on that information it could have dramatically impacted the amount of money she received.


It all has to do with the way the value of the annuity is calculated. In fact, there are two ways that the value is calculated. In our client’s case there is one value called the “Cash Value” and another value called the “Annuitization Value”.

Cash Value

This value is based on the amount the client contributes and then grows by a small interest rate. Our client’s cash value is around $65,000.

Annuitization Value

This value is based on the amount the client contributes, but grows based on what the stock market does. Our client’s annuitization value is around $120,000.


The CSR told the client that she could essentially only withdraw from the cash value meaning that she would only receive about $65,000 over time. And once the $65,000 cash value was withdrawn there would be nothing left.

But what about the other amount in the annuitization value? Does the client not get to tap into that amount?

According to the CSR the only way to do that would be to annuitize the contract, meaning that she would have to give up complete control of the $120,000 annuitization value in exchange for a monthly income. Not many prefer this option because there is no longer an asset available to pass on to beneficiaries. However, the beneficiaries may or may not continue to receive the income stream the deceased owner was receiving. It all depends on the annuitization option chosen by the client.

Now imagine if the client would have initially acted on the advice of the CSR and decided not to withdraw from the cash value because she wanted to receive money from the much higher annuitization value even though it meant annuitizing the contract. That would have been an irrevocable decision. And also a very bad decision, because as I mentioned, we discovered that the CSR gave our client wrong information.

It turns out that the client doesn’t have to annuitize the contract to access the $120,000 annuitization value. In fact the client can take withdrawals directly from the annuitization value and ultimately be able to spend it all the way down to $0. And if she happens to die before that happens, then the heirs would be entitled to the remaining amount of the asset. 


To make matters even worse, if the client wanted to cash out and do away with the annuity altogether, she would face a $55,000 penalty. You heard me correctly – a $55,000 penalty. To cash out, the client would only be able to receive the $65,000 cash value, not the $120,000 annuitization value. So, even if she absolutely hated the annuity, she really has no choice but to stay because the penalty is too steep.

As you can see annuities tend to be very complex and generally not structured in a way that benefits an investor. And that’s why we tend to shy away from them.

Stay tuned for next week when I will discuss Indexed Annuities and how they are structured in such a way that you would have to see it to believe it. And it’s not in a good way!

Please feel free to share comments, questions, or experiences below.

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Brad E.S. Tinnon

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