Although Ben Stein likes variable annuities, these insurance products can be an expensive way of investing. They do “assure” a level of income over a certain time period, but depending on where you go to receive this product, you could be paying too much for a service that can be found somewhere else for less.
Additionally, the variable annuity product is not right for some people. Not all salespeople are ethical and even when innocent, they often have their own commission check in mind rather than the fiduciary health of their customer.
If you find yourself with an expensive variable annuity, you can switch. The IRS allows you to transfer your assets to a different annuity product, even one offered by a different company than the current insurance carrier. Normally there’s a 10% IRS withdrawal penalty if you liquidate the annuity before the age of 59½, but this penalty is waived for a qualifying transfer.
There are two catches:
1. You can only switch products if you haven’t begun to receive payments.
2. Your insurance carrier may require you to pay a surrender fee.
Catch number one has no wiggle room. Either you can perform the transfer or you can’t. The second catch requires you to weigh the surrender fees against the lower expenses of the new annuity product.
This escape clause should come in handy if you or a loved one is “trapped” in an annuity product that was misunderstood at the time of contract.
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The surrender charge is the trap. I don’t see how you can get out of an expensive annuity “easily” if you have to pay a surrender charge. Once you buy into an annuity, you are trapped. There is no easy escape. Either you let them bleed you with high expenses year after year, or you pay several years worth of high expenses in one shot in the form of a surrender charge and admit your defeat.
Sadly for most people it is the surrender fees that keeps them trapped in their high cost annuities. The surrender fees are generally down played by the sales people as, “but it’s a long term investment, so this shouldn’t matter.” Of course, the funds may be for a long term goal, but that doesn’t mean that that particular annuity is the right long term investment.
Consumers should NEVER accept a lengthy or high surrender fee. Annuities are especially maddening because many financial salespeople sell them because they do not have breakpoints. Breakpoints reduce their commission for large dollar sales.
If you MUST consider an annuity, only consider a no-load annuity like that offered by Schwab or Vanguard. It’s still more expensive than mutual funds, but I don’t believe they stick you with loads or surrender fees.
If you do choose to do an exchange, I recommend Vanguard. You can get into one of their variable annuity portfolios (total stock market, reit, balanced index, etc) pretty cheaply. On average I think the total expense runs around 0.5% per year, which is probably less than 1/3 of what you will pay most other places. And that 0.5% is the out-the-door price. It includes all the mortality fees and all that. If you must own a VA, Vanguard is probably the place to be. As far as I know, there are no surrender fees either.
I like the idea of having an annuity, but the lack of wiggle room really puts me off. I don’t like to feel trapped in anything. It’s great you’re posting some ways to get out of it.