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I’ve received a number of responses from my articles
pointing out the problems with variable and equity-indexed
annuities. Folks who call or email often ask the same
question: “Why not lock up my money? I’m not going to use it
anyway.” Agents try to convince you that it’s good to lock
up your money for 7, 10 or 15 years since you won’t be using
it anyway. This argument is complete hogwash, and let me
show you why.
First of all, the only reason, and I mean the only reason
these advisors are asking you to lock up your money is
because of the commission structure of these annuities.
That’s how the insurance company makes sure they can pay
brokers commissions of up to 15% on these investments. If
you want to know how much your agent is earning off of your
money, just take a look at the surrender penalty. It almost
always equals the commission.
Just look at the underlying securities you’re investing in
when you buy a variable or equity indexed annuity. They work
just like mutual funds or index funds, don’t they? What if
you were to purchase a mutual fund or index fund instead of
an annuity. Would you have to lock up your money for 7 to 10
years then? Of course not! You’d be able to liquidate that
money at any time at its current market value, without
paying onerous surrender penalties. Locking up your money in
an annuity is for the agents benefit, not yours.
Now that you understand that agents want you to lock up your
money because it impacts their paycheck, let’s look at the
other side of the “why not lock it up” argument. You say
that you aren’t going to use the money anyway, buy how can
you be sure? How do you know you won’t need that money?
Let me give a real life example. I have a client whose
mother had a large portion of her portfolio invested in an
equity indexed annuity. She wasn’t going to use that money
anyway, she thought, so why not lock it up and at least get
a small, but guaranteed return?
Unfortunately, soon after, she developed Alzheimer’s and she
had to move to an assisted living facility. Her annuity had
a nursing home clause, which meant money could be withdrawn
to cover nursing home care without incurring a surrender
penalty. But she wasn’t sick enough for a nursing home. So
now, either her kids will have to pay $10,000 a month to
cover her care, or she will have to pay steep penalties to
get her own money. Either way, the family loses, not the
agent.
There are many other situations that might cause you to tap
that money. Some are negative, such as the death of a
spouse, long term illness or needing to help a child going
through a crisis. Some are positive. Maybe you decide you
want to move to a warmer climate or help a grandchild pay
for college. Whatever the reason, you can’t predict the
future and it’s foolish to paint yourself into a corner
financially when you don’t have to.
Many investors say they can’t foresee a situation in which
they might want to change their investment. But wanting to
change your investment is even more likely to happen than a
sudden illness. Interest rates can take a downward or upward
trend. The market can tank or take off. Your income needs
might increase beyond what you’re currently earning. If your
funds are locked up where you can’t touch them, you won’t be
able to respond to these situations and opportunities. It’s
like locking an airplane on auto-pilot, so you can’t
navigate around a thunderstorm or take advantage of
tailwinds.
Don’t fall for the “why not lock it up” argument. Remember,
agents are asking you to give up your flexibility so they
can earn a big commission. It just isn’t a fair trade. I am
always happy to answer an investor’s questions about
investments or annuities, so don’t hesitate to call. I will
be happy to help you in any way I can.
Mr. Voudrie is a Certified Financial Planner and the
President of Legacy Planning Group, Inc., a Private Wealth
Management firm in Johnson City, TN. His firm employs
proprietary strategies designed to protect your investment
and grow your wealth without locking you into years of
surrender penalties. For more information call
1-877-827-1463 or email jeff@guardingyourwealth.com.
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