Fixed Annuities have one (1) negative feature - The Finance Forums: Financial planning, debt help, loans, mortgages, retirement and 401k, investment, and general finance discussion forums

GarySpicuzza · #1 (**permalink**) 04-15-2008, 11:57 AM

There is exactly one (1) negative feature in a Fixed Annuity contract.

The SURRENDER charges.

They last 5, 7, 10, 12, or 15 years and DECREASE each and every year. A typical 10 year surrender charge schedule would be (12%, 11%, 10%, 9%, 8%, 7%, 6%, 5%, 4%, 2%, 0%)

These "surrender charge" percentages, while at first glance appear unusually severe or draconian, but in mathematical reality are nothing more than an "interest penalty."

Fixed Annuities are NOT designed for someone to put their money in and take it right back out like some day trader playing stocks like a flea market swap meet.

They are designed for Seniors over the age of 70, primarily for the wealth preservation and transfer of their cash asset DIRECTLY to their beneficiaries or to provide a guaranteed lifetime income stream.

Let's pick on, End of Year 2, in the actual contract below.

Attorneys, stock brokers, bankers and news media would lead a client to believe if the client made an initial premium deposit of $50,924.90 and wanted to "get out" of the contract the on the last day of year two (2) she would lose 11% of her money. They would claim the insurance company would only pay her $45,323.16.

NOT TRUE, the above is an absolute twisted material misrepresentation.

These mathematical Einsteins can even "prove it" on their calculators. They'll take her initial premium of $50,924.90 and subtract 11% and then show the result of $45,323.16.

The only problem with their calculation is the fact it's totally WRONG and doesn't jive with the stated MINIMUM CASH SURRENDER value printed in the policy of $52,340.26 at the end of year two (2).

The correct calculation goes like this:

Premium of $50,924.90 PLUS 10.75% first year interest equals an account value of 56,399.32 PLUS MINIMUM "Guaranteed Interest" of 3% equals an end of year two (2) MINIMUM account value of $58,091.30.

Now let's figure her actual MINIMUM cash surrender value end of year two (2) and see if my calculations match what's printed in the policy.

The first thing to understand is the fact most ALL annuity contracts allow a 10% "free withdrawal provision" per year. With that in mind, the calculation goes like this:

Account value end of year 2 equals $58,091.30, MINUS, the 10% "free withdrawal provision" equals, $52,282.17, that is subject to the withdrawal charge of 11%. $52,282.17 times 11% equals a surrender penalty of $5,751.04.

$58,091.30. (the MINIMUM account value) MINUS $5,751.04 (the correct surrender charge) equals a MINIMUM cash surrender value of $52,340.26. EXACTLY as it's printed in the policy!

So by the end of year two (2) the client could have cashed in her annuity and received back every penny she put into the contract plus some.

Question for Stock Brokers: Would you recommend an 80 year old widow cash out her annuity and risk her money in Stocks or Mutual Funds?

Question for Bankers: Would you recommend she put her funds in bank CDs that on average pay 1% to 2% less than her annuity?

Question for Attorneys: Would it be better for her to exempt her cash asset pursuant to Florida Statute 222.14 and pass the cash asset upon her death DIRECTLY to the named beneficiaries AND avoid Probate Court at the same time or should she pass it under her Last Will and Testament so you can collect your 3% share pursuant to Florida Statute 733.6171???

Fixed Annuity Data Page.Used with permission.

Fixed Annuity Surrender Page.Used with permission.

GarySpicuzza · #2 (**permalink**) 04-17-2008, 12:53 PM

See THIS link.

Did you know Ben Bernake the chariman of the Federal Reserve has the bulk of his cash asset split between two (2) annuities?

One is a Traditional Fixed Annuity and the other is a Variable Annuity. Each annuity is valued between $500k to 1 million dollars which means he has a minimum of $1 million and a maximum of $2 million dollars invested with annuities.

This represents the bulk of his retirement savings and wealth. His next closest investment in terms of dollar amount is a Wachovia money market account valued between $50,001 to 100K.

Anyway, I just wanted share some financial trivia with anyone who may read this thread.

If I sold annuities I would first explain the surrender charge schedule to my clients. Then I'd have them sign the brochure at that section and make a copy for myself.

Then I'd ask....

"Setting aside the surrender charge schedule, what's the "other" negative feature of a Traditional Fixed or Fixed Indexed Annuity?"

P.S. Are there any Stock Brokers, Attorneys, Bankers or News Media out there who are up for a good Internet thread war on this HOT topic?

Come on.....humor me!