Registered: 1109333805 Posts: 373
Reply with quote #1
There is exactly one (1) negative feature in a Fixed Annuity contract. The charges. SURRENDER 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, 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 a passbook savings account. 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. Ok, let's get back to the topic. For example, current interest earnings on Fixed Annuities is about 6.5%. If a client put $100,000 into a 10 year surrender product at the end of year one the annuity is worth $106,500, at the end of year two the annuity is worth $113,422. If the client wants out, end of year two, here's what happens with their money: Keep in mind most ALL annuities have at least a 10% free withdrawal provision per year. The company first subtracts the free withdrawal amount ($11,342) from the account value of $113,422 which leaves $102,080 that is subject to the surrender penalty. In this example 10% or $10,208. $113,422 minus $10,208 equals a cash surrender value of: $103,214. So by the end of year two a client in almost all cases can walk away and get back every penny they put into the annuity plus growth. some
How about a 15 year surrender penalty product that pays a 7% bonus. Here's the surrender charge schedule: 19%, 18%, 17%, 16%, 15%, 14%, 13%, 12%, 11%, 10%, 9%, 8%, 7%, 6%, 5%, 0%. Unusually severe, draconian? Not in real dollars. Follow the math: $100,000 premium + 7% bonus = $107,000. Assuming just 5% interest earnings in years 1, 2 and 3 would result in an account value of $123,865 at the end of the third year and if a client wants out he pays a 16% penalty. So just how bad is that? The company first subtracts the 10% free withdrawal amount ($12,386) from the account value of $123,865 which leaves $111,479 that is subject to the surrender penalty. In this example 16% or $17,837. $123,865 minus $17,837 equals a cash surrender value of: $106,028.
In both of the typical examples above the client can completely surrender the policy for its cash value after only two or three years and get back every penny paid into the contract plus some growth.
Stock brokers, attorneys, bankers and news media always misunderstand and thus misrepresent how the actual surrender charges are calculated in an annuity. Let's pick on, End of Year 2, in the actual contract below. Trial attorneys, brokers, bankers and news media would lead a client to believe if she 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 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. PLUS 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 be aware of 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 of $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) my mother could have cashed in her annuity and received back evey penny she put into the contract plus some. Question for Stock Brokers: Would you recommend a now 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% than her annuity? less 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 names beneficaires avoid Probate Court at the same time or should she pass it under her Last Will and Testament so you can collect AND 3% share pursuant to Florida Statute your 733.6171 ???
Fixed Annuity Data Page. Used with permission. Fixed Annuity Surrender Page. Used with permission.